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Editor's Note: Jay Van Sciver and the Hedgeye Industrials team are hosting a black book on the short case for shares of Rollins (ROL) today at 10AM EST. If you’re an institutional investor and would like access to this call email sales@hedgeye.com. To learn more about Jay's research product 'Industrials Pro', click here. |
Shares of Rollins (ROL) trade at an astoundingly high multiple on investor expectations for mid-single digit organic growth supplemented by accretive acquisitions, at least as judged by our conversations. This alchemy has long been a source of dissonance for us as pest control M&A valuations preclude much ‘value add’ in an industry without clear economies of scale beyond local route density.
The recent earnings release and call included an ‘admission’ that the historic organic included only (undefined) ‘Significant’ acquisitions, leaving investors with little clarity on actual organic growth numbers excluding all acquisitions. The excuses for the clarification were, for us, more alarming than the disclosure itself.
Further, the gain on recently acquired properties in 1Q21 casts doubt on the integrity of fair value allocations for ROL’s many acquisitions, as a large gain over a short period can imply aggressive purchase accounting. In an industry that relies on the circular reasoning by using Rollins's rich valuation to justify acquisition multiples, the risk of a substantial re-rating is unusually high.
These recent disclosures come amid an SEC investigation that is understood to focus on Rollins acquisition accounting, decreasing the odds that these issues fade. Beyond these concerns, ROL shares may underperform in a robust growth recovery as the company comps several more ‘COVID winner’ quarterly results.
We expect the shares to underperform the market by 60% or more as investors take a close look at the dubiously very consistent, steady, on-target organic “growth” and the dodgy governance underpinning the astronomical share price valuation.
