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Shares in Rentokil Initial (LSE:RTO) have fallen to £3.77 – the level I’ve previously identified as where I think they’re a bargain. But the latest drop is due to some disappointing news.
In its preliminary results for 2024, the company reported weak sales growth and a decline in operating profits. So should I buy the stock, or revise my estimate of what it’s worth?
Results
Rentokil’s sales grew 1.1% in 2024. That’s not particularly impressive and with inflation above these levels, it amounts to a decline in revenues in real terms. Worse yet, operating income fell by 12% (or 7% adjusting for amortisation, one-off costs, and changes in interest). And given this, investors might wonder why the stock didn’t fall further.
I think there are two main reasons. One is that most of this isn’t fresh news – Rentokil has been reporting weak earnings throughout the year, so the latest update shouldn’t have been a big surprise.
The second is the outlook for 2025’s slightly more encouraging. The firm’s still in transition after a major acquisition in 2022, but the CEO’s comments indicated progress is being made.
Outlook
Rentokil acquired US competitor Terminix at the end of 2022. Since then, it’s been working out how it can save costs and improve efficiency by integrating the two businesses. The latest news is that the FTSE 100 company is making good progress with streamlining its branches. This is expected to generate $100m a year in savings by the end of 2026.
On top of this, the firm’s been revamping its brand strategy to try and boost sales. But growth has been slow in the first quarter of 2025 as a result of weak lead generation.
Overall, I view the latest report as mixed – it looks as though progress is being made, but it’s definitely slower than investors would like. And that’s been the story of the last few years.
Should I buy?
Investors can’t ignore the fact it’s going to be another couple of years until Rentokil completes its integration process. A 2.5% dividend isn’t much of a return while they wait.
Despite this, I’m still looking to buy the stock. I think the company’s position in a market that I expect to grow through pretty much any economic conditions makes it quite attractive.
The big risk with the stock is if the anticipated cost savings don’t materialise. If that happens, investors might struggle to get a good return on an investment at today’s prices.
Rentokil however, has successfully integrated a lot of businesses in the past. And while this one is on a different scale, I think there’s a good chance it could be a success over time.
Long-term investing
Right now, I’m not in a position where I have excess cash available to invest. And Rentokil stock isn’t at such a low price that I want to sell my other investments to add to this one.
When I’m next buying shares however, I’ll be looking at the stock as an opportunity. If the price doesn’t move from today’s levels, I’m expecting to be a buyer later this month.
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