On Wednesday, Rentokil Initial Plc (LSE:LON:RTO) (NYSE:RTO), a global pest control and hygiene company, received a downgrade in stock rating from CFRA, a leading investment research firm. The company's rating was lowered from "Buy" to "Hold" with a new price target set at £4.50, a decrease from the previous target of £5.50. This adjustment comes after Rentokil issued a profit warning, prompting the research firm to reevaluate its stance on the stock.
The downgrade reflects concerns over Rentokil's near-term performance, particularly after the company reported weaker-than-expected trading results in July and August. Rentokil now anticipates that organic revenue growth in North America will slow to around 1% in the second half of the year, compared to a 1.3% increase in the first half. Moreover, the company has revised its full-year Group adjusted operating profit margin forecast to 15.5%, a decrease from the previously expected figure, which was to be marginally above the 2023 margin of 16.6%.
CFRA has also revised its earnings per share (EPS) estimates for Rentokil, reducing the 2024 forecast to £0.20 from £0.23, and the 2025 estimate to £0.25 from £0.26. The revised price target of £4.50 is based on a 2024 price-to-earnings (P/E) ratio of 22.5 times, which is below the average P/E ratio of 44 times for Rentokil's comparable peers. The adjustment takes into account the risks associated with the integration of Terminix, a recent acquisition, and the company's higher leverage.
Despite the near-term challenges, CFRA acknowledges that Rentokil has solid longer-term growth prospects, driven by sustained demand for its core services. However, the firm notes that the current operating conditions and integration issues in North America could delay the realization of Rentokil's RIGHT WAY 2 strategic plan. This plan is integral to the company's long-term growth and efficiency objectives.
InvestingPro Insights
Following the recent downgrade by CFRA, current data from InvestingPro provides additional context to Rentokil Initial Plc's financial health and market performance. With a market capitalization of $12.23 billion and a trailing twelve-month gross profit margin impressively high at 82.51%, Rentokil demonstrates considerable efficiency in its operations. However, it is trading at a high earnings multiple, with a P/E ratio of 24.26, which suggests the stock might be valued richly in comparison to its earnings.
InvestingPro Tips indicate Rentokil is trading near its 52-week low and operates with a moderate level of debt, which could be a sign of potential value for investors willing to assume some risk. Additionally, analysts predict the company will be profitable this year, with a strong return over the last three months, reflected in an 18.1% total price return over that period. This is particularly noteworthy considering the broader market conditions.
For investors seeking a deeper dive into Rentokil's performance and future prospects, InvestingPro offers further tips and metrics. The platform lists several additional InvestingPro Tips, providing a comprehensive analysis that can help investors make informed decisions. Interested readers can find more insights by visiting the specific InvestingPro page for Rentokil at https://www.investing.com/pro/RTO.
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