Chit Chat Stocks - Exterminating the Premium: Is Rollins (NYSE: ROL) Finally a Buy? - Full Analysis

Episode Date: October 7, 2026

On this episode of Chit Chat Stocks, Ryan dives into another research episode covering the stock Rollins (NYSE: ROL). We discuss: (00:00) Introduction (04:50) History of Rollins and its founder, Otto Orkin (11:07) The evolution of Rollins' business model and growth strategy (14:48) Industry overview: size, competition, and customer demand (20:03) Resilience of the pest control industry through economic cycles (24:55) Details of Rollins' acquisition approach and portfolio management (30:06) Financials: margins, costs, and operational efficiency (37:04) Valuation analysis and why the stock has fallen (45:01) Risks and opportunities: AI, digital marketing, and market dynamics (54:59) Conclusion: Is Rollins a good investment today? ***************************************************** Subscribe to our newsletter and join our interactive chat community: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

For the past three years, interactive brokers individual clients average 24.3% annually beating the SMP 500. Lower costs and access to 170 plus global markets matter. Visit IBKR.com slash performance. Welcome to Chit Chat Stocks. On this show, host Ryan Henderson and Brett Schaefer analyzed businesses and riff on the world of investing. As a quick reminder, Chichet Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks? by Ryan, Brett, or any other podcast guest is not formal advice or recommendation.

Now, please enjoy this episode. Welcome into another edition of the Chit Chat Stocks podcast, a podcast to help you find your next great investment. My name is Brett Schaefer and I am joined by my co-host Ryan Henderson for another edition of a Ryan research episode. We are covering a Fallen Angel and it may not be the biggest AI win. or loser. It's not going to be something they talk about much on CNBC. If they ever did, I would be shocked. But it's a pretty sizable business. And it's one that has delivered huge compound annual returns, but is in one of its steepest drawdowns ever. It is Rollins. It is a pest control rollup. We're going to look into why it is down, whether the stock is an

interesting buy today and what Ryan uncovered with his research. Before we get started, I want to mention we have plenty of other stock research. episodes in the catalog that anyone can look at. Also give us a review on Spotify, Apple Podcast, or follow us wherever you are following or listening to us right now. Let's get started right away. Ryan, why Rollins? Why now?

Pest control. Let's get into it. Yeah, it's yet another fallen angel. I've been trying to stick with the fallen angel theme this year. I mean, there's honestly an endless list, it seems. So they've given me ample opportunities to look at some of these. But over, I guess, the last couple weeks, I have been looking through some of the larger companies that are in major drawdowns. And I have been blown away by the amount of companies that are now down 50% or more from their highs that just a few years ago were deemed by pretty much most investors as like these.

untouchable compounders. You can really just go to the S&P 500 worst performers for the year and you'll see a shocking list of companies that were once extremely loved and seemed to be soured on by investors now. And some of the drawdowns make sense. Like I saw FICO on the list. They've got some big political controversy. Software stocks are obviously getting hurt by the SaaS apocalypse. But there are a few that seem to.

a little out of place where it's just durable, boring businesses, boring but impressive businesses. And one of those was Rollins. Rollins is in the span of about six months, shares have dropped 50%. They are currently in their largest drydown in 25 years and nearly their largest drawdown ever. Apparently they, I guess maybe they were hurt in the dot-com crash. They had a bigger drawdown in the year 2000, but it was a very different business then. So, For modern Rollins, this is the biggest drawdown ever. For the better part of the last decade, I think pretty much since 2008, Rollins has traded between 40 to 60 times earnings.

And they've been praised by investors as being this extremely durable serial acquirer with natural organic growth, ample room to reinvest capital. So since it now has been cut in half naturally, it falls into that fallen angel camp and we are taking a look to see if anything has actually changed or just opinions have changed. Yeah, I was going to say history might not repeat, but it rhymes. The biggest drawdown.com boom. AI boom, same thing is happening. I'm not sure you said it might not be apples to apples there. We had, again, thank you for people that had listener questions for this episode.

I forgot to mention this at the beginning, but there were some listener questions. And if you ever want to ask something up front on what the Ryan Research episode or any other research episode that we're doing, we do this with interviewees as well. We're going to have the substack chat, which the link to that is in the show notes.

You sign up for the free tier. You join the chat. I always put at least a week before, maybe a couple days before we record. Hey, anyone have any questions on X topic? So if you wanted to ask questions about Rollins, you could have done so for any future one. you can also do so as well.

But let's get into the company history. Again, this is not the sexiest story, but these are one of the, you know, this is how a lot of the money is made in the United States and really around the world. So how was Rollins started? How do they start in this niche of pest control? Otto Orkin,

which kind of a cool name, Otto Orkin, who is more or less the original founder of what is today, Rollins, I guess. was born in 1887. Strong start there when we're talking about Lindy businesses. He was a Latvian immigrant living on a farm in Pennsylvania. His childhood job on the farm was to keep rats out of the grain.

What a gritty childhood, by the way. Yeah. Thank you for living in 2026. We don't want to be on the farm, you know, being the personalized rat control. Yeah. apparently, and keep in mind, he's like 14 at the time. Apparently, he brought an incredible level of focus to this, in my opinion, horrible job.

