In financial circles, Rollins (ROL) is a widely-beloved compounder, having produced impressive results for decades. The company – which owns Orkin, HomeTeam, Critter Control, and more than a dozen other brands – has arguably been the biggest beneficiary of the attractive economics long available to pest control operators. One need look no further than the company’s most recent results for evidence of this. Rollins produced $583mm in operating profits in 2023 (amounting to 19% of revenue) on a negative net tangible equity base.

Just as importantly, the company has enjoyed the fruits of several available pathways to growth. As a leading domestic provider, the company has benefitted from both the ongoing growth of the US population and the ability to use its size advantage to gradually take market share. Complementing this multifaceted organic expansion is an active acquisition initiative. Here, the company’s sweeping footprint provides an opportunity to add unique value post-acquisition as back-office tasks are consolidated and purchased customers are integrated into existing routes. Taken together, these drivers have allowed the company to more than double its revenue base over the last ten years.

Given the above, it is not surprising that investors have become enamored with Rollins’ long-term prospects, bidding the shares up to a valuation that equates to nearly 50x trailing earnings. Simply stated, it is good to be the scaled incumbent in one of the best industries known to man. This is particularly the case when, at least to the layman, said industry seems unlikely to change meaningfully at any point in the foreseeable future.

What may well be lost in the above is the potential evolution of the profession to a perimeter centric treatment approach. This shift, which capitalizes on the increasing efficacy of chemicals, can be a game changer, providing large operators with newfound flexibility to optimize their routes for efficiency (rather than having to accommodate customer schedules). The magnitude of this unlock is considerable. Our understanding is that the typical Orkin technician completes only 10-12 applications per day vs. the 25+ that are possible with an externally-focused approach. And with the strong majority of costs in this business tied either directly (wages) or indirectly (fleet costs) to headcount, it is not hard to see how even modest improvements along this dimension would deliver material margin gains. This seems like an unambiguous positive for scaled players like Rollins and Rentokil (RTO).

Fortunately or unfortunately, the reality is a bit messier for these providers. Having convinced their existing customers that effective treatment is only possible with a comprehensive interior and exterior approach (as was the case previously), the incumbents now face the tall task of attempting to retrain their (fragmented and largely disinterested group of) current subscribers. With this being such a difficult undertaking, most incumbents are simply ignoring the opportunity, limiting their perimeter-driven treatments to new customers. Often, this means that those homeowners who are new to the service receive modestly better pricing than the installed base, reflecting the more efficient nature of the exterior-based treatment protocol.

A hybrid treatment/pricing approach works as long as transparency remains limited throughout the industry. This is to say that, as long as loyalists don’t become wise to the fact that they are paying more than newbies, incumbents face only limited risk of mass customer defections. This dynamic helps explain policies like the one below, with Orkin subjecting prospective customers to a cumbersome quoting process in order to avoid the need to publicly disclose its prices.