The Rentokil Initial (LSE:RTO) share price just fell 20% on news that the company’s profits are going to be lower than previously expected. The drop puts the stock at a 52-week low.

In my view, the company has one of the most durable businesses in the FTSE 100. As a result, I see today’s drop as an opportunity and I’m looking to buy it for the long term.

US issues

Rentokil has recently been focused on expanding its presence in the US. There’s a reason for that – it’s the largest market for pest control companies by some margin.

A big part of this growth strategy has been the acquisition of a firm called Terminix. Rentokil paid just over £4.5bn for the company back in October 2022, but the acquisition hasn’t gone well. 

Integrating the two businesses hasn’t been straightforward and returns have taken a while to come through. And the latest update indicates things are going to take even longer. 

Organic growth in the US is set to be 1% in the second half of 2024, which is down on the 2.8% Rentokil reported in the first half of the year. And higher costs are set to weigh on margins. 

Not all of this is to do with the Terminix acquisition – part of it is due to the British pound strengthening against the US dollar. But it’s sent a stock that had been up 10% in 2024 crashing.

A buying opportunity

Back in June, the Rentokil share price jumped 15% on news that activist investor Nelson Peltz had been buying. But the latest decline has undone all that and then some.

The thing is, I think the long-term thesis for the company is pretty firmly intact. So if the shares stay at their current level (or go lower) I’m expecting to start buying them. 

Rentokil operates in a market that has been growing steadily. Global warming – hotter summers and wetter winters – creates better breeding environments for pests, driving durable demand. 

Furthermore, this has nothing to do with inflation, GDP, or any other economic issues. That means the industry as a whole should be fairly resilient. 

Recent concerns aside, Rentokil is building a dominant position in this industry. Over the long term, its scale should allow it to maintain more attractive unit economics than its competitors.

At the moment, that’s being masked by issues integrating its latest acquisition that are taking longer to wear off than anticipated. But I think this is a question of ‘when’ rather than ‘if’. 

Activist attention

A key reason Rentokil was attracting attention back in June is that activists thought its market cap didn’t reflect the full value of the underlying business. I happen to agree with this.

Right now though, the stock is below where it was three months ago and hitting a new 52-week low. And I don’t think the long-term value of the business has changed significantly.

The company’s recent performance highlights the risks of big acquisitions. But at today’s prices, I think Rentokil shares are too cheap to ignore.