Since 2000, pest control juggernaut Rollins (NYSE: ROL) has delivered total returns of nearly 10,000%, leaving it just shy of being a 100-bagger in under 25 years. While this feat is impressive in its own right, it is even more remarkable considering that the stock's beta never rose above 0.9 during those years.
In simplest terms, beta measures how reactive a stock is to market movements, with a score below 1.0 signifying that the stock is less volatile than the overall market. Sporting a 5-year beta of just 0.64, Rollins has not only thoroughly stomped the market since 2000 but done so with less volatility, as its services are generally viewed as non-discretionary.
In a sense, this combination of incredible returns and low beta allows investors to have their cake and eat it, too -- giving them market outperformance from a somewhat "boring" investment.
But with all that growth in the rear-view mirror, have potential new investors already missed their chance to buy Rollins?
Absolutely not.
A market-leading serial acquirer in a highly fragmented industry
The parent company of the famous Orkin brand, Rollins provides pest and wildlife control to over 2 million residential and commercial customers. The company breaks out its sales through the three following service offerings:
- Residential (46% of total 2023 sales): This unit protects residences from pests, insects, rodents, and wildlife, and grew sales by 17% in 2023.
- Commercial (33%): This segment provides pest control solutions to various markets like healthcare, food service, logistics, and hotels, and its sales rose 11% last year.
- Termite (20%): This unit offers termite protection services for residential and commercial customers, and achieved revenue growth of 14% in 2023.
Holding around an 11% share of the pest control market in the United States, according to various estimates, Rollins is a leader in its niche, alongside Rentokil Initial and its Terminix brand. Whereas the U.K.-domiciled Rentokil made a massive $6.7 billion splash to bring in Terminix and expand into the U.S., Rollins relies upon a serial acquisition strategy to capitalize on the deeply fragmented industry in America.
Operating in a U.S. pest control industry with over 20,000 peers, Rollins continuously seeks new tuck-in acquisitions to incorporate into its operations. The company has acquired hundreds of smaller players over the years -- including 24 during 2023, and five in the fourth quarter alone.
Most importantly for investors, Rollins has proven masterful at integrating these acquisitions, as its outstanding cash return on invested capital (ROIC) shows.
Top-tier free cash flow generation
With a cash ROIC that has averaged 34% over the last decade, Rollins far surpasses its nearest peer on its most crucial profitability metric.
ROL Cash Return on Capital Invested (CROCI) (TTM) data by YCharts.
Measuring the companies' free-cash-flow (FCF) generation compared to their debt and equity, cash ROIC highlights Rollins' outsize ability to bring in FCF from the capital it deploys on mergers and acquisitions. Comparatively, Rentokil lags. Similarly, Rollins has maintained far superior cash from operations (CFO) margins than Rentokil -- along with higher CFO-per-employee figures -- demonstrating the company's best-in-class profitability.
ROL Owners' Cash Profits Margin (TTM) data by YCharts.
The icing on the cake for investors is that more than 80% of Rollins' sales come from recurring revenue contracts, meaning that this cash generation is predictable and steady, providing a consistent stream of funding for new tuck-in purchases.
An ideal investment for a dollar-cost averaging strategy
Trading at 40 times FCF, Rollins' valuation will never be mistaken as cheap. However, this P/FCF ratio roughly equals its 10-year average of 41 -- over which time the company has delivered total returns of over 400%.
ROL Price to Free Cash Flow data by YCharts.
Best yet for investors, though its valuation is in line with its historical average, the company's dividend yield is 25% above its 10-year average, so passive income seekers are getting more bang for their buck today. Rollins has boosted its dividend payments by an average of 13% annually since 2013 -- including a 25% increase last year -- showing management's dedication to rewarding shareholders -- and the payout still only uses 52% of the company's FCF.
Since it's a premium business trading at an above-market price, gradually building a stake in Rollins using dollar-cost averaging purchases makes sense. That spares investors from going "all-in" at a lofty valuation, but also avoids the risks of waiting for a dip in price that may not come until the stock has already doubled again.
Given Rollins' combination of low beta, recurring revenue, top-tier profitability, and growing dividend payments, plus its effective long-term strategy of tuck-in acquisitions, investors would be wise to add this non-discretionary juggernaut to their portfolios and hold on forever.
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Josh Kohn-Lindquist has positions in Rollins. The Motley Fool has positions in and recommends Rollins. The Motley Fool has a disclosure policy.