In 1901, he borrowed 50 cents, bought arsenic in bulk, and started selling his own blend of rat poison door to door. I don't know if that would be quite committed. It's an entrepreneur. Yeah. In today's world. You get VC money today. Yeah. That's great.

Yeah. this was the beginning of what would eventually become Orkin. Eventually, instead of just selling the poison door to door to other local farmers, he started selling it as a recurring service where he would come and spread the poison. And he advertised himself as Orkin the Ratman, which there's actually like flyers online that you can go look up, the rat man. It's pretty, pretty interesting little business card. But he kept it this business basically from that point on, from everything I could tell. and in 1925 he moved to Atlanta, commissioned the red diamond logo that Orkin still uses to this day, and officially sort of kicked off expansion.

By the end of the 1930s, and I think this is, I mean, it's not relevant to the business day, really. But by the end of the 1930s, Orkin had branches all across the southeastern United States, which this was a time, the Great Depression, when all businesses were struggling. And here he is expanding. I think it just goes to show that the resilience of the pest control category, like no matter how hard times are, the last thing you want is a rat in your grain. The last thing you want is termites in your kitchen, whatever it is. So very resilient. Fast forward a couple decades.

And apparently some family drama led to what is now considered the first ever real LBO. So in 1963, the Orkin family was having some issues. Otto's sons forced him out of the picture and the sons could not agree on financial or business strategy decisions. So in steps, Wayne Rawlins. Wayne, Wayne Rollins has a story of his own that I think is, you know, if you're really interested, you can go look at it, but it's not that important to the business today. But apparently he was great entrepreneur, grew up poor and he really wanted to own boring, predictable businesses. And at one point discovered, that Orkin was for sale. So the issue was, so I guess back up a little bit. Wayne Rollins and his brother owned a Ford dealership, and then Wayne Rollins bought a small radio station in Delaware. And the entire acquisition was apparently just to give free advertising to the Ford dealership

and then also run the broadcasting business as well. When they saw Orkin, they were doing just under $10 million. in revenue across the broadcasting business. So, and keep in mind, Orkin wanted like $60 million for the business overall. So obviously, the broadcasting business is much smaller. Apparently leaning on his brother's connections, I'm not sure how he was able to do this, but he was able to convince Chase Manhattan and Prudential to underwrite most of the acquisition offer based on the strength of Orkin's expected earnings.

Meanwhile, the Rollins family would put up just a small slice of equity and they would retain the control. The deal, after getting financing from the banks in the first LBO, closed in 1964 and is generally regarded as one of the first leveraged buyouts in American history. So Rollins now owns Orkin. It's 1964. Following the Orkin deal, Rollins kept expanding. apparently this was like the conglomerate era every every business wanted to own every business in every industry so i think they had they owned like uh it might have been a tv channel there was lawn care there was oil fields and eventually by 1984 they decided okay we got to split these businesses into three separately traded entities and kind of consolidate our focus and resources so there were three different businesses. Rollins communication, that was kind of the broadcasting and billboards, RPC Energy,

which was the oil fields, and then Rollins Incorporated, which is the business you know today, which was basically Orkin plus a bunch of other service-based businesses. And I think within six years of splitting it off, they had divested basically everything except for Orkin and other pest control businesses they'd acquired. So this was by 1990s, a pure play pest control business, publicly traded. And that's kind of when the modern history starts. Okay, let's talk about the 21st century. We're not going to do a whole episode on the history. What happened?

What is the recipe for growth? I'm looking at the stock. And you'll probably have some better data than me. I'm looking at our friends at fiscal.a.I here. As always, use our link. fiscal.AI slash chit-chat and get 15% off any paid plan. The link is in the show notes. We are going back to 1990.

I guess we did, I don't want to go to 2000. The stock, even in this drawdown, has had a total return of 7,500 percent or compounded at 12.5% per year. And again, the earnings multiple is. We'll get into the valuation as much lower today. So what was the business model change that led, or just, business model development. I'm sure, you know, they're still in pest control that led to these fantastic results. Yeah, the 21st century was basically all of the modern history. So in 2001,

Wayne Rollins son, Gary, became CEO. And he should be credited largely with building the Rollins that we know today. He served as CEO from 2001 to 2022. And actually, actually, Actually, if you go all the way back, I think there's only been now since the 60s, three CEOs of Rollins. If you go all the way back to the 1800s or I guess the early 1900s, there was, I guess, it was Otto Orkin, his son, Wayne Rollins, Gary Rollins, and now the current CEO, which is not in the family. But anyway. Like Steelers football coaches. Three in the entire history. Yeah.

Oh, wow. Fascinating. Yeah, it's long executive ten years. But the formula was really straightforward. He wanted to grow organically. He wanted to buy regional competitors. And he wanted to build a shared infrastructure or best practices to improve each business and ultimately improve margins in the process as well. Western Pest Services was kind of the first major acquisition, Rollins did.

and it was the first one where they didn't absorb it into Orkin. A couple times they bought these smaller businesses and they'd roll them into Orkin and try to integrate them and do all this. And Western Pest Services, they left it operating on its own. I think it was a $400 million deal, which is pretty big back then. I mean, it's big now too. But this initiated the standard for the multi-brand portfolio, which is what exists today. They have since replicated the strategy over and over again. And each acquisition, it's a, I think oftentimes you want to look at serial acquires and assume there's like this very simple playbook that they deal with for every single acquisition.

