The Cintas Bubble
The market is propped up on small wooden sticks right now. Investing more of your money in stocks or bonds in this current environment seems foolish at best given the industrywide inflated valuations that are partially induced by constant market hype (crypto, WSB/Reddit, etc…).
We are living in a weird stage where the economy is escaping and entering big booms and small busts.
This is the revolving door that the Fed is ultimately responsible for.
However, this article isn’t aimed at criticizing the government or the Fed. It’s about one of the biggest individual stock bubbles I think is bound to burst.
Enter Cintas.
Overview
Cintas is a global industry giant. They supply uniforms for companies of all shapes and sizes.
They also have some side businesses such as providing first-aid equipment, logo mats, fire protection products and cleaning services as well.
From mops to fire extinguishers, this $40 billion business has incredible reach.
While Cintas does have relatively strong financials and has been a superstar stock for decades, I have concerns for the company’s future.
Scale
When it comes to moat, Cintas has a big one. At nearly every restaurant you go to there will be either Cintas’ equipment or maybe one of its few competitors (usually Aramark and UniFirst).
Though “the uniform people” have been around for a long time, the world around them is changing quickly.
Cintas’ business depends heavily on restaurants staying open and companies not losing significant number of employees. Restaurants are reopening but many are likely to close again due to threats of the Delta variant.
Excluding threats of the Delta variant, companies are still facing major issues in retaining employees.
This has grown to be a major problem.
If people can collect checks from the government for staying home and don’t have to earn their living, why should they want to work?
Needless to say, much of the concern I have for Cintas is tied with overall trends in the macroeconomy, not so much the company itself.
Gig Economy Effect
Let’s kick this off with the best-case scenario. COVID is defeated in its entirety, the economy roars back and there are no more public health or economic concerns with the virus.
One of the things I’ve learned about people is they love DoorDash, UberEats, Postmates, and anyone who delivers food to their door. Many people, especially younger generations don’t want to sit down at a restaurant.
They want to sit at home and work on their upcoming presentation or play Call of Duty with their friends. The simple fact is that people just aren’t as inclined to go out anymore.
COVID-19 has trained us well.
The old way was going out to restaurants. The new way is sitting at home and telling your Dasher where to drop off your Mediterranean food.
So, what does this have to do with Cintas?
Industry Changes
Approximately 80% of their business is in uniform rentals.
More people ordering takeout means fewer staff and employees needed at restaurants. This means fewer people wearing uniforms, which means less revenue for Cintas.
If Cintas’ stock was a person, they would be in denial.
While many understand the gig economy transition that we’re in, many still think there is still considerable room for the “old”.
Wrong. This a secular change.
After this next recession, the economy will change forever.
The gig economy makes things easier for everyone (most would say that, anyway). However, as we have learned from the virus, young and old people partake in the value that technology brings.
I have delivered food to retirement homes and frat houses.
Most participate because they realize they can live their lives in more convenient ways.
The Amazon effect.
Suffice it to say the future for uniform rentals does not look promising (COVID or no COVID).
For those who think the gig economy isn’t going to change everything after the next recession, feast your eyes on exhibit A.
5610 Interstate Food Co – Order Tasty Food for Pickup (5610foodco.com)
This is the present and the future. A group of two or three employees in t-shirts and sweatpants manning the front, distributing orders to drivers (Dashers and Uber Eats drivers) and give or take 20 cooks (in total) sprawled out in mini kitchens preparing food.
No hosts + No wait staff= Fewer uniforms.
COVID-19 Continues
In a more bearish scenario where the virus continues and even gets worse, restaurants will be hit even harder than before. Despite the fact that some restaurants have grown accustomed to surviving in tough times, another COVID lockdown would likely put the nail in the coffin for many.
Whatever liquidity and financial footing a restaurant may have after emerging from the initial lockdowns, many of them (especially mom-and-pop restaurants) do not have the financial means to continue if they are hit again.
No business to run. No uniforms.
In both the bull and bear scenario, Cintas’ core business has a dim outlook.
