Shares in Rentokil Initial (LSE:RTO) are up 11% in the last two weeks. The FTSE 100 company’s been going through a tough couple of years, but things seem to be looking up for investors.
The firm’s set to report earnings in less than a week and it’s fair to say there’s a lot at stake. But could the recent rise be the start of an epic comeback for the stock?
Mistakes
On the face of it, Rentokil’s a pretty straightforward business. Pests show up fairly regularly – even more so as global temperatures rise – and they need to be dealt with.
Things however, haven’t been going so well over the last few years. The FTSE 100 firm attempted to boost its US presence by merging with a rival, but the process hasn’t gone to plan.
US growth has been tepid and the expected efficiencies have been slow to materialise. CEO Andy Ransom also said it was his intention to retire in 2026 (four days after Warren Buffett made it cool). The result has been a company with higher debt and a lower share price, which isn’t a good combination for investors. But I think it might just be a matter of time for the firm.
Improvements
Since the start of the year, Rentokil has been working on several initiatives to try and realise the benefits of its expanded business. And there’s been a lot to get done. Most notably, the firm’s been rerouting technicians to avoid overlap. Less time traveling between jobs is one of the chief benefits of having a strong presence in an area.
Rentokil has also been integrating its IT systems and consolidating branches. This should also help reduce the costs of running a store network that previously covered two companies. There have been other initiatives underway as well. But while the overall process has taken a long time and tested investor patience, the market seems to think good news could be on the way.
What I’m looking for
I own Rentokil shares in my portfolio and there are two key things I’m going to be on the lookout for in the next update. The first is growth in leads generated by the business in the US.
This has been disappointing recently, but it showed some signs of improvement through 2024. I’m hoping to see improvements as the firm’s branch strategy takes shape. The other is a potential improvement in operating margins. Avoiding having technicians driving on overlapping routes should help reduce costs and this is a key metric. There’s a chance I might be disappointed on this front.
Inflation has been a nuisance recently and there’s a risk this might cut into the cost savings that I’m expecting from the business.
Foolish thoughts
It’s unusual that I’m looking for quick results with a long-term investment. I typically prefer to think in terms of years or decades, rather than months.
The change of CEO however, creates uncertainty. So I’d like to see signs of the Terminix integration taking shape in a meaningful way before Ransom departs.
Rentokil shares have been moving higher in anticipation of the firm’s update on 31 July. And I’m hopeful this could be the start of a long-overdue recovery for the stock. It may be worth considering.
