Atlanta, Ga.-based Rollins, Inc. (ROL) is a premier global consumer and commercial services company that provides pest and termite control services to residential and commercial customers. It serves more than two million customers across more than 700 locations worldwide. However, the company has an ISS Governance QualityScore of 10, indicating high governance risk.

ROL’s shares have slumped 15.9% in price over the past year and 10.2% year-to-date to close yesterday’s trading session at $30.72. 

Bearish investor sentiment surrounding the stock can be attributed to its stretched valuation and an ongoing SEC investigation.

Here is what could shape ROL’s performance in the near term:

Expanding Market Reach

Last month, ROL expanded its services to Florida by acquiring seven branches from Hulett Environmental Services, Inc. under its Northwest Exterminating brand. The acquisition should allow ROL to broaden its customer base to include southeast and southwest Florida.

Regarding this, Co-President of Northwest Exterminating Stanford Phillips said, “Our strategy of connecting with leading companies like Hulett to create a future that is good for customers, teammates, and their families, continues to be the foundation of our acquisition success. Liz and Tim Hulett have built an exceptional family pest control business, and we are thankful that they chose to work with us to achieve all of their goals.”

SEC Investigation and Lawsuits

Last October, ROL reported that the Securities and Exchange Commission is investigating it. The SEC investigation was initiated after the company conducted an internal investigation that found significant deficiencies in its internal controls relating to the documentation and review of accounting entries for certain reserves and accruals. The SEC investigation is regarding how the company established accruals and reserves at period-end and the impact of those accruals and reserves on reported earnings for periods beginning January 1, 2015.

Following the SEC probe, several class-action lawsuits have been filed against ROL alleging securities law violations and the issuance of materially misleading statements and business information.

Frothy Valuation

In terms of forward non-GAAP P/E, ROL is currently trading at 40.63x,  which is 113.1% higher than the 19.06x industry average. The stock’s 1.27 trailing-12-month PEG multiple is 193.3% higher than the 0.43 industry average, while its 26.43 forward EV/EBITDA ratio  is 120.7% higher than the 11.98 industry average.

Furthermore, ROL’s 5.78 and 34.13 respective forward Price/Sales and Price/Cash Flow multiples compare with the 1.49 and 14.80 industry averages. In addition, its 6.03 forward EV/Sales multiple is 219.3% higher than the 1.89 industry average.

POWR Ratings Reflect Uncertainty

ROL has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

ROL has a C grade for Momentum and a D grade for Value. The stock is currently trading below its 50-day and 200-day moving averages of $32.65 and $35.41, respectively, indicating a death-cross downtrend, and in sync with the Momentum grade. In addition, ROL’s higher-than-industry valuation metrics are in sync with the Value grade.

Among  the 46 stocks in the Outsourcing – Business Services industry, ROL is ranked #32.

Beyond what I have stated above, view ROL ratings for Growth, Sentiment, Stability, and Quality here.

Bottom Line

ROL is a leading pest and termite control service provider with a global market reach. However, an ongoing SEC probe investigating the company’s accounting practices has caused investors to adopt a bearish sentiment. Moreover, its aggressive accounting practices indicate that the company might have exaggerated its profits over the past years. Thus, we think investors should wait until the results of the SEC investigation are known.

How Does Rollins, Inc. (ROL) Stack Up Against its Peers?

While ROL has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, TriNet Group, Inc. (TNET), Ituran Location and Control Ltd. (ITRN), and ARC Document Solutions, Inc. (ARC), which have an A (Strong Buy) rating.

ROL shares were unchanged in premarket trading Friday. Year-to-date, ROL has declined -10.20%, versus a -6.42% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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