2023-11-08 02:20:00 ET
Summary
- Rollins, Inc. announced that the Rollins family will sell up to $1.76 billion worth of its ownership stake, causing the share price to decline.
- Rollins operates in the southern states of America, where pests are most prevalent, and benefits from a steady trend of migration to the region.
- Rollins is one of the largest companies consolidating the fragmented pest control industry, with a 26% market share and opportunities for organic growth and acquisitions.
The following segment was excerpted from this fund letter.
Rollins, Inc. ( ROL )
Rollins is the holding company for multiple pest control businesses of which the largest and best-known is Orkin. After market close on September 6, the company announced the Rollins family would be selling up to $1.76 billion worth of its 50.5% ownership stake in Rollins. This caused the share price to decline nearly 10% the following morning. We decided to take advantage of this decline.
Andvari has admired Rollins for over a decade as the business has many attractive qualities. First, the company has the wind at its back as it operates primarily in the warmer climates of the southern states of America. This region is where bugs and other pests are most pernicious. This also happens to be the region where people continue to migrate for work and for retirement. This migration is a steady trend that will continue to drive the growth of Rollins at an above average rate for decades to come.
Second, Rollins is one of the largest companies that is consolidating a very fragmented industry. For context, there are 17,670 pest control companies in the U.S. with combined annual revenues of $11.04 billion. 1 Over just the last three years, Rollins has acquired over 100 pest control businesses. Rollins’ annual revenues in the U.S. will be about $2.87 billion for 2023, so this means it has about a 26% market share. A tremendous opportunity to grow organically and through acquisitions still remains for the company.
Third, Rollins provides valuable services that are a small portion of the total cost of either owning a home or operating a business. For a business owner, rules and regulations make it so they must purchase pest control services from someone. This gives Rollins’ pest control brands the ability to raise prices 4%–5% a year very easily. We also view pest control services as non-discretionary and recession resistant. Few home or business owners will tolerate pests within their dwellings. Thus, revenues for Rollins are highly predictable: about 80% of revenues are recurring.
|
Fourth, the size and scale of Rollins gives it an advantage over smaller competitors on two fronts: purchasing supplies and acquiring other pest businesses. On the supplies front, scale enables Rollins to purchase at lower prices for its stable of pest brands. On the acquisition front, because Rollins has acquired hundreds and hundreds of businesses over the decades, it has become a very disciplined buyer that will walk away from deals that are too expensive. Further, when Rollins acquires a pest control business, it can easily improve the acquired company by helping them increase prices, modernize marketing tools, share best practices, and by providing capital for faster growth.
Fifth, the pest control business—like most service businesses—is one that does not require large capital expenditures. Over the last ten years, capex has ranged between $18 million and $42 million annually. This is all while annual revenues have increased from $1.3 billion to nearly $3 billion today. Rollins gushes free cash flows that it uses to acquire more businesses, pay an increasing dividend, and occasionally repurchase shares.
Finally, Andvari likes the fact this business is unlikely to ever become obsolete due to changes in technology. Rodents and pests will always be around and there will always be a need for pest control services. Methods used to combat critters and creepy crawlies in twenty or fifty years are unlikely to be much different than the methods of today.
When you put all the above together, you wind up with a business with excellent financial characteristics. Average annual revenue growth has been 8.2% over the last ten years. Profits have grown faster than revenues. Gross margins are above 50% and EBITDA margins are now at 22.3%. The incremental margins—the percentage of every additional dollar of revenue growth that is converted to EBITDA—are very good: they range from 30% to 40%. Andvari believes both gross and EBITDA margins can slowly go higher over the long term. We also believe we purchased Rollins at a reasonable price that will allow us to compound our money at above average rates.
disclosure |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Andvari Associates - Rollins: Unlikely To Ever Become Obsolete