1 Killer Stock to Buy Now for Long-Term Growth

Want to make a killing in your portfolio? Forget AI, and instead invest into a company that is the world’s largest commercial pest control business - Rentokil Initial PLC (RTO). It has a leading market share in the majority of 87 countries in which it operates.

Pest control is a very lucrative and resilient business. It is seen by its commercial and residential customers as an essential service, and, as a result, tends to hold steady even if the economy turns down. Providing services to the commercial segment of pest control global markets accounts for 80% of pest control category revenue.

Rentokil, headquartered in the United Kingdom, has been one of the U.K.’s most profitable stocks, delivering total returns in the past decade of 528%. Since the company listed on the New York Stock Exchange on Oct. 12, 2022, it has climbed 37%.

Rentokil Initial’s ordinary shares are listed in the form of American Depository Shares (ADS), which are in turn evidenced by American Depositary Receipts (ADRs). Five ordinary shares are represented by one ADS. The terms ADR and ADS are commonly used interchangeably.

The company has achieved its success by following a simple strategy: delivering steady levels of organic growth from its pest control and hygiene businesses, and complementing this with bolt-on acquisitions (over 200 since 2015).

Rentokil did change its strategy somewhat by making a major acquisition in October 2022. It purchased Terminix Global Holdings, giving it the leading market share position in pest control in the U.S.

Let’s take a closer look at the deal.

About the Terminix Acquisition

In buying Terminix, Rentokil created the world’s largest pest control business. It has combined the leading global commercial pest control brand, Rentokil, with a U.S. residential pest control giant, Terminix.

The deal cements Rentokil as the new market share leader in the U.S., where the enlarged pest-control franchise commands a 30% share of the addressable market. The U.S. is by far the world’s largest pest control market. It accounts for just over half the global market, which is worth around $22 billion in annual revenues.

The Terminix deal now means that pest control is even more dominant as a source of profits for the company. It now accounts for 83% of Rentokil’s total profits, up from 73% previously.

A large chunk of Rentokil’s revenues comes from contracts and subscriptions, which generates very high levels of repeat business. And with a low and flexible cost base – mainly labor, vehicles, materials and supplies – it is a very profitable business, with high profit margins of around 20%.

Rentokil’s Profitable Future

The long-term demand fundamentals for pest control remain favorable. Growth is expected to be driven by factors such as increased urbanization, climate change (pests like heat and dampness), and regulation.

As well as common pests such as rats and mice, a significant source of growth in the U.S. is likely to be mosquito control, as well as termites and bed bugs.

One of the keys to Rentokil’s long-term success has been, and will continue to be, its product innovation. This has ranged from chemical-free and non-hazardous biocides to LED insect-catching devices. The widespread rollout of digitally enabled pest-control devices to its commercial customers over the next decade will further reinforce its dominant position in the industry.

Following years of product development, Rentokil is embarking on a digital transformation of its commercial pest-control business. In doing so, Rentokil aims to lead the industry toward pest prevention from its present, pre-digital state of reactive pest control.

PestConnect is Rentokil's highly popular proprietary digital ecosystem, which utilizes digitally connected pest-control devices — in place of traditional bait boxes with mechanical traps and poisons — to transmit data in real time to a central command system, allowing for pest monitoring to take place 24 hours a day. Valuable data is generated, with pest activity tracked by site area and benchmarked against industry averages. 

This contrasts with traditional pest-control visit cycles, which are typically six to eight weeks, allowing for pest infestations to go unchecked for weeks before detection. The end result is improved service for customers and the reduction of routine visits to sites from technicians. For Rentokil, a PestConnect installation reduces technician visits to an average of four annually, down from a prior average of eight.

Its RADAR suite of products, including items like non-toxic mouse traps, has been a great success, and accounts for two-thirds of connected devices. Rentokil has 319,000 connected devices on 18,000 sites across the world. A new product, RADAR X, will be launched later in 2023.

The connected service is sold on three-year contracts, and has proven to be very helpful in retaining contracts. Rentokil management has a target of having 25% of its customer base on connected contracts over the next few years.

Here's Where I Would Buy Rentokil Stock

The global pest control market should grow about 5% annually over the coming decade, driven by increasing economic prosperity and population growth, especially in the emerging markets of Asia.

Rentokil’s pest-control revenue will outpace the growth of the overall market, thanks to the rollout of its market-leading PestConnect. The integration of Terminix is expected to be complete by 2025. Rentokil management is hoping that its scale, brand, and service offering will allow its business to grow around 6% a year.

The company remains a very solid business with plenty of opportunity to grow. It is a global leader with a powerful brand and good profitability. It is the type of business that warrants a high valuation and has a great track record of delivering for its investors.

Its shares offer better value than they have for some time. A couple of years ago, they were reasonably valued in excess of 30 times its next-12-month forecast EPS. Today, that is down to 25 times.

RTO is a buy anywhere under $40, and preferably under $37.