After around a 60% gain since the March 23 lows of the last year, and at the current price of $34 per share, we believe Rollins Stock (NYSE: ROL) is trading below its near-term potential. Rollins, a pest control company, has seen its stock rally from $21 to $34 off the 2020 March bottom compared to the S&P which moved around 90%. While the stock is lagging the broader markets by some margin, it has gained around 21% over the last twelve months. Further, the company has reported an increase in revenues over the recent quarters on a year-on-year basis – the top line has grown 6% y-o-y to a consolidated figure of $2.2 billion for the last 4 quarters, driven by growth in residential pest control and termite & ancillary revenues. That said, the company’s commercial revenues suffered in 2020 and its growth was slow in the first quarter of 2021 as well. This has made the investors somewhat cautious toward the stock – the stock is down 13% YTD.
Rollins’ stock has surpassed the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. Despite the rise since the March 23 lows of the last year, we feel that the company’s stock still has potential as its revenues are likely to remain higher than the previous year.
While the company’s total revenues rose around 19% from $1.8 billion in 2018 to about $2.2 billion in 2020, this translated into a 13% increase in the net income figure. The net income growth was slower than the revenues due to an increase in loss from the sale of assets, higher interest expenses, and an additional accelerated stock vesting expense in 2020.
ROL’s revenue and earnings have grown over 2018-2020, and its P/E multiple has also increased. We believe the stock is trading below its near-term potential and has some scope for upside, despite the recent gains and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 41% Change In Rollins Stock Between 2018-End And Now?” provides the key numbers behind our thinking.
Rollins’ P/E multiple has changed from around 51x in FY 2018 to just below 74x in FY 2020. The unusual jump in P/E multiple in 2020 was due to positive revenue growth amid the Covid-19 crisis driven by higher demand for its pest control services. While the multiple currently stands at 64x, it is likely to drop closer to 56x in the near term, but higher earnings will lead to some growth in the stock price.
So Where Is The Stock Headed?
Rollins’ revenues grew 7% y-o-y to $2.2 billion in 2020, primarily driven by a 13% increase in residential pest control and 10% rise in termite and ancillary revenues – residential pest control contributes around 45% of the total revenues. While 80% of the revenues were recurring, the stay-at-home restrictions due to the Covid-19 crisis also led to an increase in the demand for residential pest control. That said, ROL’s commercial pest control revenues suffered in 2020 due to the impact of the Covid-19 crisis – the stream contributed roughly 35% of the total revenues. While the stream is likely to suffer till a majority of people get vaccinated, we expect it to see some improvement in 2021. Overall, the company is likely to continue its growth momentum in 2021 as well. This will likely boost investor sentiment, positively impacting its stock price.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Israel. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
While Rollins stock can move, it is helpful to see how its peers stack up. Check out Rollins Peer Comparisons to see how ROL compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.
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