Rollins Inc has been awarded a ‘Buy’ rating and a 12-month price target of $48 from analysts at UBS as the broker initiated coverage of the pest-control company.
Given the non-discretionary nature of its services, the analysts expect Rollins to maintain resilient growth even into a recession, after it managed to generate positive organic growth during the recessions caused by the global financial crisis and during the COVID-19 pandemic.
“Additionally, we believe tailwinds related to warming temperatures (+2 degree Fahrenheit nationwide over past decade) and demographic movements (7 fastest growing states in 2022 accounting for 100%+ of nationwide population growth all warmer than average) should provide secular tailwinds to pest control demand in the coming years,” the analysts wrote in a note this week.
Among the catalyst that are likely to support the expansion of the company’s profit margins, the UBS analysts noted the recent appointments of Jerry Gahlhoff as CEO and Kenneth Krause as chief financial officer can help drive margins by over 100 basis points (bps) a year for the next three years.
While Rollins has one of the highest gross margins within UBS’ coverage at 51.5%, the broker noted that it has one of the highest SG&A (selling, general and administrative) structures at 29.8%. Reducing this closer to that of Sintas, a best-in-class peer with an SG&A level of 26%, would generate over 300bps of margin opportunity.
“We understand new CFO is focused on SG&A optimization, and has this exact pedigree at his prior role, where SG&A leverage improved 700bps under his tenure,” the analysts said. “Company also has more modest opportunities around pricing and sourcing initiatives, in our view.”
With its stock multiple historically driven by margin expansion, continued EBITDA (underlying earnings) margin expansion should support/expand the current multiple, resulting in a greater than 20-25% upside over the next year as investors recognize Rollins’ strong earnings trajectory, the analysts said.
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