FTSE 100 – Analyzing Rentokil’s 39% Share Price Drop: Causes and Implications

FTSE 100 – Over the past year, Rentokil (LSE) has faced significant challenges, earning the title of the worst performing stock on the FTSE 100. As of October 8, 2023, the company’s share price has plummeted by 39%, a decline largely attributed to troubling developments in its North American operations.

Impact of the September Trading Update

The substantial damage to Rentokil’s reputation and stock price was primarily inflicted on September 11, when the pest control, hygiene, and wellbeing group released a disappointing trading update. The company attributed its woes to ongoing issues in North America, forecasting that its adjusted pre-tax profits for the fiscal year ending December 31, 2024 (FY24) would amount to approximately £700 million. This figure represents a decline from the £766 million reported for FY23, marking the third instance within a year that Rentokil has reported difficulties in this key region, which contributed 61.6% of its revenue in FY23.

The latest update pointed to lower-than-anticipated sales and higher operational costs—including increased wages due to over-resourcing—as the main culprits behind this disappointing outlook.

Resilience Amid Challenges

Despite these setbacks, Rentokil has a strong history of revenue and earnings growth. Moreover, the pest control industry remains vital, with pest issues persisting regardless of the economic climate. This resilience suggests that Rentokil might navigate an economic downturn more effectively than many of its peers.

Additionally, the company has caught the eye of activist investor Nelson Peltz, known for revitalizing struggling businesses. This attention could signal potential changes aimed at improving performance in the near future.

Investment Outlook: Short-Term Issues or Long-Term Concerns?

From an investment perspective, the key question remains whether Rentokil’s North American troubles represent a short-term blip or a sign of deeper, systemic issues. The company’s update mentioned that while there was some positive momentum in North American sales towards the end of the second quarter, the trading performance in July and August fell short of expectations. This indicates that the challenges facing the company had not been adequately addressed by the time the update was released, raising concerns about future performance.

Competitive Landscape

In the realm of pest control, Rentokil’s largest competitor in the United States is Rollins, which appears to be thriving. Rollins’ second quarter update for 2024 highlighted “healthy growth across all major service lines” and a 9% increase in revenue compared to the same period in 2023. Furthermore, its earnings per share surged by 23%, suggesting that the market for pest control services is not contracting overall.

Personal Investment Opinion

Given the comparative performance of Rollins, it is prudent to remain cautious about investing in Rentokil at this time. While it is unclear if Rollins is siphoning off Rentokil’s customers, its robust performance suggests a stable market environment that Rentokil is currently failing to capitalize on. Therefore, it may be wise to wait and see if Rentokil can resolve its operational issues before considering any investment.

Additionally, the company’s dividend offerings do not appear particularly generous. For FY23, Rentokil paid a dividend of 8.68p, which, based on the current share price of 359p as of October 7, results in a yield of only 2.4%. Given that dividends are never guaranteed, I would need greater confidence in Rentokil’s growth prospects before committing any capital.

While Rentokil is undoubtedly a solid company with a strong brand, the current climate presents too much uncertainty, particularly in its most critical geographical market. For these reasons, now does not seem to be an opportune time to invest in Rentokil shares. Investors should keep a close watch on the company’s progress in addressing its North American challenges and any potential strategic changes that may arise under new activist pressure.