Rollins Q3: Focus On Modernization

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I reiterate a “Buy” rating on Rollins, Inc. with a fair value of $65 per share, driven by solid growth and modernization efforts.Rollins achieved 7.7% organic revenue growth despite disruptions from ...

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(NYSE:ROL) in March 2024, showing its solid growth in commercial business. Rollins delivered a strong Q3 result with 7.7% organic revenue growth despite some disruptions from Hurricane Helene. The focus on modernization and margin improvement could potentially accelerate its business growth and margin expansion. I reiterate the 'Buy' rating, with a fair value of $65 per share. Focus on Modernization Rollins released its Q3 results on October 23rd after the market closed, delivering 7.7% organic revenue growth and 3.3% adjusted net income growth, as depicted in the chart below. As discussed in my previous article, their growth has been quite consistent and resilient over the past few years.   Rollins Quarterly Results My key takeaway from the quarter can be summarized as follows:  Rollins continues to execute their modernization initiatives, hiring several key talents across the organization to support their digitalization and modernization efforts. In addition, the company has been upgrading their core technology and IT systems to improve customer engagement. Due to the Hurricane Helene during the last week of the quarter, Rollins experienced some business disruptions in affected regions. As discussed over the earnings call, their organic revenue growth would have exceeded 7.7% if no hurricane happened. I have no issue with the business impact, as it is a one-time event. The company remains focused on their margin initiatives through price increase and productivity improvements. The company anticipates a 3%-4% price increase in FY25, aligned with their past track record.  Outlook and DCF Revision As shown in the slide below, Rollins is guiding for 7%-8% organic revenue growth and 2%-3% M&A growth for FY24. I think the guidance is very consistent with their historical growth trajectory. I have updated my FY24 assumptions accordingly.   Rollins Investor Presentation For growth from FY25 onwards, I am considering the following factors:  I have revised its organic revenue growth to 8%, up from 7% in my previous model, assuming 3%-4% price increase and 4%-5% volume growth. As the Fed has begun to cut interest rates, I anticipate the economy will start to normalize, supporting a strong market for both residential and commercial property services. In addition, Rollins has been investing in their core technologies and modernizations, which could potentially accelerate their market share gains. I have increased the M&A growth contribution to 4.5% annually, assuming the company allocates 10% of revenue towards acquisitions. A lower interest rate environment could drive more M&A activities in general. As discussed in my previous article, Rollins has been consolidating the fragmented market via acquisitions. I continue to forecast their operating expenses to grow by 10% year-over-year, leading to operating leverage and margin expansion of 20-60bps per year. In addition, the depreciation and amortization costs related to M&A will impact their operating margin. I estimate that the depreciation and amortization costs as a percentage of revenue will range from 3.4% to 6.6%.  The WACC is updated to be 9.2% assuming: risk-free rate 3.7%; beta 0.8; equity risk premium 7%; cost of debt 5%; equity $22 billion; debt $490 million; tax rate 26%. With all these parameters, the DCF can be summarized as follows:   Rollins DCF Discounting all the future FCF, the fair value is calculated to be $65 per share, as per my estimates. Key Risks Rollins announced that, effective January 1, 2025, Gary W. Rollins will transition from Executive Chairman of the Board to Executive Chairman Emeritus, and he will be succeeded by John F. Wilson, the current Vice Chairman. Although I don’t anticipate significant strategic changes, the leadership transition might cause some business disruptions in strategy and decision-making. Conclusion  I believe Rollins's modernization efforts, IT upgrades, and focus on margin improvement will support a strong stock performance in the near term. I reiterate the “Buy” rating, with a fair value of $65 per share.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2478913061"}