Actions in Rentokil Initial (LSE: RTO) have consistently underperformed FTSE100 over the last few years. But I have high expectations for the stock in 2025.

My investment thesis has two parts. The first is the multiple price/earnings (P/E) the stock is trading at. And the second is that the underlying business is showing signs of recovery.

Assessment

Rentokil shares are currently trading at a P/E multiple of 26. This doesn’t seem particularly low, especially when compared to the FTSE 100 which trades at an average P/E of around 15.

There are, however, a few things to note. The first is that the company could well be better than the average FTSE 100 company – for one thing, it’s in a consistently growing sector.

More importantly, a P/E multiple of 26 is actually unusually low for Rentokil stock. Since the pandemic, the stock has traded at an average P/E ratio of around 35.

Rentokil Initial P/E Ratio 2020-24

Created on TradingView

This indicates that investors are less optimistic about the company than they have been in some time. But if that changes and the P/E returns to its recent average, the stock price could rise 35%.

However, on its own, that’s not enough of a reason to consider buying the stock. If the stock takes years to recover, it could still underperform the FTSE 100 as the index rises faster.

What the stock needs is a boost from the underlying business. And I think it could happen in 2025.

Is it your time to shine?

Over the past two years, Rentokil has struggled to integrate Terminix, its American rival. acquired in October 2022. So far, the main effects of the acquisition have been higher costs.

Rentokil Initial Interest Charges 2020-24

Created on TradingView

As a result of its net debt more than doubling, the company faced higher interest payments. And this is a permanent risk for shareholders.

So far, investors haven’t had much to show for it. But the company’s latest trading update indicated rewards could be on the way.

In October, Rentokil presented its clearest plan yet to drive efficiency gains. This includes branch integration, technician rerouting, and migration of data and information systems.

The company has been implementing these changes over the past three months and intends to evaluate them in early 2025, so I will be following the March and April updates with interest.

If cost reduction initiatives start to take shape, I think margins could increase and profits could rise sharply. And that could have a very positive effect on the stock price.

Activism

The Rentokil stock price has been volatile in 2024. And several of the sharp rises are the result of activist investors’ interest in the stock.

It’s not something I would count on. But an unusually low valuation and a company making progress are enough to think investors should consider buying the stock for 2025 and beyond.