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On Thursday, Bernstein SocGen analysts lowered the rating for Rentokil Initial Plc (LON:RTO:LN) (NYSE: RTO) from ’Market Perform’ to ’Underperform’. Accompanying this downgrade, the price target was also reduced to GBP3.00 from the previous GBP3.65. The stock, currently trading at $23.09 with a market capitalization of $11.59 billion, is showing signs of undervaluation according to InvestingPro Fair Value analysis.
The downgrade by Bernstein SocGen reflects concerns about the company’s leadership and strategic direction, particularly in the North American market. With vacancies for key executive roles such as North America CEO and group CEO, the firm indicates that Rentokil faces challenges in the scale and duration of its US Pest turnaround efforts. Despite these challenges, InvestingPro data shows the company maintains impressive gross profit margins of 83.87%.
The analysts at Bernstein SocGen highlighted a shift in Rentokil’s strategy regarding store numbers and branding. They also pointed to a deterioration within the company’s higher quality recurring revenue business within US Pest, particularly in the first quarter. The reliance on one-time jobbing revenues was noted as a factor that has been supportive but may not be sustainable. This concern is reflected in the stock’s year-to-date decline of 7.46%, though InvestingPro analysis reveals over 6 additional key insights about the company’s financial health and future prospects.
While acknowledging the potential for upside risk from further activism, special situations related sales, and spin-offs, Bernstein SocGen expressed concerns about earnings risk and deteriorating earnings quality. These factors have led to their earnings per share (EPS) estimates being 6-15% below the consensus, which has influenced their decision to set a lower price target and recommend an ’Underperform’ rating for Rentokil stock. The company’s current ratio of 0.81 indicates some pressure on short-term liquidity, potentially supporting these concerns.
In other recent news, Rentokil Initial has announced that CEO Andy Ransom plans to retire by 2026, with the search for his successor already underway. This announcement is part of the company’s long-term strategic planning, ensuring a smooth transition without immediate changes to operations. Additionally, Deutsche Bank (ETR:DBKGn) has revised Rentokil’s stock target to GBP4.65 from GBP4.85 while maintaining a Buy rating. This adjustment follows Rentokil’s fiscal year 2024 results and guidance for the first quarter of 2025, which disappointed due to challenges in North America. Rentokil’s revenue in North America is expected to remain similar to the 1.0% growth seen in the first quarter of 2024, influenced by factors such as a polar vortex and California wildfires. Rentokil is expanding its branch footprint to over 500 locations and emphasizing its branding strategy by leveraging regional brands alongside Terminix and Rentokil. The company has also reverted field sales responsibilities to branch managers, a move supported by Deutsche Bank as aligning with industry standards. These strategic shifts aim to navigate current challenges and position Rentokil for future growth.
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