Whether it’s building wealth or passive income, a Stocks and Shares ISA can be a great tool for UK investors. But it’s extremely important for investors to think carefully about what to buy.
Different stocks are attractive at different times. But if I had £1,000 to invest right now, I’d buy 239 shares in FTSE 100 company Rentokil Initial (LSE:RTO).
Steady demand
The pest control business isn’t particularly exciting, but it has a number of very attractive properties for investors. The first is that it isn’t cyclical.
It doesn’t matter what happens with inflation, interest rates, or the upcoming election. Rats, flies, and bed bugs will keep showing up and they will need dealing with.
The second is that there are some favourable long-term trends. One of these is global warming – warmer summers and wetter winters create better environments for insects to breed in.
All of this means Rentokil is in an industry where demand isn’t going away anytime soon. And it has an unusually strong competitive position.
Competitive strengths
The key to Rentokil’s competitive strength is its scale. Being the biggest operator in the industry gives the firm some significant advantages and can boost returns for investors.
Most notably, size allows the company to attract more business in a particular area. This reduces travel time for technicians, increasing productivity and bringing down traveling costs.
In October 2022, Rentokil made a big investment in this regard. It agreed to buy Terminix – one of its largest competitors in the US, expanding its presence in the largest market in the world.
The company paid a lot for the deal. It increased its total debt from around £2bn to just under £5.5bn and its interest payments grew from £34m to £189m.
Acquisition risks
This is something investors will need to pay close attention to. Rentokil is hoping increased scale can bring more efficiencies, but the risk is that the costs are guaranteed and the benefits are anticipated.
Since then, though, the stock has fallen significantly. The company’s share price is down 35% over the last 12 months and I think there’s a buying opportunity here for shareholders.
The stock currently trades at a price-to-earnings (P/E) ratio of around 27. That sounds like a lot, but it isn’t compared to where it has been trading over the last few years.
Furthermore, analysts are expecting earnings per share to increase from 23p last year to 35p by 2027. If this happens, the current price represents an earnings multiple of just under 12.
A buying opportunity
Rentokil shares could be a terrific investment over the next few years. It has a strong position in an industry that enjoys steady demand and the market looks set to grow from here.
Earnings are likely to increase as the company works off its debt from its latest big acquisition. But when it does, I think investors could look back at today’s prices and think the stock was a bargain.