But it's a lot messier than that. There's certain, certain businesses maintain their own brand. So Western Pest Services, if it's a big regional player, they tend to. to let that brand kind of keep its existing business. If it's really small, they'll typically roll it into a regional player. So they do probably 30 acquisitions a year, roughly. The data is up on fiscal AIA if you want to check it. But from 2023 to 2025, they acquired 94 different pest control businesses.

They don't have 94 brands. So they do consolidate some of these. But for the most part, if it's big, it's well known within your specific community, your specific state, they're going to let that operate independently. Today, the business has, I think, 60 different brands all across the U.S. and Canada, and they are the largest pest control provider in North America. Okay, I was just loading up the acquisitions line. Yeah, it is under the KPIs there.

and the average, if we use that little button, 28 per year since 2013, 24 and 2024, only 26 and 2025, kind of hovers around that 20 to 30, 25 to 30 figure per year. What is this industry like? You mentioned people have pests. They have any problems.

They usually want to get it done as quickly as possible. They don't want to think about it. It's not a job you really DIY for the most part, unless you put a little bit of that ant spray on the bottom of a door or something like that, beyond the basic stuff. How does it work? Where does the money come from? Size. Let's kind of move into as we get into the financials of Rollins itself. Yeah.

The industry is really important here because for any business, the industry is important, but for a serial acquirer where you're concerned about the runway, potentially, it's obviously extremely. important. The North American pest control industry generates an estimated $30 billion per year in revenue. Now, that could be off by quite a ways, but Rollins generates about $4 billion in revenue. So that is to say, the pest control industry is much larger than Rollins. Rollins does not have half of 50% market share or anything like that. Most of the industry is made up of smaller local providers. It's estimated. estimated that there are about 32,000 independent pest control businesses in North America. And despite serial acquirers like Rollins taking share, that number has remained stubbornly consistent. I mean, think about it. It is not hard to start a business like this. Get a license by a truck, buy the chemicals, go knock on doors. So the barriers to entry are really low.

So you have a lot of competitors often popping up. as for the industry broadly, it's a pretty great place to be, I think. You think about the buying process for a second. If someone sees a cockroach or a mouse, a homeowner who is not already a customer is going to call whatever name they recognize, they're going to ask their neighbor for a reference, or they're going to look up pest control near me. it is time sensitive and they are not just looking for the lowest cost solution. In fact, I went through this process actually recently.

Bought a house immediately realized I needed some pest control services. I think I got added to some directory or whatever because I immediately had a bunch of pest control salesman knocking on my door. Thank you, too, info. That's that business bottle right there. Yeah, probably. Someone gave me what seems like that. like a reasonable offer. I just checked online. Like is this within the right wheelhouse? I wanted to fix right away. I didn't want to have to wait just to save $10 a month or whatever. So I went

with them. It's we are like the customer is looking for whoever can solve the problem immediately and importantly keep the problem away with that recurring service element. So in my example, they they come to the house initially spray a bunch of stuff and then they basically come once every two months you pay you know a monthly charge and it's a relatively small cost compared to having a pest free house like the value they're providing is certainly there that is the residential side and keep in mind oftentimes it's not even discretionary like many southern states require a termite letter to complete the sale of a house or um v a loans require an inspection to see if insects have damaged any wood for the home. Yeah, I'm seeing termites. It has its own segment here. It must be important. Yeah, I found that quite funny. You've residential, commercial, and termites. Yeah, and there's, it's like termites and ancillary, so I think it also includes like wildlife extraction, potentially if there's, like, bigger issues. But the commercial, so.

As far as revenue split goes, residential is the biggest. Commercial, I think someone asked this question in the chat. So residential, I'll just skip to this now, 45% of revenue. Commercial is 33%. And then termite and ancillary, which is like, you know, maybe removing wildlife or something, is 21%. So the bulk of the business is commercial and residential. On the commercial side, if you're a restaurant,

you have to pass a health inspection. And in order to pass the health inspection, you typically have to show documentation of having pest control services that occurred. So it's an absolute must have in order to just continue operating. So the demand is very, very resilient. It's about as recession proof of an industry as you can find. Rollins specifically has grown revenue for 25 years straight, including right through the dot-com bust, right through the 2008 financial crisis and the. COVID pandemic. In fact, in the pandemic, they said it was actually sort of an inflection for their business because people were spending more time in their house and they needed to address more

of the pest issues. But think about the 2008 crisis as a good example here. They grew right through it. Like if you look at this revenue chart, there's not even a blip from 2008, 2009. The 2008 financial crisis was largely geared towards, like, it really affected homes. It really affected homeowners. So the fact that they were able to grow right through that, I think, is not only a testament to the resilience of the category, but how much of their revenue is recurring services instead of just like new customers. So I think 80% today is basically recurring contracts. And then the remaining 20 is sort of those one-off wildlife extraction or termite inspection, that kind of stuff.

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revenue split a bit. What about costs, margins, kind of the income statement here and how the top of funnel works. I'm assuming we're going to be talking about and I see it in your notes here, a lot of Google focus and probably Yelp a little bit in the early days and we're having that transition,

maybe that's part of the reason the stock is down from, you know, maybe AI sources or AI agents taking over some of this. Yeah, they're the largest pest control company in North America, more than 60 different brands. Most of them, you probably would not,

recognize most of the brands, but you might recognize the one that you've seen around your area. These are the kind of businesses that are, if you go to a high school football game, you're going to see the banners advertised on the fence, that kind of stuff. Little League teams. I would love if you're Little League teams sponsored by the pest control and that works with some sort of your mascot or your team name. It works beautifully. Better than a real estate broker.

