Rollins, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Rollins, Inc. is a global pest and termite control services company that generates revenues through a subscription based recurring revenue model.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Rollins is not a straightforward business to analyse, so it is important to go in-depth into its structure, financials and moat.

Business Overview

Rollins, Inc. is a global provider of essential pest and termite control services, operating primarily in the United States, Canada, Europe, and Australia. The company operates through a network of company-owned and franchised locations, offering services to both residential and commercial customers, through its well-known brands like Orkin. The business model is primarily based on recurring revenues through subscription-based contracts that are usually sticky due to a multitude of factors including customer convenience, strong switching costs and the recurring nature of the services. Rollins is differentiated by its wide variety of services, scale and brand.

Revenue Streams

Rollins’ revenues are broken down into two principal segments:

  • Residential Services: Primarily consisting of providing pest control services to homeowners, which creates stable recurring revenue.
  • Commercial Services: Caters to businesses across diverse industries, including food and beverage, healthcare, hospitality, and warehousing.

The pest control industry is characterized by the following trends:

  • Consistent Demand: Pest control is essential for property protection and public health; therefore demand remains consistent in good and bad times.
  • Technological Advancements: Companies are increasingly adopting digital tools for pest monitoring and management. Rollins is not particularly good at this, but does have some capabilities.
  • Growing Health Concerns: Growing recognition of the health hazards related to pests is leading to increased demand for services.
  • Consolidation: The pest control industry is not immune to acquisitions and mergers. Smaller companies are being gobbled up by larger ones.

Competitive Landscape

The pest control industry is highly fragmented, with competition ranging from national players to local businesses. Key players include Rentokil Initial, Terminix, and ServiceMaster, along with countless local and regional providers. A key component of success in this industry is a strong brand, scale, and customer service. The industry is marked by significant competition; however, there are a few elements that allow Rollins to have a competitive edge, as discussed below.

The Moat

Rollins is a strong company that has a solid moat, albeit not impenetrable. It is best rated a 3/5. Rollins benefits from:

  1. Brand Recognition: Rollins operates under the Orkin brand, which is one of the most recognizable and reputable names in pest control. This translates to customer trust and lower customer acquisition costs.

In the US, brand names of companies matter, especially in something that customers are not familiar with.

  1. Recurring Revenue Model: A significant portion of Rollins’ revenue comes from recurring service agreements, which create a stable and predictable revenue stream, since there is a subscription and customers often have high switching costs.

The subscription-based model provides recurring cash flow.

  1. Geographic Diversification: The company operates across multiple geographies, limiting exposure to regional economic downturns or regulatory changes. This geographic diversification has a material impact on its moat.
  2. Scale and Route Density: Rollins’ extensive branch network and large-scale operations allow it to operate with greater route density and at lower costs than smaller competitors, which means larger margins. This creates an economies of scale moat.

Moat Risks

Rollins also has certain risks to its competitive advantage:

  • Increased Competition: The pest control industry is highly competitive, and there is no barrier to entry. Price pressure from local and regional providers as well as other national providers can affect earnings.
  • Changing Technology: The industry is constantly evolving due to technological advancements in pest control, monitoring, and software, and the slow adaption by management can create a risk to its moat, especially if other companies incorporate that well.
  • Reputational Risk: Any negative publicity, product recall or service failure, can harm the brand and reduce its competitive advantages.
  • Regulatory Changes: Changes in regulations regarding chemical usage, licensing, or other practices may increase operating costs and could reduce profitability.
  • Poor Management Decisions: In a company with a business model as simple as ROL, bad decisions by management can easily reduce the moats, if not handled properly.

Business Resilience

Rollins has demonstrated high resilience due to its:

  • Essential Services: The demand for pest control services remains relatively constant, creating recurring revenue and allowing for resilience to market volatility.
  • Strong Customer Retention: The subscription business model, coupled with the high switching costs, creates sticky customers who are less likely to leave even if the business has issues.
  • Geographic Diversification: Diversification across multiple geographies reduces exposure to regional risks.
  • Cash-Generating Business: The business is very cash generative, allowing them to repay debt, re-invest in the business or for shareholder payouts.

Financial Deep Dive

Here’s a look at ROL’s financial performance and how its management has made decisions based on the current data.

  • Revenue Growth: Rollins has shown moderate and steady growth in revenues over the past several years, primarily fueled by organic growth and tuck-in acquisitions. However, the growth has not been exceptional.
  • Profit Margins: The company has historically maintained a relatively high and consistent operating margin, which showcases its efficient operations and brand strength.
  • Net income Net income was about 14.2% of sales in 2023 and 14.7% in 2022.
  • Gross margin Gross margins were high for both 2022 and 2023 at above 50%.
  • Return on Invested Capital (ROIC): Rollins exhibits an attractive ROIC, signifying efficient capital allocation by management and its ability to generate value for shareholders. However, due to several factors like goodwill, intangible assets and high acquisition costs, ROIC appears to be lower than usual.
  • Capital Structure: The company has historically had low debt levels. As such it is not a significant factor for the business.
  • Balance sheet The most obvious part from the balance sheet, is that this business carries a lot of goodwill. In 2023, it was $1.7B and in 2022, it was 1.6B. Intangible assets for both years are around $400M. And, cash for both was around $50M. Total debt was around $600M for both years.

The company has high goodwill levels and intangible assets as well. The business is also not dependent on debt to finance operations, which highlights its solid operations.

  • Cash Flow: Rollins produces substantial free cash flow from its operations. This cash flow provides a cushion for the company to reinvest in the business, engage in acquisitions, pay down debt, and provide shareholders with income through buybacks and dividends.

Management’s View on the Business & Recent Concerns

  • The management seems focused on recurring revenue streams.
  • Management is focused on acquiring smaller companies to accelerate growth.
  • Management has not discussed any serious issues and seems very confident on the business outlook.
  • In the latest earnings calls, Rollins management has emphasized its ability to retain existing customers, strong financial foundation, diverse customer base and strong brand name.

Understandability: 2 / 5

Rollins’ business is relatively straightforward, but its complexities lie in the detailed financials. Its financial statements are highly complex due to acquisitions. Also, understanding the nuances of operating a national and international pest control chain requires industry and business model knowledge. Therefore, this company rates a 2/5 in understandability.

Balance Sheet Health: 4 / 5

Rollins has a reasonably healthy balance sheet, with manageable debt and consistent cash generation. However, it has very high goodwill and intangible assets, which means if those assets are impaired at any point, the business will take a big hit to its equity. As such, it receives 4/5 rating.

Conclusion

In summary, Rollins is a fairly solid company with a recognizable brand and has a good business model. However, one must not be overly optimistic since other players have very similar and perhaps more efficient operations. Furthermore, the heavy reliance on acquisitions may prove to be a problem in the long term as it may prove difficult to integrate them effectively. The management seems competent and understands the company quite well, and seem focused on growth. The financial health is good. But this is not an easy to understand business.