Zika fears attract fund managers to exterminator Rollins shares
By David Randall NEW YORK (Reuters) - Rollins Inc , parent of extermination company Orkin, has seen its shares jump 5 percent during this year's stock market selloff because investors expect fears of the mosquito-borne Zika virus will lead to increased revenues. Those bets were boosted on Wednesday when Florida Gov. Rick Scott declared a state of emergency in four counties and ordered regional mosquito spraying. The virus, rapidly spreading in the Americas, has been linked to thousands of babies in Brazil being born with microcephaly, a condition where infants have abnormally small heads and often underdeveloped brains. Yet managers who have increased their stakes in Atlanta-based Rollins over the last six months said they are attracted to the largest publicly-traded pure-play extermination company for another reason: it should have no trouble increasing prices and revenues even if the U.S. economy begins to stagnate. "We've owned this stock before I even knew how to spell Zika,” said Jonathan Coleman, portfolio manager of the $6.7 billion Janus Triton fund. Coleman said part of its appeal is that it is neither economically sensitive nor in a price sensitive market. "If you have termites in your house you want to get that problem solved without calling around to get the best price.” A total of 59 mutual fund and hedge funds have added shares of the company over the last three months, a jump of 84 percent from the quarter before, according to Morningstar data. All that buying has made the shares pricey, and put the company in the position of having to produce some combination of pest-related growth if it is to reward investors. At around $27, Rollins shares now trade at 39 times its per share earnings for the last year, more than 2.5 times the level for the S&P 500 index. COMPANY'S ZIKA PLANS The company has not said how much it expects to benefit from the Zika scare, though chief executive Gary Rollins told analysts in a Jan. 27 conference call he expected publicity about mosquito risk to increase. "At the moment, I am not aware of any government customers approaching us for municipal treatments," Eddie Northen, the company's chief financial officer, told Reuters. Rollins largest source of revenue is from what it calls "general pest control", a category that includes ants, cockroaches and flies and includes brands Orkin, HomeTeam Pest Defense, and Western Pest Services. Mosquito revenue nationwide in 2015 grew 9.6 percent from the year before, Northen said. When 2012's mild winter allowed for an extended mosquito season, the growth rate for mosquito-related revenue jumped 18.8 percent from the year before. MARGIN EXPANSION Zika fears will likely help Rollins, said Joe Box, an analyst at KeyBanc Capital Markets, but cautioned it was impossible to quantify. He has not included any boost from increased Zika-related spraying or warmer weather into his estimates. "All I can say is when you go back and look at historical trends, any time people are able to attach any sort of infectious diseases with pests that's driven incremental business," Box said. Thanks in part to the strength of its Orkin brand name, the company has been able to consistently raise prices and should expand its margins by approximately 2 percent a year over the next three years, he said. That sort of steady improvement, along with technological upgrades to boost productivity, prompted the $2.1 billion T. Rowe Diversified Small-Cap Equity fund to boost its position in the company in its most recent quarter. "We view this as a high-quality service company ... (that) has also been a successful consolidator in the pest industry," said Curt Organt, an analyst at the firm. (Reporting by David Randall; editing by Linda Stern and Grant McCool)