Oh, those are our team teams. Yeah, that's true. Yeah, the costs are relatively low. The main cost for Rollins is labor. So they have, in total, Rollins has more than 20,000 employees. About 75% of those are field employees. So technicians, specialists, you know, high school guys going door to door trying to sell services, maybe, you know, 20 something, that kind of age group. The pay varies by region, but on average, these are employees that are probably making about 20%

$20 an hour for their base pay, and then they'll have a range of different, like, route completion incentives. Each business is a little different, but, you know, if you, you know, complete six houses in a day or whatever, maybe you get some sort of a bonus. So labor in total is probably about 40% of revenue. And then as far as other costs of providing the service, they have to pay for pesticides and chemicals, which I think is around 5% of revenue. And then they, centrally source a lot of that. I guess it's 6% of revenue. So the Atlanta headquarters for Rollin is doing a lot of the procurement efforts.

So they're getting these big bulk discounts and buying all these pesticides, finding the providers, buying group trucks. So, you know, buying fleet discounts. But yeah, it comes out to about 52% gross margins. So from the revenue, about half of that is shaved off for, actually providing the service, like sending someone out in a truck, spraying the chemicals. The remainder of the costs are more your corporate level expenses, advertising, maybe more enterprise or nationwide sales, fleet expenses, insurance, there's a lot of liability stuff.

The advertising and marketing segment is a hybrid effort, usually, between the corporate staff and the regional brands. So they've got data analysts and SEO people working at their HQ in Atlanta focused on search engine optimization, paid search ads, helping generate leads for the local brands, as well as like Oregon is national. It's nationwide. So all the advertising for Oregon is done at HQ. However, much of the creative messaging is left to the local brand. So stuff we just talked about, the Little League jersey sponsors, for example. that's it's very community based.

I think it's probably good that it's community based because a lot of these pest control businesses have been around for a long time. You know, they know people in the community. They've knocked on doors. They've been advertisers. They've, you know, kids went to the local high school. So they, they know the area. And I think there tends to be more like I had a pest control guy knock on my door yesterday. yesterday, funny enough. And a big part of the pitch was, we're not, we're not this big, uh,

nationwide chain. We're, we're a local branch from there, or we're a local brand from, you know, a town nearby. Obviously, I don't really care that much about that, but he was trying to counter position, which is, it's funny because Rollins is the biggest, but all their brands are probably saying that exact same thing. Like, we're not, we're not corporate. We're local, even though they're a part of Rollins. Beyond that, the staff at Rollins' headquarters is spending their time building tech, like shared infrastructure for their brands, CRMs, stuff like that, optimizing fleets and routes, negotiating and finding new vendors,

seeking out new acquisition targets, and then all the generic corporate roles as well. So HR, legal accounting. All in all, those accounts. expenses account for 30% of revenue. So bottom line, you're getting about 19% operating margins. That's going to be much higher than your average independent pest control business. Well, I've seen the operating margin here. It's climbing over the last 20 years. That just been more scale. I guess the gross margin, as you mentioned, is about 50%. From what you're ready, would you expect that? And to kind of steadily continue, is there no reason it can't get a

25% over the next decade. Yeah, I think margins can grow steadily. This will never be, I don't think, this will ever be a 40% operating margin business. It's never going to have 70% gross margins. I can't see a world in which that happens just given how competitive this industry is. There are cost synergies when they roll a company into Rawlins. So the sourcing of chemicals, that's a big one. They're able to buy it for a lot cheaper than your average independent pest control service.

They're able to reduce redundant work. Kind of the typical M&A playbook is at play here, at least to Sunday. So you get general margin expansion from that stuff. And then there's also the big one. We'll talk about this in a sec, is the route density. So you end up spending a lot less time, dead hours on the road. Because once you're part of the Rollins network, you have a bigger customer base. They're optimizing your route for you.

So you're not spending hours going to and from house to house. You're picking up houses that are much closer to each other. Okay, let's talk about the acquisition process and potentially, although you might be answering this in another section, but I'll just ask it now, the runway to keep acquiring mom and pop shops. Yeah, the runway's enormous. I mentioned earlier. There's 32,000 independent pest control businesses in North America. Rollins buys like 25 a year. And the number keeps growing of independent pest control businesses.

So I mention it. The barriers are extremely low. Every day a new competitor has probably started that is a potential acquisition candidate for Rollins. I think one of the important things to distinguish here, this isn't like, Rollins isn't going on to biz by sell and looking up pest control services and going into these auction bidding wars. most of these are from local, like, family-owned businesses where the competitors know each other. So these regional players, for example, let's say Rollins has a big business in Washington and Oregon. If they have the big regional provider, they fold it in maybe, I don't know, 10 smaller local providers, someone in that organization is going to know. they're competitors. So a lot of the acquisition leads are started organically like that,

where a competitor will reach out to them and say, hey, you know, I'm, I'm looking to move on from the business or I don't want to operate it myself anymore, whatever that is. They're sourcing them a lot more organically as opposed to higher price bidding worse. So those regional players, they've done a lot of the hard lifting. Literally, they've been knocking on doors for decades. So they've got some know-how. And Rollins, I wasn't able to get a sense of how much they pay, like what their average multiple is for these businesses. I can't imagine it's that high because a lot of these are probably sort of key man

risk type of businesses. But when they sell to Rollins, here's what they get. They get typically, you know, money. So you get the price for your ownership of the business. You get earn out incentives. And then there's typically a 12 to 24 month transition period if you want. So you could just keep operating the business, collect some cash, be paid, whatever. Maybe there's some sort of an ownership split or earnings split.

