Shares of North America's leading pest control company, Rollins(NYSE: ROL), 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.
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) 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.
Should you invest $1,000 in Rollins right now?
Before you buy stock in Rollins, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Rollins wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $700,076!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 22, 2024
Josh Kohn-Lindquist has positions in Rollins. The Motley Fool has positions in and recommends Rollins. The Motley Fool has a disclosure policy.
