We recently came across a bullish thesis on Rentokil Initial plc (RTO) on ValueInvestorsClub. In this article we will summarize the bulls’ thesis on RTO. RTO shares were trading at closing price of $28 when this thesis was published. Yesterday the stock closed at nearly $31.

Rentokil Initial plc, together with its subsidiaries, provides route-based services in North America, the United Kingdom, rest of Europe, Asia, the Pacific, and internationally. It offers a range of pest control services for rodents, and flying and crawling insects, as well as other forms of wildlife management for commercial customers.

A specialist cleaning service team in full protective equipment removing hazardous waste.

RTO used to be a poorly run business. This changed when Andy Ransom moved into the CEO role in 2013. He reorganized the business by disposing non-core assets (facility management, parcel delivery and interior services) and focused on building out the best segment, pest control. Pest control went from 20% of revenue in 2012 to 80% today. Since Andy Ransom took over in 2013, EPS grew in every year with a CAGR of >12%. He is still running the same playbook today, growing revenue at 9-10% (equally split between organic and bolt-ons) coupled with margin expansion.

Management guides 8-10% total revenue growth

Management guides for at least 5% organic revenue growth and 8-10% total revenue growth. Margins are guided to reach >19% by 2026 (vs. 16.7% today). This is driven by synergy execution and operating leverage (30% incremental operating margin). If RTO hits these targets, this would result in a ￡0.34 EPS in 2026. Note that the current management team has always exceeded their guidance since they started providing it in 2014.

RTO is currently trading at a price-to-earnings (P/E) ratio of 17.5x for 2024, significantly below its historical averages of 28.5x over five years and 24x over ten years. Assuming RTO successfully executes its strategy, its valuation multiple should converge towards its historical levels. Applying a P/E multiple of 20-22x to 2026 earnings estimates suggests an upside potential of 53-68% with an implied internal rate of return exceeding 30%.

RTO is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 20 hedge fund portfolios held RTO at the end of the first quarter which was 15 in the previous quarter. While we acknowledge the potential of RTO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as RTO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.