Three analysts have increased their EPS estimates for this pest control company in the past 30 days; they now forecast growth of 47.1% for the company next year.
Terminix Global Holdings, Inc. (TMX)
From Cabot Undervalued Stocks Advisor
Terminix Global Holdings is both a new company and an old company. While the name “Terminix” is one of the largest and most widely recognized names in pest control, the company previously was obscured inside of the ServiceMaster conglomerate. With the sale of its ServiceMaster Brands operations recently completed, the company changed its name to Terminix and started trading under the TMX ticker symbol on October 5th.
Terminix shares fell sharply last year due to new disclosures about its legal liability from deficient termite treatments. These liabilities will likely cost the company upwards of $100 million or more.
In early 2020, the company fully addressed its problems by removing the CEO, announcing plans to divest its non-pest control operations, and ring-fencing the termite treatment liabilities. These steps should allow the company to put its difficult past behind it. In August, Brett Ponton, former head of Monro (MNRO) joined as the new CEO. His leadership at Monro led to sales growth and a strong recovery in its share price. Our expectation is that he will bring sales growth, operational efficiency and integrity to Terminix, ultimately leading to a higher share price.
There was little news on Terminix in the past week. Terminix shares were unchanged in the past week and have 20% remaining upside to our 57 price target.
Reliable consensus earnings estimates are not yet available, but we anticipate that 2022 estimates will settle at around $1.60/share. This would put the TMX multiple at a high 29.7x, but we recognize that these types of companies generally are valued on EV/EBITDA. On this basis, the shares trade at about 16.5x EBITDA.
Major risks include the possibility of new disclosures that would significantly increase the company’s litigation expenses, difficult industry competition that may exert pricing pressure, and possible execution risks by the new leadership. TMX shares carry more risk than our typical recommendations, but if its litigation and sub-par margins are behind them, we see a clear path to a higher stock price.
With a reasonable valuation, solid balance sheet, renewed focus and better revenue and margin outlook, there is a lot to like about Terminix. BUY.
Bruce Kaser, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, October 28, 2020