MacroHint

Stock Analysis: Cintas (NASDAQ: CTAS)

About Cintas 

It was a Texas morning like most others; calm winds, blue skies and a few fellow morning warriors walking to their early morning classes. 

My school’s campus is notoriously known for being filled with delivery trucks of all sorts. Whether it’s a university-owned truck transporting equipment to and from buildings, a FedEx truck lugging through campus to drop off packages or a Pepsi vendor filling up the vending machines on campus, there always seems to be some trucks moving around on campus. 

However, one morning in particular I was greeted by an unfamiliar truck with the word “CINTAS” painted on the front of the hood. 

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What an interesting story. 

 I had previously heard of Cintas and seen a few of their trucks and other products (floor mats and hand sanitizer stations primarily) around town so it’s only right that our team decided to perform a formal stock analysis on the company. 

We find inspiration in strange places! 

Since the company’s founding in 1929, what started as a small garment and laundry cleaning services has grown to become the largest uniform rental service company. After expanding organically (not through acquisitions) over a long period of time, Cintas began growing inorganically (through acquisitions). Specifically, the company acquired Omni Services (uniform rental competitor), Petragon, American First Aid and Respond Industries all of which are companies in the uniform and first-aid and safety spaces

Over the years, the company also acquired Zee Medical as well as their highest-priced acquisition ($2.2 billion) of former uniform rental competitor so far, G&K Services

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The company’s business model is fairly simple as they rent out uniforms to a wide net of companies, subsequently clean their uniforms and rinse and repeat. Similarly, they fulfill similar tasks with hand sanitizer stations, mops, first-aid kits, custom mats for businesses and a few other products and services

Since we’ve established what the company does and how they make money, let’s get into the numbers and figure out whether or not this company’s stock is worth considering investing in for the long haul. 

Cintas’ stock financials 

The company currently has a share price of around $436, a market capitalization of $44.17 billion, a price-to-earnings (P/E) ratio of 37.48 and pays out an annual dividend of $4.60. 

Given this bit of information, it appears as though the company’s current stock price is overvalued. This is also supported given that some third-party estimates of Cintas’ intrinsic value (what the company’s shares are worth paying for today) stand at around $265. 

 It can also be noted that the company’s stock has had quite an impressive run up over the past five years, trading at around $126 in July 2017. 

It would’ve been pretty nice to have been a shareholder between 2017 and now, however inching into a new position in the company’s stock today might require some long-term patience for investors looking for strong future returns. 

As it relates to the company’s balance sheet, Cintas currently maintains around $8.2 billion in total assets and nearly $4.6 billion in total liabilities. This divide between total assets and total liabilities makes sense given that the company has a lot of operations and long term assets that are vital to the business. For instance, the company has a large fleet of vehicles such as trucks and vans that transport garments, first-aid equipment and other products and services they offer. 

All in all, we’re fine with the company’s balance sheet. 

Onto the company’s income statement, their total revenue has increased each year over the past five years, starting at around $5.3 billion in 2017 rising to nearly $7.2 billion in 2021. One of the best things about Cintas’ business model is that, from our perspective, they have a premium subscription business model. Restaurants, stores, gas stations, schools, arenas and other venues need uniforms and apparel for their employees, hand sanitizer stations to be refilled, cleaned entry mats, fire extinguisher inspections and other essential materials that need to be consistently cleaned or replaced. 

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As long as businesses have their lights on and people are still going out, Cintas will likely continue growing their revenue across the United States and other geographies. 

With regards to the company’s cash flow statement, having a strong knack for locking up contracts with all sorts of businesses and companies across the country tends to allow companies to generate a lot of recurring cash flow. 

Cintas is no exception. 

 Over the past five years the company’s net income has been resoundingly positive (literally) and generally growing as their net income in 2017 was pegged at $481 million and it has since grown to over $1 billion in 2021. 

Cintas’ stock fundamentals 

Unsurprisingly, the company’s trailing twelve month (TTM) net profit margin is considerably higher than that of the industry average, sitting at nearly 16% to the industry’s -15.71% according to TD Ameritrade’s platform. 

This is exceptional and indicates that they are truly a (if not the) leader of the industry. 

Additionally, the company’s TTM returns on equity, assets and investment are all notably higher than the industry average. 

An interesting proposition for Cintas

Given one of our previous articles regarding Cintas and our opinions on the future efficacy of the uniform industry as a whole, we’re not exactly bullish.

Although we admit that employers will continue to need uniforms and other custom clothing for their employees, we think general demand for uniforms will decline as employees wish to be more of an “individual” and less of an “employee.”

If this general decline in demand comes into fruition, it will likely be a good idea for the company to invest further in some of its other supplementary businesses, namely the hand sanitizer space. 

What’s one way to take a large chunk out of the industry and accelerate a company’s growth?

Buy out the competition. 

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We’d venture to say that one of the best deals the company could achieve is an acquisition of Gojo Industries, well-known for being the parent company of hand sanitizer domineer, Purell. 

Purell reportedly oversees around 25% of the hand sanitizer market and although the company is private (which makes it rather difficult to find metrics related to its valuation), some say the company’s worth at least $1 billion.

While this can initially be seen as a staggeringly high value, it’s probably a very fair base price to pay for a company as established as Gojo, especially when other hand sanitizer leaders such as Ecolab are worth (as of 8/21/2022) around $60 billion

This is a high price to pay, even for a cash-heavy company such as Cintas, which is one of the reasons it might make more sense for the company to pursue an acquisition of the less (relatively) expensive yet valuable Gojo, which along with Cintas is headquartered in Ohio.

While it could be a great purchase for Cintas, with an increased market share typically follows substantial regulatory scrutiny and instantly scooping up a quarter of the hand sanitizer market likely calls for lots of scrutiny.

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Over time, we’d assume that the deal would get done, especially if Cintas and Gojo’s shareholders approved of the deal along with the relevant regulatory agencies (usually the Department of Justice and Federal Trade Commission, among others) approved of the buyout. However, a deal isn’t always as safe as people assume it to be.

Overall, this is just a potential move that Cintas could attempt in order to further diversify and fortify its core businesses while hedging against the potential softened demand for uniforms and uniform-related services. 

Should you buy Cintas stock? 

Given the financials and numbers our team has seen so far, the only thing we don’t like about this company is the fact that its current stock price is objectively overvalued. Of course, although the company’s stock has performed quite well over the past five years, no company is immune to macroeconomic pressures, legal issues or the host of other issues that could negatively impact a company and subsequently its shareholders. 

However, given Cintas’ position in the industry, its ubiquity, its strong financials and track record of providing for its customers, we think they’re in the best position possible to provide investors returns in the long run moving forward. 

We currently give the company a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity. 

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