Why Rentokil shares are down today

Shares of the global provider of pest control and hygiene services Rentokil Initial (RTO -21.17%) were down 20% as of 1:45 p.m. ET Wednesday, according to data from S&P Global Market Intelligence.

Providing a trading update earlier this morning, Rentokil warned that organic revenue growth in North America for the second half of 2024 would be only around 1%, beating management’s previous guidance of 2% to 4% .

Why is the market so worried about this slight misdirection?

While this one percentage point miss from the low end of management’s guidance may not seem alarming, Rentokil’s North American operations account for 60% of the company’s total revenue and operating profit. Making matters worse, this North American unit has been an area of ​​intense focus for management following Rentokil’s $6.7 billion acquisition of Terminix in 2022, which has kicked the company’s growth plans for the continent into high gear maximum.

Making an acquisition nearly half the size of its own market cap, Rentokil announced its Right Way 2 growth plan to ensure its massive new acquisition was successfully integrated. Focusing on expanding the reach of the Terminix brand, generating leads, retaining colleagues and customers after the acquisition, and adding the acquired company’s employees to Rentokil’s processes, that growth plan took a hit with today’s news.

Compared to Rollins — the company’s largest North American partner — and 10% organic growth so far in 2024, Rentokil’s 1% growth in the region through the first three quarters of 2024 looks like a potential red flag.

However, now trading at just 20 times free cash flow (FCF) — as opposed to Rollins’ lofty 46 times FCF — Rentokil could prove available at a discount if it can maintain landing with Right Way 2 Growth plan.