Bottom of the Barrel: Working Out the Bugs at Rollins

Investors looking for a way to eliminate pests from their portfolio should take a look at Rollins (ROL Quote - Cramer on ROL - Stock Picks).

This Atlanta-based company is the parent of Orkin, among the best-known pest-control companies in the country. And, with the company jettisoning noncore businesses in recent years, the bugs are largely gone and the company can focus on capturing more market share by exterminating the competition.

Swatting and Spraying Smarter

Rollins began with humble roots, but the company currently has 1.6 million customers in the U.S., Canada, Mexico and the Caribbean. Orkin began operations in 1901 when Otto Orkin sold rat poison door-to-door to farmers and grocers. It now has more than 400 locations in North America with over 7,500 employees.

The nature of the pest-control business has been both a blessing and a curse for Rollins. While monthly visits keep you close to your clients and generate nice recurring cash flow, visits in such proximity also are costly. However, Rollins is now implementing a bimonthly treatment program, whereby revenues are little changed but transportation and labor costs are reduced dramatically.

Even though a technician spends more time at each customer's location (with new treatment products in some cases) in the bimonthly program, the unit cost per service is much less than the monthly visitation program.

At a Glance Rollins, Inc. (ROL:NYSE)
Current Price	$19.28
52-week Range	$21.75-$14.97
Price-Earnings Ratio	23.2
Market Cap	$583.0 million
Avg. Daily Volume	29,318
Inst. Ownership	36%
Dividend Yield	1.10%
Beta	0.13
Company Web site	www.rollins.com
Source: Market Guide, Company Reports

The conversion program has been both successful -- more than 40% of Rollins' customers are now on the bimonthly program -- and economically beneficial. Sales in the second quarter were relatively flat compared with the same period in 2001, but the company actually posted a 29% increase in net income.

Call the Orkin Man

Rollins stock has performed well this year. Though nothing exciting -- the total return is relatively flat since January -- it has outperformed most equities as investors consider the steady business a safe haven in a tumultuous market.

And, in tough economic times, Rollins has continued to exercise balance sheet discipline, building a significant cash position of $46 million at the end of June that supports its dividend and share-repurchase program. That cash also keeps the powder dry for possible acquisitions of other regional pest-control companies.

Rollins also has potential internal growth opportunities. Orkin has historically been consumer-focused. Therefore, the possibility for growth in the commercial arena, such as office buildings and merchants, is significant. In addition, Rollins hopes to leverage the Orkin brand by selling pest-control products in retail outlets.

Of course there are pests that could hamper Rollins' growth. Should demand for consumer pest-control services slip, it would have a significant impact on the company's bottom line. The core business comes from the consumer, but meaningful future growth, especially from a margin perspective, will come from commercial business. Hence, Rollins has to prove it can build that business.

That said, the old problems in Rollins' business are largely gone and the company's focus on pest control makes it an interesting consideration for investors looking for a stable consumer-services company. Plus, the 1.1% yield provides a modest income boost.

No Bugging Rollins The pest-control company is a steady performer
Year	Revenue (in millions of $)	EPS
2000	649.6	0.32
2001	652.3	0.56
2002*	675.0	0.80
2003*	715.0	0.95
*Estimates Source: ValueLine, Thomson Financial, Company Reports, TSC Research

Rollins' ability to grow earnings at 7% to 9% over the long term, combined with the earnings and cash flow stability, makes it a good, conservative small-cap. I give it 2 1/2 barrels.

Barrelology

A couple of comments about stocks in the Bottom of the Barrel portfolio. First, as I noted in the columnist conversation on RealMoney.com over the weekend, Developers Diversified (DDR Quote - Cramer on DDR - Stock Picks) is said to be close to a deal to purchase JDN Realty (JDN Quote - Cramer on JDN - Stock Picks) for about $13 a share. While the deal may or may not be completed, the important fact is that $13 seems to be the price the Street expects for a deal. As noted previously about JDN, the play is for the dividend and the eventual sale of the company. This lends support to our thesis.

Another company, Trico Marine (TMAR Quote - Cramer on TMAR - Stock Picks), has been a horrid performer, and things keep getting worse. The marine-boat business remains soft, and Trico's debt levels threaten to choke the company. The business will pick up as the energy cycle turns, but the balance sheet is troublesome.

