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Consumer Discretionary

Buggy Profits

By Peter Staas, on Dec. 26, 2016

You may not expect to find profit where the bugs crawl around, but insight into unexpected places is what Capitalist Times Premium subscribers receive. And that’s in addition to regular coverage of and updates to the Wealth Builders and Lifelong Income Portfolios. Don’t wait–become a subscriber today!

The latest addition to our Watch List, Rollins (NYSE: ROL), serves more than 2 million businesses and households worldwide and boasts the No. 1 commercial and residential pest-control franchises and the No. 2 termite-control business in North America.

The company has generated year-over-year net income and revenue growth in 41 consecutive quarters, usually in the low to mid-single digits. This impressive winning streak stems primarily from operational excellence, a recognizable brand (Orkin), resilient demand growth and a track record of smart acquisitions that don’t venture too far from the company’s core expertise.

Given the health risks and structural damage that pest infestations can cause, residential customers (about 43 percent of Rollins’ 2015 revenue) don’t regard payments to control the barbarian hordes of bugs and rodents as discretionary. The same goes for hotels, restaurants and other commercial clients where an infestation can cause significant reputational damage.

Regarded as an essential service, demand for pest control remains steady even in the most challenging of economic environments. Rollins, for example, managed to grow its revenue throughout the the 2008-09 financial crisis and the Great Recession, though the rate did fall off a cliff in the second quarter of 2008 before recovering thereafter. Recurring revenue also accounts for about 80 percent of the company’s sales.

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Although Rollins completed about $36 million worth of bolt-on acquisitions in the first half of 2016, these transactions only contributed 40 basis points of the 4.8 percent revenue growth that the company posted in the second quarter. The bulk came from organic growth and annual price increases of 1.5 to 2 percent.

This organic growth stems, in part, from a confluence of favorable trends, including growing human populations in warmer climates and major cities—areas where insects and rodents also thrive.

Rollins has also benefited from the recovery in residential construction in these areas, thanks to requirements for termite pre-treatment and the popularity of its Taexx pest-control systems among leading homebuilders.

In the first half of 2016, installations of these in-wall solutions had increased 11.6 percent from year-ago levels. Even better, the subsequent homebuyers often become recurring customers, as technicians come back at regular intervals to inject chemicals into the Taexx system.

As one of the largest pest-control companies in North America, Rollins boasts the scale and financial strength to provide superior training to its technicians, dominate the marketing landscape and roll out technologies that improve service quality and efficiency. The smaller operators that predominate in this highly fragmented industry struggle to compete with this firepower.

For example, Rollins in August 2016 completed the installation of a new customer-relationship management system across its Orkin branches that has helped to optimize technicians’ schedules and routes, improved cross-selling capabilities at the point of service and reduced the time between billing and collection.

Investments of this nature and in savvy online marketing should enable Rollins to continue to take market share. Bolt-on acquisitions in North America likewise help to fuel growth, creating additional opportunities to cross-sell its suite of services.

Although bed bugs and mosquitos represent a relatively small portion of Rollins’ overall revenue mix, these segments continue to post robust growth and could become more important, particularly with the Zika virus making headlines.

The company in 2015 acquired Critter Control, which specializes in removing rats, bats and other animals and preventing their return, providing another growth platform.

Rollins generates about 7 percent of its revenue from international markets and has a solid track record of growing via acquisitions and franchising.

The company in 1999 purchased Orkin Canada and moved into Australia with the purchase of AllPest in February 2014. More recently, Rollins established a foothold in the UK market with the purchase of Safeguard, a well-established company that provides pest-control services to residential and commercial customers in and around London and southern England.

Whereas Rollins operates in Canada, the UK and Australia primarily through wholly owned subsidiaries, the company has Orkin franchises in Latin America, the Caribbean, the Middle East, Asia, Europe and Africa. Last year, partners opened franchises in Mexico, Colombia, the Republic of Georgia, Qatar, China and South Korea.

Highly resilient demand for pest control services, coupled with organic growth opportunities and smart acquisitions, should enable Rollins to increases its revenue by 4 to 6 percent annually while paying a healthy dividend and repurchasing shares.

The buy target for Rollins, along with more under-the-radar stock ideas like this, is available to Capitalist Times Premium subscribers. Become one today!

Peter Staas is managing editor of Conrad’s Utility Investor and Energy & Income Advisor.

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