I have been interested in the Rentokil (LSE: RTO) share price for some time. And my interest in the company has only grown over the past 24 months.
There are two significant themes driving growth at the pest control specialist. And it is highly unlikely these will come to an end anytime soon, suggesting the outlook for the group is only going to improve.
Three tailwinds
The first theme is global warming. According to various studies, rodent populations are growing as the world heats up. Scientists believe they are thriving and breeding more in warmer environments.
As well as this trend, in densely populated centres such as London, rodents are thriving on human leftovers. Neither of these trends has an immediate solution, suggesting their populations worldwide will only grow as we advance.
For companies like Rentokil, this presents a tremendous opportunity. The business has the edge over competitors in the sector because it is one of the world’s largest and most recognised pest control businesses. And its recently-announced deal to acquire US peer Terminix for £5.1bn will only reinforce this advantage.
This is one of the most significant acquisitions in the company’s history, but we can assume it will not be the last. The global pest control market is incredibly fragmented. Thousands of smaller operators, typically owned by a family-run business or small independant operator, dominate the sector.
This fragmentation provides scope for further consolidation in the years ahead. In fact, I think this is a third tailwind that can help drive the company’s growth over the next five to 10 years.
So, overall, all these tailwinds will support Rentokil’s medium-term growth. As earnings and revenues expand, I think the stock will follow suit as more investors buy into the company’s growth story.
Rentokil share price risks
Of course, the company’s growth is not guaranteed. The main risks it faces right now are rising prices and competition. Although a fragmented market presents opportunities for consolidation, it also means additional competition. Rentokil’s size and economies of scale have helped the group fend off the competition up until this point.
However, investors should never use past performance to guide future potential. There will always be the risk that the business could lose market share to a smaller competitor if it takes its position in the market for granted. This is especially true in an inflationary environment. If the company hikes prices too far too fast, it could send consumers elsewhere.
However, even after considering these risks and challenges, I would be happy to buy the stock for my portfolio today. I think the pest control market will likely see substantial growth over the next few years, and the Rentokil share price may reflect this trend.
