I like to consider a stock when it has a news catalyst because sometimes a buy can be well-timed in such circumstances.
Over the weekend, there was news about the FTSE 100‘s Rentokil Initial (LSE: RTO) regarding a possible takeover. This morning (22 July), the pest control and hygiene company’s share price shot up 10% in early stock market trading.
Investing organisations seeing value?
Media reports said former BT Group chief Philip Jansen is working on a private equity-backed takeover bid for Rentokil.
If it proves to be true, the interest in Rentokil may mean that big investing organisations are seeing value in the company’s shares. Last month, the news reports were all about activist investor Nelson Peltz’s Trian Fund Management buying a “significant” chunk of Rentokil shares.
Rentokil had been a steady growth business before the pandemic. However, the stock declined last year when the company reported weak trading in the US. Nevertheless, for those with a long-term perspective, there’s plenty of potential here for recovery and growth in the coming years.
But Rentokil isn’t obviously cheap. The stock’s been trending higher since the beginning of June and after this morning’s rise it’s near 494p. That puts the forward-looking earnings multiple for 2025 at just below 19 for 2025. City analyst’s estimate a 13% lift in earnings that year.
The average rating for all companies in the FTSE 100 is around 14, so Rentokil’s valuation looks fair. Therefore, this isn’t a bargain-basement opportunity and there may be some valuation risk here for shareholders if trading weakness continues.
Big in America
The American market matters because in 2023 around 62% of overall revenue came from the US.
If the firm can engineer recovery and growth across the pond, shareholders may see decent share price progress from where we are now. However, positive outcomes aren’t guaranteed. Rentokil’s multi-year earnings record has been patchy since 2018.
But in April’s first-quarter update, chief executive Andy Ransom said there had been a positive start to 2024 with a “stabilising” performance in North America.
One of the challenges for the company is the ongoing integration process following its almost $7bn 2022 takeover of US pest control business Terminex Global Holdings.
The weaker recent performance in America suggests the firm may have bought-in trouble for the overall business, at least in the shorter term. The situation adds more ongoing risk for shareholders now.
Nevertheless, at the time, Ransom said of the deal it adds “valuable scale, capabilities and talent as well as the wonderful Terminix brand”.
In April, the directors’ said the “key” trading period was still ahead for the year. They were then “confident” the business would deliver 2-4% organic revenue growth for 2024 in America.
On balance, and despite the risks, Rentokil’s now on my watchlist. I’ll be vigilant for an attractive entry point into the shares — perhaps on market down-days, or if the share price drifts lower as the excitement of recent news fades.
