On Thursday, Rentokil Initial Plc. (LSE:LON:RTO) (NYSE:RTO), a leading pest control company, faced a downgrade in its stock rating by Redburn-Atlantic from 'Buy' to 'Neutral'. The firm also adjusted the price target for Rentokil shares to GBP4.20, citing challenges in the company's US operations.
The downgrade comes as Rentokil Initial struggles with its organic growth in the United States, which has not shown significant improvement following last year's concerns.
The company is entering what is expected to be a disruptive phase of integration, with growth currently at 1%. This has raised the risk profile for the company's stock.
Redburn-Atlantic's analysis suggests that Rentokil may experience a drag on its integration efforts, potentially impacting its US organic growth by 40 to 100 basis points through 2026.
As a result, the firm forecasts US organic growth to remain below 2% and anticipates limited profit growth from 2023 to 2026. This is due to expected synergies being offset by lower volumes.
The analyst pointed out that the current share price, which is near trough multiples, reflects the upcoming challenges Rentokil faces. The multiples mentioned are 16.6 times next twelve months' (NTM) earnings per share (EPS) and a 4.5% free cash flow (FCF) yield for a 9.5% 3-year EPS compound annual growth rate (CAGR).
Despite these concerns, there is still a belief in the long-term value of Rentokil's merger with Terminix. However, the path to realizing this value is now seen as longer and more complex than initially expected, making the outlook for the stock over the next year appear difficult.
In other recent news, Rentokil Initial faced several adjustments in its stock outlook. Oppenheimer revised its price target for Rentokil to $30.00 from the previous $35.00, maintaining an Outperform rating, following a downgrade of the company's full-year 2024 forecast due to slower organic growth in North America and expected cost escalations.
Rentokil's management adjusted its expectations for North American organic revenue growth to 1% for the second half of 2024, a decrease from the previously anticipated 3%.
Investment research firm CFRA downgraded Rentokil's stock rating from "Buy" to "Hold" after the company issued a profit warning. The company also revised its full-year Group adjusted operating profit margin forecast to 15.5%. CFRA revised its earnings per share estimates for Rentokil, reducing the 2024 forecast to £0.20 from £0.23, and the 2025 estimate to £0.25 from £0.26.
These adjustments consider the risks associated with the integration of Terminix, a recent acquisition, and the company's higher leverage.
Despite these challenges, both CFRA and Oppenheimer acknowledge Rentokil's potential for long-term growth. However, they note current operating conditions and integration issues could delay the realization of Rentokil's strategic plan.
InvestingPro Insights
In light of the recent downgrade and price target adjustment for Rentokil Initial Plc. (LSE:RTO) (NYSE:RTO), it's worth considering additional perspectives that can be gleaned from InvestingPro data and tips. Notably, Rentokil has been maintaining impressive gross profit margins, with the last twelve months as of Q2 2024 showing a robust 82.51%. This suggests that despite challenges in organic growth, the company remains efficient in its operations.
Moreover, the stock is currently trading at a low P/E ratio of 23.42, which is reduced further when adjusted for near-term earnings growth to 20.12. This indicates that the stock may be undervalued relative to its earnings potential. Additionally, the Relative Strength Index (RSI) suggests that Rentokil's stock is in oversold territory, hinting at a potential rebound. These metrics, coupled with the fact that analysts predict the company will be profitable this year, could signal an opportunity for investors.
For those considering a deeper dive into Rentokil's financial health and future prospects, there are more InvestingPro Tips available, providing a more comprehensive analysis. To explore these insights and consider their implications for your investment strategy, visit https://www.investing.com/pro/RTO for additional tips and real-time metrics.
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