The Rentokil (LSE: RT)) share price has rocketed this morning (7 March) and as far as I’m concerned, that’s as welcome as a plague of rats.
Why so bitter? Because I’ve been desperate to buy the FTSE 100 pest control expert for months, having decided its shares had been unfairly treated by the market. They had climbed right to the top of my buy list, and I was ready to swoop the moment I had the cash.
After this morning’s 13.86% jump, Rentokil Initial shares are going to cost a fair bit more than I hoped.
A top recovery play
The stock is on the up after full-year 2023 preliminary results showed adjusted pre-tax profit jumping 43.8% to £766m, with revenues up 44.7% to £5.4bn. Organic revenue growth was 4%, supported by strength in Europe, Asia, Pacific, UK and Latin America. Group adjusted operating margins climbed 120bps to 16.6%.
We learned today that Rentokil has made great strides with its October 2022 acquisition of Terminix for $6.7bn. The board upgraded expectations for total gross cost synergies by $50m to $325m, to be delivered by 2026.
No wonder the shares are flying. The worst thing is, I saw it coming. I’d be feeling like a clever bunny if I’d acted on my instincts and actually bought Rentokil shares, rather than simply praising them.
On November 26, I wrote that markets had been too harsh on the stock after the board warned on 19 October that full-year performance in North America would be “marginally below” previous expectations. The share price crashed 12% in a day. That was despite a 53.3% jump in Q3 revenues to £1.38bn (albeit only by 4.3% on an organic basis).
North America may be the world’s biggest pest control market, but Rentokil has a broad global footprint, and its European and emerging markets operations were still cleaning up.
I accepted that Rentokil shares were priced for growth trading at more than 21 times earnings. When hopes are high, a little bit of bad news can have an outsized impact. Yet I also said it was a top buying opportunity.
Next time I need to take action
On 18 February, I returned to Rentokil, and said the outlook was brightening as the US economy holds up better than expected. Today, CEO Andy Ransom said Rentokil had “created a clear and comprehensive roadmap to reinvigorate growth in North America”. Organic revenue grew 3.1% although there’s a way to go amid “lower new business lead generation”.
Even after today’s jump, the shares are still down 16.21% over the last 12 months, so maybe it isn’t too late to buy them.
They’re still relatively expensive trading at 20.08 times earnings, twice the FTSE 100 average. The yield is just 1.55%, but the board is progressive. It lifted its dividend per share by 15% to 8.68p today, as free cash flow rose 33.7% to £500m.
I wouldn’t buy Rentokil after this morning’s leap. There’s likely to be a bit of profit taking, so I’ll probably bank an instant loss. Instead, I’ll keep a watching brief, wait for things to settle, and purchase it when I have the cash.
I feel gratified that I called the Rentokil share price recovery. Next time, I need to have the courage of my convictions and push that buy button.
This post was originally published on Motley Fool
