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Rentokil said that in the third quarter, it experienced a softer consumer demand environment in North America. In addition, it saw lower demand for chemical products for use in pest control and in turf and ornamental end markets in North America.
Furthermore, the company said that while customer retention rates remained resilient, new residential customer acquisition was challenged by the macroeconomic backdrop and a softer consumer demand environment.
In reaction to the news from its competitor, ROL shares fell more than -8% in Thursday’s session. The move adds to its recent slide in the last three months, which now stands at -26%. So far in 2023, it is at -10%.
ROL was recently the subject of a short report from Spruce Point’s Capital, in which the firm said it sees a potential 30% to 40% downside risk in Rollins. In its October 4 report, Spruce Point said it believes there are “multiple growing long-term macroeconomic and microeconomic issues” that will likely pressure Rollins’ historical growth and margins.
Following the RTO release, Spruce Point reiterated that view, adding that ROL is more exposed to North American consumer demand softness than Rentokil. The short seller said this is because ROL is a pure play on pest control, it has been “significantly underspending in digital marketing,” it has greater customer churn, and the stock is trading at an “undeserved premium.”
“Rentokil is the largest North American pest control operator. As a result, we believe it provides a good window into what is happening in the industry,” Spruce Point’s Founder and CIO Ben Axler told Investing.com. “We believe the pest control industry is becoming increasingly challenged with more competition from smaller operators and private-equity backed growth platforms.”
In addition, Axler said there is “now evidence that customers are resisting further price increases,” with housing demand slowing and customer counts flat. “Inflationary cost pressures are rising and margins are contracting,” he added. “We believe that Rollins is even more exposed than Rentokil to yesterday’s news.”
He explained that research indicates that Rollins has also experienced higher customer turnover than Rentokil in the last 12 months and that “Rollins trades at a massive and undeserved premium to Rentokil for no valid reason.” Axler noted Rollins’ “EV/’23E Sales and EBITDA multiple is 6.0x and 27x vs. Rentokil’s 3.4x and 14.6x (pre-Thursday’s value reduction).”
“As a result, we expect Rollins’ valuation premium to narrow and believe there’s 30% downside to hit the middle of our long-term price target,” Axler concluded.
Elsewhere, Stifel analysts have taken the opposite view, upgrading Rollins from Hold to Buy with a price target of $40 in a note Friday. They said their firm believes “the RTO softer organic growth may be more company specific and that 3Q23 organic growth remains in line with the upper-end of industry growth (3% to 5%) for ROL.”
“The private market is not suggesting any PC softness,” they added. “ROL attended the Stifel London Industrial conference on Sept. 6 and suggested 3Q was on pace for normal growth trends. Post the sell-off, we believe this is an attractive opportunity to own a best-in-class operator with the ability to sustain double-digit FCF growth over the next 10 years.”
Meanwhile, Citi analysts said in a memo that with Rollins’ Q3 results due next Wednesday, we will “see if the growth gap (1H: 4.4%) between these rivals has widened.”
ROL shares are down a further 1.3% so far in premarket trading on Friday.
