Berko: Investment in pests has paid off, so move on

Dear Mr. Berko: While working for Rollins back in 2003 through late 2008, I bought 2,000 shares at $5. Rollins is now $39 a share, and after reinvesting the small dividends, I have 2,400 shares worth $93,000.

My wife wants to sell, and she thinks we should buy Five Below. But because Rollins is in our joint account, we’ll have to pay taxes on an $83,000 gain. A friend tells us if we put this stock in our IRA, we won’t have to pay taxes on our gain, providing we keep all the sale proceeds in the IRA. He seems to be very knowledgeable.

— J.F., Cleveland

Dear J.F.: That friend didn’t drink from the fountain of knowledge; he just gargled. Even my dog Fang knows that’s wrong. There seems to be a twerp in Cleveland spreading nonsense that’s dangerous to your financial health.

Rollins (ROL-$41.60) is Orkin Exterminators, and Orkin is among the largest pest and termite control companies, with more than 900 locations worldwide. Rollins has a splendid record of revenue, earnings and dividend growth. During the last dozen years, revenues improved yearly from $823 million to $1.84 billion, and cash flow increased annually from $0.25 to $0.95 last year. Earnings also grew each year from $0.17 to $0.75 and so has the miserly dividend, from a nickel to $0.37.

Certainly, a testament to good management is the steady improvement in operating margins and a yearly growth in net profit margins from 5.5 percent to 13.5 percent last year. And I believe management (the Rollins family owns 53 percent of the stock) can continue its winning ways, as its well-planned acquisition strategy (32 in 2018) continues to grow ROL’s future.

But even considering ROL’s notable and record-setting numbers, I’m not impressed with the stock, and I think your wife may be right as sunshine and blue skies. ROL’s long-term chart of the last dozen years shows a steady 45-degree incline with higher highs and higher lows since 2012, but the current price gives ROL a rather high P/E of 55, and I don’t think there’s a bug business on the planet that justifies this number. Even though company officers and directors purchased more than 300,000 shares of ROL last year, I’d sell the stock, which appears too richly priced in the $39 to $42 price range. You’ve got a smart wife.

Even with the lure of Amazon and the convenience of the internet, off-priced retailers continue to thrive in the sweet spot of the retail industry. Five Below sells a formidable range of junk merchandise to a target market of teens and pre-teens. And every piece of merchandise is priced at $5 or below. Cool beans! The “wow” management certainly has impressive merchandising alchemy to grow revenues from $280 million to $1.8 billion since coming public at $17 in 2012. Five Below (FIVE-$117) has 750 stores in 33 states, and each location is about 8,000 square feet. And that 8,000 square feet is engorged with more bits and bobs, knick-knackery and oddments than a county landfill. Think jump ropes, dumbbells, DVDs, candy, crafts galore, innumerable pens, pencils, stickers, crayons, team sports merchandise, backpacks, greeting cards, beach and outdoor games, headphones, arts & crafts, T-shirts, jewelery, gag gifts, puzzles and incense, and this is just a tiny list of the merchandise at a FIVE store.

While management needs a quantum computer to keep inventory, foxy marketing, clever TV ads and talented social media skills continue to attract customers and reach a wider audience. FIVE has a brilliant group of nixies, pixies, gnomes and elves running this company; therefore, I believe the momentum can continue. So, even at 41 times earnings, I reckon FIVE has the mojo to be $200 in 18 months. Do it.

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