Rollins (ROL)

Pest control company Rollins (NYSE:ROL) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 9.9% year on year to $822.5 million. Its non-GAAP profit of $0.22 per share was in line with analysts’ consensus estimates.

Company Overview

Operating under multiple brands like Orkin and HomeTeam Pest Defense, Rollins (NYSE:ROL) provides pest and wildlife control services to residential and commercial customers.

Many facility services are non-discretionary (office building bathrooms need to be cleaned), recurring, and performed through contracts. This makes for more predictable and stickier revenue streams. However, COVID changed the game regarding commercial real estate, and office vacancies remain high as hybrid work seems here to stay. This is a headwind for demand, and facility services companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact commercial construction projects that drive incremental demand for these companies’ services.

Other large-cap international pest control companies include Ecolab (NYSE:ECL), Reckitt Benckiser Group (LON:RKT), and Spectrum Brand (NYSE:SPB).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Rollins grew its sales at an impressive 10.8% compounded annual growth rate. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Rollins’s annualized revenue growth of 11.9% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Rollins grew its revenue by 9.9% year on year, and its $822.5 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 9.6% over the next 12 months, a slight deceleration versus the last two years. Despite the slowdown, this projection is commendable and implies the market is baking in success for its products and services.

For industrials businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.

Rollins has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 52.1% gross margin over the last five years. That means Rollins only paid its suppliers $47.89 for every $100 in revenue.

Rollins’s gross profit margin came in at 51.4% this quarter, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Rollins has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 18.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Rollins’s operating margin rose by 1.2 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Rollins generated an operating profit margin of 17.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Rollins’s EPS grew at a spectacular 16.3% compounded annual growth rate over the last five years, higher than its 10.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Rollins’s earnings to better understand the drivers of its performance. As we mentioned earlier, Rollins’s operating margin was flat this quarter but expanded by 1.2 percentage points over the last five years. On top of that, its share count shrank by 1.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Rollins, its two-year annual EPS growth of 14.5% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q1, Rollins reported EPS at $0.22, up from $0.20 in the same quarter last year. This print beat analysts’ estimates by 1.3%. Over the next 12 months, Wall Street expects Rollins’s full-year EPS of $1.01 to grow 14.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Rollins has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 16.7% over the last five years.

Taking a step back, we can see that Rollins’s margin dropped by 2.5 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Rollins’s free cash flow clocked in at $140.1 million in Q1, equivalent to a 17% margin. This cash profitability was in line with the comparable period last year and its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Rollins’s five-year average ROIC was 27.6%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Rollins’s ROIC averaged 2.5 percentage point decreases over the last few years. Only time will tell if its new bets can bear fruit and potentially reverse the trend.

Rollins reported $201.2 million of cash and $1.04 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $782.6 million of EBITDA over the last 12 months, we view Rollins’s 1.1× net-debt-to-EBITDA ratio as safe. We also see its $14.16 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

This was a fairly in-line quarter, with revenue and EPS meeting expectations. The stock remained flat at $54.93 immediately after reporting.

Updated: May 16, 2025 at 10:05 PM EDT

Before investing in or passing on Rollins, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Rollins is a rock-solid business worth owning. First, the company’s revenue growth was impressive over the last five years, and analysts believe it can continue growing at these levels. And while its diminishing returns show management's recent bets still have yet to bear fruit, its admirable gross margins indicate the mission-critical nature of its offerings. Additionally, Rollins’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Rollins’s P/E ratio based on the next 12 months is 49.6x. Expectations are high given its premium multiple, but we’ll happily own Rollins as its fundamentals shine bright. Investments like this should be held patiently for at least three to five years as they benefit from the power of long-term compounding, which more than makes up for any short-term price volatility that comes with high valuations.

Wall Street analysts have a consensus one-year price target of $53.65 on the company (compared to the current share price of $56.97).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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