In order for Rawlins to maintain high customer retention, the earn out clauses are based. on usually customer retention hurdles. So it prevents the owner from saying, here you go, Rollins. Also, I'm going to start a new one and take my customers. The other part is they usually sign a three to five year non-compete clause. So it kind of protects Rollins. The when, let's say it's a smaller acquisition candidate, when they actually get acquired, they will get folded into usually that larger regional player.

And then this is kind of great for them because once they get folded in, they now have this share at CRM. They have the larger customer database. And their routes are no longer, I'm going to Ted's house at 9 a.m. And then I've got three dead hours and got to drive, you know, 40 miles. I know how some of these small business construction type firms work. They got a little notepad. Oh, I know the area. I don't, they're the type of people who.

I love. They're usually like, oh, Google Maps, I know a better route. We don't need optimization, right? It's that sort of vibe. Yeah. And so they get an automatic lift, but I don't know the specific numbers, but my guess is they're probably on average serving one to two more houses per day, which is huge in the grand scheme. So it's a nice benefit for them because they're getting probably paid more. The technicians are probably getting paid more because they're hitting those hurdles. And it's better margins and better revenue for the acquired brands. I'll leave it at that.

The only thing I also mentioned is you get a lot of lead gen from corporate. So a lot of the SEO, all that stuff. Like maybe you weren't spending time on paid search. ads. But if someone in Austin, Texas looks up pest control near me and now you're a part of Rollins, Rollins can do that advertising on behalf of you and suddenly you're getting these leads that you weren't before. You're also getting referrals from other companies. So let's say you focus on pest control, but Rollins has a wildlife removal chain in your region. You're going to pass that along to them. So, yeah, there are, I think, some nice advantages to being acquired by Rollins.

Okay, let's talk competitive advantages. Motes, where is, where do they win? Why do they have increasing, well, we talked about the increasing returns to scale, but why is it defensible unless, yeah, maybe you've talked about this a little bit, but anything else to add before we get into the stock and valuation. Yeah, we've kind of alluded to it a little bit. You can get nitty gritty with certain advantages. Like, okay, you don't have to do the HR anymore if you were, you know, doing that at all for your tiny, you know, pest control business. But in broadly speaking, I don't think pest control, like the scaled place,

player in pest control does not have the same level of competitive advantages that scaled players in other industries do. So you think about like O'Reilly and AutoZone, they have massive scale advantages, especially in procurement. They're, you know, they are buying stuff much cheaper than a mom and pop auto parts store. And the materials is one of the biggest costs for them. When you look at Rawlins, chemicals, pesticides, it's only 6%. It's probably, I don't know, I guess, 8 to 10% of their costs.

Most of it's labor, right? So there aren't as significant of competitive advantages, but I'll go through at least a few. First one is bulk discounts. So they do get the chemicals, pesticides, all that stuff at cheaper prices because they're getting enterprise level volumes. Same with your trucks. Like you don't have to buy a truck at retail because they're buying 50. So you're saving money there. The digital marketing and lead generation from corporate, that is a huge deal.

And then the biggest one by far is the route density. We just talked about it. You get folded into a regional player. You have access to a much bigger CRM, a much bigger customer base. Your route optimization is done for you. You're able to service five, six houses in a day as opposed to the three or before that you were pulling together on your own prior to that. So those are big advantages and you're able to you're not necessarily a big, it's not a big pricing difference really between

you and the competitors, but the costs are lower and you're much more efficient. Okay, let's get to the fun part. The stock is down. Your note here for the section is why I have the shares collapsed. I'm looking at the EV to EBIT chart, which probably a pretty good figure for business like this, especially doesn't have much interest expense. I don't think the EB is not nothing too crazy. Although, again, whatever, that would be the right one. Anyways, historically, right about 30 to 40, maybe 35 to 45 times EBIT. And then you just see the last year and a half it's just collapsed to 20. Why?

What happened? Is there an attractive opportunity here? Are they buying back stock on the cheap? What are the risks that, you know, Mr. Market, Wall Street, all the investors out there are looking at? And that's why they're ditching their stock. Yeah, I guess this is probably why most people tuned in. Because if you're listening to this, I assume you've probably heard of the Rollins brand. Maybe you know what the business is generally.

I mean, it's not. Right. And they want the history of pest control. That's what they came in. Yeah. Most people, yeah, maybe they'll skip to this section. Yeah, it's not a complicated business. Most people understand it.

It's high quality. It's durable. But somehow the stock, the multiple has been cut literally in half in the span of a year. So there's a few reasons that I think have sort of driven this. For starters, in late 2023, the Rollins family started selling a massive chunk of its ownership stake. In total, it was about a $2.6 billion sale, which I guess, congrats to you grandkids that are inheriting that $2.6 billion. There we go. And for reference, market cap, 15 billion-ish. So pretty sizable. What is that? 20%? 20%? It used to be a lot higher.

