Shares of North America's leading pest control company, Rollins (ROL -6.73%), dropped 6% as of 2:30 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
Despite growing sales by 9% and earnings per share (EPS) by 27% in the second quarter of 2024, the company's share price slid as it fell $3 million short of analysts' revenue expectation of $892 million.
NYSE: ROL
Key Data Points
Rollins: A successful history as a serial acquirer
While missing analysts' expectations by this small of a margin may seem laughable, the market's reaction makes more sense when you consider that Rollins still trades at 44 times free cash flow (FCF). Operating in a recession-resilient pest control industry and bolstered by a track record of 20 consecutive years of sales growth, Rollins' stock remains priced for perfection.
A serial acquirer, Rollins has spent over $1 billion (roughly half its free cash flow, or FCF) on hundreds of acquisitions over the last five years. Boasting a return on invested capital (ROIC) of 27%, the company has proven to be a masterful acquirer, generating outsize profitability compared to the debt and equity it uses to make new purchases.
This ability to profitably consolidate the highly fragmented and resilient pest control industry means Rollins usually has a premium valuation.
Is Rollins a buy?
At 44 times FCF, the company's valuation remains lofty today. However, investors shouldn't dismiss Rollins altogether. Had an investor purchased the company in 2015 at a similar valuation, they would have still easily outpaced the S&P 500 index's total returns, 337% to 204%.
Ultimately, Rollins will probably continue to maintain a premium valuation as long as its mergers and acquisitions department keeps firing on all cylinders. As a top-tier business trading at a premium valuation, Rollins looks like a perfect candidate for dollar-cost averaging.
