Bottleneck Capital
Long/Short Investor, Technology, Media & Telecom
Rollins and Rentokil are pest-control roll-ups built on cheap money, which let them pay acquisition multiples that only made sense thanks to Rollins' premium valuation. Unlike aerospace aftermarket parts makers or specialty MEP contractors, pest control is commoditized: treating a house or a larger building uses a similar process, which means more competition and less profit. David Royce founded and sold four pest-control companies, often to Terminix, now part of Rentokil. x.comÂ
Rollins still looks expensive for a pest control company at about 29x earnings and 26x forward, even after falling from a stupidly expensive 65x. @DudeWhoInvests notes the stock is down nearly 50% this year while fundamentals kept rising. x.comÂ
Rentokil remains cheap, though cheapness is not a thesis after organic growth decelerated and it pulled its 2027 margin target to reinvest. It trades at 16x 2026 and 14.5x 2027 earnings, organic growth should likely improve on the back of that reinvestment, and the commercial focus is good. The quarter was worse for Rollins than for Rentokil. x.comÂ
Rollins' mission-critical, recurring pest control business has grown revenue for 25 consecutive years, through every crisis. About 80% of revenue is recurring, and nobody cancels pest control with termites or rodents in the house. Revenue grew 10% a year in the financial crisis and 12% in 2020, and adjusted EBITDA margins have risen to 23%. With 13% of a fragmented US market, it keeps taking share through acquisitions, operating leverage and pricing power. The catch: the stock isn't cheap. x.comÂ
Cintas is preferable to Rollins, since Rollins carries possible future mass tort risk from insecticides used in homes and businesses. Retrospective studies could one day implicate those chemicals and create a J&J talc-style overhang, though that may never happen. Dry cleaning chemicals may raise health concerns too, but Cintas would be one of countless targets, while pest control risk centers on Rollins and Rentokil. Both are always expensive; Rollins would need a lower price. x.comÂ