Yeah. Well, the market gap used to be higher. Okay, okay. Back then, maybe 10% of the market cap. Yeah. On its own, I don't think this really would have been that big of a deal. I mean, you see this all the time where the founding family starts cashing in chunks of their ownership. I think the Walton's have been sellers for as long as I can remember. You know, it happens all the time. However, Rollins, the company spent $300 million of its own capital buying that stock from the family to help facilitate their cash out. So this was, and maybe you can share this chart, Brett, they had done basically no stock buybacks for 20 years, not none, but very little share buybacks for 20 years. And then when the stock is trading at 40 times earnings and the founding family wants to cash out, all of a sudden they offer up a $300 million buyback.

It seems a little suspicious and it kind of feels like they're stealing from shareholders. So this left a bad taste in investors' mouths. Yeah. And they've started ramping up buybacks again, but that's at lower prices. So if you stripped out the last year and a half, it was a total outlier. So investors didn't like that. Then in June of this year, Rollins CFO Ken Krause left unexpectedly. He started in 2022, so he was there for about four years.

But keep in mind, they have pretty long executive ten years. So I think this caught a lot of the investing community off guard. And two weeks before his departure, he at the Investor Day laid out these long-term margin growth trajectories and was like very optimistic for the Rollins business. So for him to turn around two weeks later and leave to become CFO of an AI data center business, it feels, I don't know, I think. It feels. That's what I feel. That's what I thought.

Yeah, concerning maybe for Rollins, but maybe, hey, good luck. running an AI data center business. Yeah, we'll see if that one's around in 2030 or Rollins is still kicking. I would bet on Rollins sticking around. Yeah, I think with a serial acquirer and a business that's very mundane, the CFO is like kind of the main contact point and probably the person that Wall Street cares about the most. So for him to leave, like, sort of unexpectedly, I think it scared off a lot of investors. The Rollins executive team had nothing but praise for him and basically said, like, he's pursuing an opportunity in an unrelated industry. We really appreciate everything he's done.

We wish him well. And so it didn't sound like it was any sort of disagreement, but nonetheless, it's a departure. the former chief accounting officer has since stepped in. We'll see how they do. Yeah, so that's, I guess, the second red flag. And then on top of that, Q2 showed a drop in organic revenue growth, specifically due to slower new customer growth in residential channels. And they specifically mentioned that their digital lead gen was slowing.

So I think there's kind of two things here. One. A.I loser, Ryan. Boom. That's all. Wall Street here. Here's that. They just go, AI loser, dump everything. We're going to send this down 30% tomorrow. I think that's what people were worried about. Honestly, they thought, okay, Rollins isn't able to generate the same level of SEO leads or SEO paid search driven leads that they used to because people are going through whatever chat GPT looking for the lowest cost provider.

And then on top of that fuel cost junk, so margins compressed a little bit. They revised their revenue guidance from 7 to 8% to 6% for the year. Their organic revenue growth guidance. So they're still expecting to grow organically 6%. The other thing I will add here is it's a, it is one of the worst times in U.S. real estate history as far as transactions go because homes are as unaffordable as they have been. So if you're, they do get a lot of customers by new homeowners. So someone switches a home. They, you know, they got to get a new pest control provider.

If you're seeing fewer and fewer people moving and buying homes, I think that could just be a headwind in general. My. And then the other factor, which is harder to point your finger at, but interest rates are higher. So if investors can get five and a half percent yield on 10 year bonds. probably doesn't make sense to pay 40 times earnings for Rollins. Yeah, probably never did, but it's okay. It's a slow grower. I don't really get it.

Did you know you can lock in 3% real returns on inflation protected bonds for the next 30 years, Ryan? You're going to put all your money in that and go home? It's not bad. If I was 60, I might be doing that. That's a topic for another episode. But your note here reminded me of that. 3% real? Come on. If I were loaded and all I wanted was a 3%

is guaranteed 30 years inflation protection 3% on top of whatever inflation is I think however the mechanics work. I'd lock that in if my ambitions were lower. Yeah, that's true. And we weren't under 30 years old. Yeah. Although I'll be 30 in a couple of months here so I can't say that. I can't say that anymore. All right, we're on topic.

We are anti-bonds till the age of 50. Hey, I don't some long-term bonds, but yes, not a 60-40 portfolio. Okay, okay. I think the real risk, I mean, we looked at the buyback thing that's a bit yucky, I guess. A little bit of a yellow flag, but it's unfortunate you can't really control it. CFO leaves. Also not really much there. Hopefully the new guy coming in is fine.

Like, it seems like they have a solid culture. That was just a bit of surprise. but the one thing maybe we can discuss more is the top of funnel risk. They're probably going to have to do a little bit of work to adjust to AI agents, chat GPT, Gemini, Claude, being the inbound instead of Google, instead of just Google, Yelp, Google Maps, things of that nature. I was trying to think through while you were talking. I don't necessarily think they lose most of their motive if an AIA.

agent is conversing with a lot of people. They'd find a reasonable price. They can probably get there fast enough. You can lock into a long-term contract. But maybe it helps the mom and pops who have good digital footprints. But again, Rawlins also has the best infrastructure for a digital footprint. So they're probably most likely to get people to surface on AI agents, generative AI results, things of that nature. Yeah.