Laboring Over the Barrel Looking for bargains as the market struggles to turns
Current Rating	Company/Ticker	Date of Mention	Current Price	Mention Price*	% Change From Mention
Above Average Outlook
	Superior (SUP:NYSE)	July 10, 2002	$47.61	$43.87	8.53%
	Roadway (ROAD:Nasdaq)	June 19, 2002	32.70	34.03	-3.91
	Fidelity National (LION:Nasdaq)	May 8, 2002	8.93	10.58	-15.60
	UCBH Holdings (UCBH:Nasdaq)	March 27,2002	37.06	35.65	3.96
	Cost Plus World Markets (CPWM:Nasdaq)	March 6, 2002	25.95	25.83	0.46
	Coastal Bancorp (CBSA:Nasdaq)	Dec. 12, 2001	29.40	27.84	5.60
Average Outlook
	Coachmen Industries (COA:NYSE)	Aug. 21, 2002	$16.94	$15.05	12.56%
	Champps Entertainment (CMPP:Nasdaq)	May 29, 2002	10.06	13.01	-22.67
	Rare Hospitality (RARE:Nasdaq)	Feb. 20, 2002	23.79	25.72	-7.50
	NetBank (NTBK:Nasdaq)	Feb. 6, 2002	11.70	13.45	-13.01
	SurModics (SRDX:Nasdaq)	Dec. 19, 2001	29.28	34.60	-15.38
	VitalWorks (VWKS:Nasdaq)	Nov. 21, 2001	7.97	4.30	85.35
	FPIC Insurance (FPIC:Nasdaq)	Nov. 14, 2001	8.97	12.83	-30.09
	Coinstar (CSTR:Nasdaq)	Nov. 7, 2001	24.82	19.96	24.35
	Witness Systems (WITS:Nasdaq)	Oct. 31, 2001	5.94	8.06	-26.30
	Hibbett Sports (HIBB:Nasdaq)**	Oct. 24, 2001	22.47	20.04	12.13
	Quixote (QUIX:Nasdaq)	Oct. 3, 2001	18.00	21.44	-16.04
Below Average Outlook
	Innotrac (INOC:Nasdaq)	June 12, 2002	$2.64	$4.79	-44.89%
	Wilsons Leather (WLSN:Nasdaq)	May 22, 2002	7.50	14.96	-49.87
	Trico Marine (TMAR:Nasdaq)	May 1, 2002	3.18	8.25	-61.45
	Arch Chemicals (ARJ:NYSE)	April 24, 2002	19.55	22.52	-13.19
	Hines Horticulture (HORT:Nasdaq)	April 17, 2001	3.12	4.75	-34.32
	Actrade (ACRT:Nasdaq)	Jan. 30, 2002	2.52	20.65	-87.80
	Endocare (ENDO:Nasdaq)	Jan. 23, 2002	10.55	18.21	-42.06
	Quanta Systems (PWR:NYSE)	Jan. 9, 2002	2.72 T	16.05	-83.05
	Goody's Family Clothing (GDYS:Nasdaq)	Nov. 28, 2001	5.68	4.50	26.22
	Bridgford Foods (BRID:Nasdaq)	Oct. 10, 2001	10.29	13.18	-21.93
Bottom of the Barrel Income Portfolio
	American States Water (AWR:NYSE)	Sept. 4, 2002	$26.31	$23.60	11.48%
	Hawaiian Electric (HE:NYSE)	July 31, 2002	43.56	41.86	4.06
	JDN Realty (JDN:NYSE)	July 17, 2002	12.53	11.57	8.30
	UGI Corp (UGI:NYSE)	June 26, 2002	35.27	31.30	12.68
	Acadia Realty (AKR:NYSE)	June 5, 2002	7.46	7.03	6.12
	Capital Automotive REIT (CARS:Nasdaq)	April 3, 2002	24.83	22.95	8.19
	Laclede Group (LG:NYSE)	March 20, 2002	23.50	23.64	-0.59
	Alexandria Real Estate (ARE:NYSE)	Feb. 13, 2002	42.92	40.25	6.63
	Empire District Electric (EDE:NYSE)	Jan. 16, 2002	17.13	21.23	-19.31
	Integra Bancorp (IBNK:Nasdaq)	Jan. 2, 2002	20.27	20.75	-2.31
	Met-Pro (MPR:NYSE)	Oct. 17, 2001	14.30	11.16	28.14
Bottom of the Barrel Special Situation Portfolio
	Key Production (KP:NYSE)	Aug. 7, 2002	$16.95	$17.30	-2.02%
	Luby's (LUB:NYSE)	Feb. 27, 2002	5.17	6.22	-16.88
*Average price on date of mention. **Prices adjusted for 3:2 split on Feb. 20, 2002 Source: Thomson Financial/First Call, TSC Research

With nearly a year of Bottom of the Barrel under my belt, I'm going to do some portfolio housekeeping in the coming weeks. Next week, I will remove a group of companies from the portfolio that have less interest than others or have outlived their usefulness in the portfolio. So, if you have a specific company you don't want to see left out of future missives, shoot me an email and I'll do my best to accommodate.