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I’ve been a buyer of Rentokil Initial (LSE:RTO) shares for some time. And the stock’s up 11% Thursday morning (31 July) after the FTSE 100 firm released its report for the first half of 2025.
The stock market’s encouraged by signs of improving sales growth and strong free cash flow. But with profit margins contracting and a stagnant dividend, is this a mistake?
Results
Rentokil’s revenues for the first half of 2025 were 3% higher than the year before. And while earnings per share fell 11%, free cash flows grew 32%.
In the US – the firm’s largest market – sales were up 2%. But this lagged the international market, where revenues came in 5% higher than during the first half of 2024.
Looking ahead, management said it expects profits for the rest of 2025 to be in line with market expectations. And the interim dividend was unchanged from the previous year.
There’s a lot to take in there and Rentokil is a more complicated business than it initially looks. But the stock market has clearly decided the results are – positive – and I think I agree.
Analysis
Since 2022, Rentokil has been attempting to integrate a big acquisition. And the share price reflects the fact that investors have largely been unimpressed by its attempts at doing so.
Today’s results however, seem to suggest the stock market’s coming around to this view. To some extent, expectations were already high going into this morning’s update.
Analysts at Deutsche Bank had noted Google Trends showing a rise in search traffic for its pest control service Terminix. And in this context, I think the latest report’s fine without being outstanding.
The biggest issue, in my view, is the lower operating margins. Rentokil expects this to reach 20% by 2027, but the first half of 2025 was a move in the wrong direction.
Opportunity gone?
Despite climbing 11%, Rentokil shares are 19% below where they were a year ago. So investors who see the latest report as a strong sign for the long term might still think there’s an opportunity.
It’s worth noting that the stock still trades at a significant discount to Rollins – its closest US rival. Even factoring in the FTSE 100 company’s additional debt, it’s at a much lower multiple.
As a result, I’m not convinced the current share price fully factors in Rentokil’s growth prospects. If the company can keep moving in the right direction, I think the stock looks attractive.
I’m surprised by the 11% jump following the firm’s update. But I thought the stock was significantly undervalued before and I still think it’s worth considering at today’s prices.
What I’m doing
Unfortunately for me, Rentokil shares are already a significant part of my Stocks and Shares ISA. So I need to be cautious about adding to my investment.
In the interests of maintaining a diversified portfolio, I’m looking for other opportunities at the moment. But despite today’s jump, I’ve no intention of selling a single share.