And it's not like they're wildly more expensive than the mom and pop shop. The mom and pops have to pay more to provide their service. They got to pay more for pesticides. They got to buy their own trucks at retail prices. It's not like they're juicing two to three X the price. Yeah. So I don't think they are just this huge loser and agentic. Which by the way, what a vacation?

You run a vacation. Everyone adopted AI agents for their entire life in a week while you were gone. Right. But what percentage of people are even buying through that? method. Like, I'd be curious, like new customers, how much comes from SEO versus door to door, neighbor referrals, that kind of stuff. And keep in mind, only two to three percent of revenue growth. Sorry, they expect to grow revenue organically or they target seven to eight percent annual revenue growth. Half of that comes from price increases. Half of

of that comes from new customers. So even if you shave off new customers a little bit, their organic revenue growth is still probably going to be just fine. 80% of the business is recurring contracts that already exist. So it's not, this isn't growing at inflation. Yeah, this isn't fundamentally changing. Like, pest control is not an AI loser. It does. It does. It does change a little bit. There is a risk if AI agents take over quickly. It changes the endbound a little bit. But they're not even a loser. They're just as competitive. in an agentic buying process. Unless the, unless the, unless there are people are searching like muse, go find the pest

control business nearest to me that is not a Rollins brand. They are not like. Yeah, that's fair. That's fair. If it, again, if they are going to be the best option for someone, the agent will probably figure that out whatever your criteria is like time cost, what have you. And then they'll lock you into a long term deal and you don't have to worry about it. Yeah, I think that's probably what investors are looking at.

just trying to figure out why the stock collapsed. I guess bonds probably have a lot to do with it. Let's go into the valuation because, as we talked about, we'll put some more numbers. A Ryan will put some more numbers on it here. It's not a hyper-growth business. So, how do I say it? Time value, I guess, matters a lot.

People maybe, as we talked about, replace their portfolio, maybe with long-term bonds here. but you have a time horizon longer than the next few quarters. As Ryan mentioned, there's the margin decrease in a little bit of an organic revenue growth weakness. Although, if you look at the chart, it's not that bad. So maybe there's some short-term people that are concerned with that. But take us through the numbers. Does the valuation finally look attractive?

And then we can talk about whether it belongs on the watch list, discard it, or into your portfolio. you. Yeah, I mentioned it, but the growth equation is really simple. Seven to eight percent annual organic growth. That's what they target. Let's say they hit it just to go through the exercise. Half of that comes from price increases. I know we saw, I think there was a question in the chat, which is, does Ork and

Rolins just buy these companies and then juice prices? The answer is no, they can't. I mean, it's extremely competitive. They don't really need to either. I mean, they source cheaper. They generate efficiencies in other ways, especially with the route density, the cheaper input costs, that kind of stuff. So there isn't a need to just juice prices. I mean, the price increases.

If you're raising prices 3 to 4%, you're basically in line with inflation right now. Yeah, they probably target a little bit above inflation. I guess that's probably where the margin comes from 10% operating margin to 20-something percent. And that's a form that you can run a long time. Sometimes, like in CPG, we saw some of these brands do that a little too much. Or you can be like a FICO and go absolutely extreme. But I think a better example may be those durable growers in the CPG space, such as like lays potato chips.

They usually were a little bit of a premium. Then they went a little bit too aggressive. People finally complained and now they've had to lower a bit. Rollins seems to be they're not, they're taking price every year and they can. but they're not being extremely aggressive about it. Yeah. Every pest control business can raise prices 3 to 4%. Not just Rollins.

A lot of the pricing-driven revenue growth, I think, is probably just customer neglect and not wanting to switch providers. Switching costs aren't really that high, but you do usually have an initiation fee. Maybe there's a cancellation fee, that kind of stuff. So it's just kind of, you just deal with. it until it's an actual, like, outrageous cost. So anyway, 7 to 8% organic revenue growth. 2 to 3% of revenue growth comes from acquisitions. I don't really see any reason why that would change in the distant or in the near future or distant future, given how many companies

there are out there. And then margins should grow gradually over time, not by a lot, but at least slightly. So I would say 10% annual revenue growth, maybe 9%, maybe even 8%, like it could be a little bit lower, 8 to 10, let's call it, low teens earnings growth. And at current prices with the buyback, you could get 13 to 15% earnings per share growth. But let's just go back of the napkin math. I did 10% revenue growth, 13% earnings growth. You get to 6.6 billion in revenue in 2031 and 1.4.4.4 billion in operating income. They've gotten enterprise value today of just over $15 billion. So they're trading at around 11 times 2031 operating income.

I typically want- Capital returns. Yeah. Yeah. And that's actually not including, yeah. I mean, you can look at the buyback. Could they do like take down share count maybe 10, 20%? And then maybe your IRA looks good.

If they trade it 20 times earnings in 2031, yeah, you know. Not bad, but I feel like the risk is they trade it 10 times in 2031. I mean, how that would be the big downside? Like, how likely is that? I'd say probably low. What do you think? Super low. Okay.

Who knows? The AI Great Depression's coming. It's going to bust. Something like that. Right? It could happen, but I think it would have to bring down the rest, the entire market with it. Okay. Let's say it does happen.

