NOTE TO EDITORS: The Following is an Investment Opinion Issued by Spruce Point Capital Management
Finds That Changing Industry Dynamics Are Causing Increased Pressures Such as Rising Customer Churn and Acquisition Costs, Auto Accident Claims, and Consumer Resistance to Recent Price Increases
Warns That Nearly 40% of Rollins’ Annual Revenue Growth Has Come From Its Acquisition Strategy and a Flood of New Private Equity Money Backing Pest Control Acquisition Platforms is Causing Growth Challenges
Warns That Rollins Recently Settled Improper Earnings Management Charges With the SEC and Questions Rollins’ Recent Claims That Gross Margins Are Improving Organically Absent Its Levered Acquisition of Fox Pest Control
Believes That Rollins Faces Long-Term Pressures From Declining Insect Populations Due to Global Warming and Other Factors
Finds that the Rollins Family is Accelerating Stock Sales While the Company Increases Leverage to Repurchase Shares
Given Multiple Pressures And That Rollins’ Valuation Is Among The Highest In The Residential And Commercial Services Sector, Sees 30% to 40% Long-Term Downside Risk to Rollins’ Share Price and Urges Investors to Visit www.SprucePointCap.com and Follow @SprucePointCap on Twitter for the Latest on $ROL
Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled “Cockroach Theory of Investing” that outlines why we believe shares of Rollins Inc. (NYSE:ROL) (“Rollins” or the “Company”) face up to 30% to 40% long-term downside risk, or $21.75 – $25.40 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
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Spruce Point Report Overview
Rollins, an S&P 500 index component, is the second largest pest control service provider in the U.S. and operates under a variety of brands such as Orkin, HomeTeam Pest Defense, Critter Control, Fox Pest Control and Western Pest Services. The Company services more than two million customers, with approximately 45% and 35% of sales to residential and commercial customers. Approximately 93% of sales are in the U.S., with the remaining 7% coming from international sales. While historically the pest control industry has exhibited healthy margins and is viewed as recession-resistant due to recurring revenues and services that were deemed essential during COVID-19, there are multiple growing long-term macroeconomic and microeconomic issues that have been identified, which are likely to pressure Rollins’ historical growth and margins.
The concerns we outline in our report include:
Industry competition is increasing with the recent merger of Rentokil and Terminix, the rise of door-to-door sales, a flood of new private equity backed platforms, and bundled home services. In October 2022, Rentokil completed its acquisition of Terminix to become the largest pest control company in the U.S. and globally. Our research indicates that the combined company is increasing its marketing intensity, which is ultimately pressuring Rollins’ customer churn and acquisition cost. In addition, because digital marketing costs have increased, the pest control industry has seen a resurgence of door-to-door marketing companies, a sales practice that Rollins has historically not fully embraced until recently. Furthermore, realizing that home services, and pest control specifically, is an attractive business, new entrants have entered the space. Beyond the shift to door-to-door sales and the growing competition, we believe the biggest threat to Rollins is by far the emergence of private equity. Today, there are at least 20 private …
