It's an ancient battle. Humans build shelter, bugs invade shelter. Humans squish bugs, bugs survive to make even more bugs. Humans poison bugs, bugs become poison-tolerant. And so it goes.
As the parent company of Orkin and Western Pest Services, Rollins (NYSE:ROL) profits from the seemingly inalterable fact that people will always want bugs to go away and bugs never will.
Pest control isn't a high-growth market, but it is lucrative. What's more, Rollins is increasingly trying to coax customers into viewing pest control as an ongoing near-essential utility expense, akin to Internet service or cable TV. By signing customers up to annual contracts, Rollins can realize a bit more predictability and consistency in its growth.
Not content to rely merely upon the residential business, Rollins is increasingly exploring other avenues toward higher profitability. The company is starting to target specialized commercial markets, such as hospitals and skilled nursing facilities. Additionally, the company is launching some new techno initiatives in an attempt to improve efficiency and productivity.
Revenue growth for the fourth quarter was positive. The company's top-line number shows 14.1% growth, but that number includes the contribution of Western Pest Services (acquired in early 2004) and isn't strictly comparable to the prior year. Stripping out Western Pest, growth was about 3% for the year-over-year period.
Net income is similarly messy. Changes in accounting and an asset sale inflated reported income. Stripping out these events, net income for the fourth quarter appears to have been $7.6 million -- double the year-ago amount (though the Western Pest acquisition certainly inflates the comparison). Cash flow is a bit simpler, thankfully. Free cash flow for 2004 was nearly $58 million vs. $50 million a year ago.
Despite more than $1 billion in market capitalization, Rollins has little institutional ownership and minimal Wall Street following. Fools should feel free to make up their own jokes as to why sell-side analysts might be avoiding a pest-control company.
No one should confuse Rollins with an undiscovered growth company. What it is, though, is a well-run business (return on equity is over 33%, return on assets is over 13%) that generates a good amount of cash flow. Although the company's percentage of intangible assets is very high (nearly 50%), and it's having some difficulty in its residential termite business, Rollins is worth keeping an eye on.
After all, termites do more damage to homes than fire or weather, and nobody really wants to live with bugs. While humanity's war with the bugs will never be won, Rollins will certainly continue to profit from the attempt. Should Rollins succeed in convincing home owners that pest control really needs to be viewed as an ongoing war (and an acceptable monthly expense), the cash flow should continue to be quite healthy.
Fool contributor Stephen Simpson has no ownership interest in any stocks mentioned.
