As the Rentokil share price dips on Q1 news, I ask if it’s time to buy

The Rentokil Initial share price has disappointed investors in the past 12 months. Could this be the year we get back to earnings growth?

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The Rentokil Initial (LSE: RTO) share price has had an erratic few years, and it dipped a couple of percent on the morning (18 April) of its Q1 update.

The shares are up 16% in the past five years, but they were a fair bit higher a year ago.

American progress

On 18 April, CEO Andy Ransom, speaking of the key North America zone, told us “we remain confident in delivering on our guidance of 2-4% Organic Revenue growth in the region.

Overall, though, revenue rose by only 0.9% at actual exchange rates in the first quarter. At constant exchange rates, a 4.9% gain does look better. But it didn’t impress the market on the day.

Still, the firm did tell us that it expects to see better progress in the second half. And it reckons it should hit its FY24 targets.

So what do I think about Rentokil as a possible buy now? My thoughts are split.

Strong business

I do like the nature of the business. Apparently, Rentokil is known as the royal rat catcher, though it’s unclear by whom. Did anyone know that? I didn’t.

The firm does a lot more than the pest control for which it’s probably best known. Ever seen its name on paper dispensers, dryers, and other gear in washrooms and the like?

Rentokil is actually one of the world’s biggest business services companies. And I’d say that gives it a bit of a defensive moat in an essential industry.

Uncertainty

There are two things I like less, though. One is that margins have been suffering in the US. And that’ll be the reason for the focus on that market in this latest update.

It’s got to be the most competitive market in the world, and a good few US firms offer the same kinds of services.

The other thing I’m not overjoyed by is the stock’s valuation. Does a firm in this business, with a 2% dividend yield, deserve a price-to-earnings (P/E) ratio of 26?

That’s the forecast for 2024, and I’m not so sure about it.

Too pricey?

It could drop to around 17.5 by 2026, though, if forecasts prove correct. But that’s some way out, and so many FTSE 100 stocks look better value to me.

Unilever‘s forward dividend yield, for example, is up at 4%, with a P/E of 17. And National Grid‘s expected 5.6% dividend comes from a stock on a forecast P/E of 15.

Those are both leaders in similarly essential businesses. But neither commands such a premium valuation.

All about growth

At Rentokil, then, it seems it’s all about growth expectations. And if the City has it right, we could see a 70% rise in earnings per share (EPS) in the three years from 2023 to 2026. And that could make it a buy.

Whether Rentokil stock turns out to be good value today will probably, I think, come down to how well the 2024 year goes.

So I’ll hold back, and wait for first-half results due on 25 July.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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