On Wednesday, CFRA reduced its rating on Rollins, Inc. (NYSE:ROL) stock, a leading pest control company, from Hold to Sell, adjusting the price target downward to $45.00 from the previous $48.00. The revision reflects concerns over increasing costs in the company's sales force expansion and customer acquisition efforts, which are central to Rollins' growth strategy.
The new price target is set at 41 times CFRA's 2025 earnings per share (EPS) estimate of $1.10, which has been decreased by $0.02. Additionally, the firm's 2024 EPS forecast has been lowered by $0.01 to $0.99. Although this valuation is below Rollins' five-year forward price-to-earnings (P/E) average, it remains significantly higher than that of its industry peers.
CFRA pointed out that Rollins' adjusted operating margins in the third quarter dropped by 90 basis points year-over-year to 21.4%. This decrease marks a reversal from the margin expansion seen in previous quarters. Despite anticipating positive organic sales and earnings growth over the next year, CFRA suggests there is a potential risk of Rollins not meeting market expectations.
The downgrade is also influenced by the stock's current valuation, which trades at a substantial premium compared to the broader environmental services sub-industry. This high valuation, combined with the observed margin pressures, implies that there is limited room for error in the company's performance, according to CFRA's analysis.
CFRA's assessment concludes with an acknowledgment of Rollins' growth prospects but highlights the challenges posed by the costs associated with the company's strategic initiatives. The firm's stance indicates caution regarding the stock's potential to maintain its premium in light of these financial headwinds.
In other recent news, Rollins Inc (NYSE:ROL). has reported a robust Q3 performance with a 9% increase in revenue reaching $916 million and a 7.7% rise in GAAP net income. These results were bolstered by strategic acquisitions and a focus on organic growth, leading to improved gross margins of 54% and an adjusted EBITDA of $219 million.
Furthermore, Rollins announced a 10% dividend increase, backed by free cash flow growth. In terms of company developments, the company completed 32 tuck-in acquisitions, expecting at least 2% growth from these activities for the year.
In addition, Rollins recently appointed Clay Scherer as Group Vice President of Technical Services, marking a significant addition to the company's leadership team.
Barclays (LON:BARC) and Jefferies have provided their perspectives on the stock, assigning an Equal Weight rating and maintaining a Hold rating respectively. Investors should note these recent developments as they reflect Rollins' ongoing commitment to strategic growth and operational efficiency.
InvestingPro Insights
Rollins, Inc. (NYSE:ROL) presents a mixed picture for investors, as revealed by recent InvestingPro data and tips. Despite CFRA's downgrade, Rollins boasts impressive financial metrics that warrant attention. The company's revenue for the last twelve months as of Q3 2024 stood at $3.31 billion, with a notable growth rate of 11.07%. This aligns with CFRA's expectation of positive organic sales growth.
InvestingPro Tips highlight Rollins' strong dividend history, having raised its dividend for 22 consecutive years and maintained payments for 54 years. This demonstrates the company's commitment to shareholder returns, even as it faces margin pressures noted by CFRA. The current dividend yield is 1.33%, with a significant dividend growth of 26.92% in the last twelve months.
However, investors should consider that Rollins is trading at a high P/E ratio of 51.58, which supports CFRA's concerns about valuation. The PEG ratio of 3.03 suggests the stock may be overvalued relative to its growth prospects. This high valuation is further emphasized by the company trading at high multiples across various metrics, including EBIT, EBITDA, and Price/Book ratios.
For those seeking a more comprehensive analysis, InvestingPro offers 17 additional tips for Rollins, providing deeper insights into the company's financial health and market position.
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