Revenue grows 4% organically. They get 2 to 3% growth from acquisitions. You're looking at 6% revenue growth annually, maybe 8% to 9% earnings growth. If you're getting annual 8% to 9% earnings growth, I don't know if 10 times earnings, that feels too cheap. And this business, I usually want something that's less than 10 times, five years. year out earnings, and this is kind of right on the cusp. But this might be the stock with the highest floor I've looked at in a long time. I don't see what would truly stop this business from growing.

They have grown revenue every single year for 25 years. Sorry, or the stock going nowhere. It could go nowhere for three to five years. Again, if we have that multiple compression, that gets extreme for whatever reason. But over a 10-year period, you kind of, as long as they are buying back and paying out that dividend, you probably do okay if pests are going to be around. They can have pest control. They buy a little bit and then they

raise prices with inflation. If Rollins is a supposed loser in this Agent McGettin era that we're in. Airbnb is a zero. Did you hear? This is getting out of hand. These guys knock on doors and spray pests. That's, it's such a simple business.

And the, and Muse is not changing the buying patterns. It's not. This, that, that little slight decrease in, uh, online leads could have very easily been from the fact that there's way fewer home buyers right now. Yeah. I agree. I mean, if they go through the GFC, like, people probably said this during the internet. It's like, oh, Rollins, you know, the, you know, the,

they were great because they were knocking on doors. They had the most foot traffic or whatever. Internet democratizes everything. Yeah. Oh, yeah. I mean, they will have to adapt, but it can't be that hard,

and they have the biggest corporate office to do so. Small business owner is not going to be building the same CRM engine as Rawlins. So I'd say they'll probably be the best chance to adapt going forward, but we're coming up on the hour, so let's go with the final question. Watch list stock. Are you buying Ryan? Starter position?

and I guess take listeners through like how you think about adding new stocks to the portfolio for those who haven't heard before. This is watch list for me. It's if I were my, I want something that has a higher upside basically. Like I want something that has the capability to grow 20% plus, 15% plus on the top line for a sustained period. That's kind of what I'm looking for, something where it's. higher upside, but you're taking more risk. If I were 40, I'd buy this in a heartbeat. If I just wanted gradual growth for my portfolio and I'm not looking to hit home runs,

this is, I think, an incredibly high floor. Would you buy this over the 30-year inflation-protected bonds at 3% real? I would rather buy this, which trades at a 4.3% free cash flow yield. Then the five, and it's growing 10% a year, then bonds at 5%. Yes. Yeah. Well, again, Rollins has some risk, but I agree with you. You're taking it.

It seems like a very, very, very, very, three varies there. Very, very steady business. Is there a price you would buy or is it more of I got a lot of options in the portfolio right now and everything. else looks a bit more attractive. I would say if this gets down, yeah, there's always a price. It's not like my dream. I'm never going to make it like a big, big position.

I think I usually skew very heavily in my portfolio to the ones that I think have high, high upside. I never say never. My fault of eight times trailing earnings, never say never. If it does, I will buy shares, yes. I would say it around, I did this with Copart too. Coppour, I don't think, has outrageously high revenue growth upside, but it got down to a reasonable price and I, you know, made it a 4% position, 5% position.

I would do the same for Rollins. These things are going to crush it over the next decade, or at least they will, you're going to get solid returns. Like, everyone is so worried about AI right now. These are such boring physical businesses that are not going to be that impacted. realistically. I think people worried about chasing the S&P's returns for those. We talked about this,

or I talked about this, so Jim Gill is caring about what the S&P 500 returns or whatever your home country index does is going to lead to more problems than not. Just look for good absolute returns over the long haul. That makes sense. What, Copart, I thought it was going to be,

I thought we timed the bottom well. What happened? Did you look? It's collapsed again. I haven't, I don't know what's caused it lately. must have been, must have been Mews again. Yeah, maybe. Insurance is going to zero.

All right. Well, that's another, it's another topic. We're coming up on the hour. No Rollins today. Have you been buying? Maybe we can add this to the rate, Ryan research episodes.

Have you been buying anything else recently? I think the last one was copart, but tell me, now you bought the house. Now it's all investment portfolio for the next 30 years, right? I mean, I wish, but you got to furnish the house. too. So there have been, I haven't been as active. But yeah, I've, I've traded out of some

stuff. I bought, um, I bought more remitly after the new bank, uh, new bank caused drawdown. What's unfortunate is new bank went down too. Uh, we'll probably talk about this on the power hour because they are apparently more to buy Monzo. Yeah. So everyone loses. That's, that's unfortunate. Yeah. Uh, bought more remittly. I think I bought more, um, of the airports Argentine airports I believe nice

all right all right okay I think that's it Rollins stem really one that I've I'm glad you did because I with these boring businesses

go apart Rollins I get no inspiration to research them myself but I'm glad I know more about the business today and I hope listeners did as well we're going to have a lot of fun stuff

over the next few years we are going to be talking AI agents, I think, on a specific episode. Winners, losers, thoughts, any fallen angels from that we can buy. I think we're maybe do a 10-part, you know, quick hitter series on that. Some interviews probably coming up later in the month in November. Some super investor stuff. Further Ryan research episodes.

And of course, a regular investing power hour. And I think that's it. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guest. may hold security discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for tuning into this episode,

and we'll see you next time.