Entrepreneurship
One of the cornerstones of America is entrepreneurship. The rise in people starting their own businesses is encouraging for people like you and me but not so much for Cintas.
Many businesses that have been started (particularly during the lockdowns) consisted of people solely selling products online or having a part time job and a web-based side hustle.
In both cases, no uniforms are needed. A couple of custom t-shirts with a company logo and that’s it.
Let’s get real. People starting companies aren’t exactly focused much on their uniforms. They are focused on perfecting their business model, customer experience, and getting as many customers in and out of their business as possible. Uniforms tend to be far down the long list of things startups have to perfect in order to succeed.
Outside of new businesses, many major corporations have become laxer in regard to what employees wear at work. The traditional custom made and cleaned Cintas uniforms are likely to see less use in the future as a result.
People don’t want to be uniform people. They want to be individuals with their own flare.
Revenue Stream(s)
Let’s forget uniforms for a second and focus on the other 20% of Cintas’ business.
They have solid supplemental businesses that will be around for as long Cintas is.
As an example, federal law requires fire extinguisher compliance inspections and first aid kits for businesses (mainly restaurants). Cintas’ services keep customers safe and businesses compliant.
Cintas also offers carpet cleaning, creates logo mats, and distributes toilet sanitizers. These might not be required by law, but they are good for any business to have!
While these are great businesses to be in (and to dominate in like Cintas does), it is a small sliver of their revenues. While Cintas will always have these businesses and be at the forefront of fire extinguisher inspections and first aid kits, if their uniform business crumbles, they are in a lot of trouble.
Cintas Stock Chart
COVID-19 impacted some business more than others.
The stock plummeted after its steady rise, breaking through $300, and sinking as low as $164. If that drop is any indication of what another shutdown can do the stock or what the digitized economy can do to the uniform business, I want no part of it.
If it were simply cyclical and Cintas dropped drop during the lockdown and we knew that things would get better eventually (as was the case looking back), Cintas would be a buy at $164. However, as I previously mentioned, there are a lot of secular threats to the fundamental wellbeing of its core businesses.
Overvalued Stock
This point doesn’t warrant troves of research or lengthy paragraphs. The market is overvalued right now, and we have been waiting for a recession. According to the historic recessionary cycle, we are due.
If you calculated Cintas’ intrinsic value, you should get somewhere in the neighborhood of $260. The stock is currently trading just under $400.
Ladies and gentlemen, this stock is a balloon.
Other common technical metrics that are used to value a stock paint the same picture.
For example, Cintas’ current price-to-earnings (P/E) ratio is 38, where anything above 20 is said to be overvalued.
Even if I am completely wrong about Cintas’ future, the actual value behind the stock price has a lot of catching up to do. Their business has historically been stable and predictable, but the stock price has started to run while the business itself has continued to jog.
Another important metric is a company’s cash-to-debt ratio (also referred to as “coverage ratio”). The lower the number, the longer it’ll take a company to pay off its debt.
Cintas’ current cash-to-debt ratio is approximately 0.18. After some calculations, this means that it would take Cintas around five and a half years to pay off its debt (1/0.18). Their current ratio is way worse than most of its industry peers.
However, I am not gravely concerned with Cintas’ debt levels because they have better operating margins than most of their peers and are profitable. The coverage ratio is just a side point that I felt should be mentioned.
All things considered, it’s important to understand that an expensive stock does not instantly mean an overvalued stock.
However, in this case it does.
Should you buy Cintas Stock?
I don’t think Cintas will necessarily file for bankruptcy protection soon. They’ve had a solid business for a while now and have services and products in just about every restaurant that I’ve been to.
However, if you add up all of the facts and macroeconomic trends, things don’t bode well for Cintas.
Even if you think the company will be around forever and disagree with all of the points I’ve laid out, the stock price is too high.
That doesn’t mean much nowadays; most stocks are at all-time highs.
There’s no telling when the Cintas bubble will pop, however, I suspect it will happen after the coming recession. There will be a point where the permanent gig-shift will change the economy so dramatically, that Cintas’ core business, like the global economy, will never be the same.
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