Lockdowns Have More Folks Interested in This 'Boring' Business

The COVID-19 pandemic has been a tailwind for a variety of businesses...

In recent months, we've tracked how companies as varied as e-signature leader DocuSign (DOCU), video-game maker Electronic Arts (EA), and packaged-foods giant General Mills (GIS) have seen surges in demand because of coronavirus-related shutdowns.

Today, we're looking at another business that's benefiting today. This "boring" business isn't directly related to the virus... But it's enjoying sales growth due to COVID-19.

And that's pest control.

Over the long term, pest control was already projected to grow at a healthy pace. According to Allied Marketing Research, the global pest-control market was worth about $18 billion in 2017 and should increase to $27.6 billion by 2025. That's a compound annual growth rate ("CAGR") of more than 5%.

The growth in pest control is not as newsworthy or as sexy as something like semiconductors, but it's incredibly consistent.

And right now, pest control is getting an extra boost. With people stuck at home, they're beginning to notice all the pests in their homes and yards that escaped their notice while they were at work all day. And they're turning to pest control companies to take care of that. Today, we're highlighting the best company in the industry...

Rollins (NYSE: ROL) is an $18 billion pest-management company. Rollins serves more than 2 million customers and has 700-plus company-owned locations and about 230 domestic and international franchises.

Rollins has a vast reach. It has operations all over the globe – including Europe, East Asia, the Middle East, Africa, and South America. But about 90% of its revenue comes from the U.S.

The crown jewel of Rollins is Orkin.

Altogether, Rollins has about 20 different brands under its umbrella. Aside from Orkin, you may recognize brands such as Western Pest Services, HomeTeam Pest Defense, and Critter Control. All brands focus on pest management.

Last year, Rollins earned 42% of its revenue from residential customers, 39% from commercial customers, and 18% from its termite-and-ancillary business. Its customers are incredibly sticky, too.

There are just some things in life that you never think about changing. If the same company has picked up your trash for years, you're not likely to switch. You just want the job done and don't want to spend a second thinking about it. It's the same with pest control. If a pest-control company does its job and is reputable, you're likely not going to switch.

The retention rate in Rollins' residential business is about 80%, and it's near 90% for its commercial business.

About 80% of total sales are recurring. Pest-control companies often perform services once a month or once a quarter. And commercial customers typically have multiyear contracts. That makes Rollins recession-resistant.

A lot of Rollins's growth comes through acquisitions. Over the past 12 months, it has bought another four competitors. Growing through acquisitions helps businesses in a few ways...

First, they benefit from economies of scale. Companies get to unload unnecessary overhead expenses and combine them into one platform. The money saved often goes right to the bottom line.

Second is diversification. We always stress the importance of diversity in investing. It's the same in business.

And finally, the combined company looks more attractive to investors. Bigger businesses are viewed as more stable than smaller ones. They're less likely to go bankrupt.

This business model is all about execution. A good team will only buy new businesses on the cheap that can improve the profitability of the firm. And this is what we see with Rollins. It makes these acquisitions without adding debt. That's a sign of a strong management team.

Rollins grew revenues 10.6% last year. It was a great year, but it was no anomaly. Rollins has a time-tested track record. Revenues typically grow by at least 5%, and earnings grow by double digits.

Rollins has a fantastic business. And that translates into strong share performance.

Since its March lows, shares of Rollins have soared. The stock is up more than 70% since bottoming alongside the rest of the market on March 23, and it recently hit a new all-time high. For comparison, the S&P 500 Index is "only" up 49% over the same time frame.

But with such a strong return over the past six months, Rollins' valuation has also risen. Now, like much of the market, Rollins sports a premium valuation today. Higher valuations add risk, and if the market falls, Rollins will fall along with it.

However, this is a great business for long-term holders. It's also a stock to add to your watchlist to buy in the next bear market.

Sometimes investing is simple.