Founded in 1968, Cintas Corporation (CTAS) is a leading provider of corporate identity uniforms through rental and sales programs.
The company offers related business services including carpet and tile cleaning service, restroom cleaning services and supplies, first aid and safety services, and fire protection products across the United States, Canada, and Latin America.
The company’s large network of distribution centers and delivery routes has led it to a dominant position in the industry.
During the Coronavirus pandemic, Cintas business was considered essential and was allowed to keep operating. Subsequently, the share price increased three-folds from $169.89 on March 1, 2020, to $443.17 on December 27, 2021. I am neutral on the stock.
The stock is currently trading at premium valuation. The trailing-twelve-month P/E of 37.1x is way higher than its five-year average of 33.8x and sector median of 21.5x.
Based on its strong fundamentals, the stock should command premium valuation. However, these positives are already priced in the stock.
Largest Player in the Industry
Fundamentally, the company looks strong. It holds a leading position in North America for providing uniform rental and cleaning services. CTAS has maintained its position through several strategic acquisitions. These acquisitions have enabled broader customer reach while maintaining the highest margins in the industry.
As there is a little scope for product differentiation, size and scale really matter in this kind of route-based service business. As of May 31, 2021, Cintas had in total, 11,000 local delivery routes, 460 operational facilities and 13 distribution centers. This is indicative of a significant operating scale, which offers cost advantages.
As such, the company delivers operating margin in the range of 16%-19%, much higher than approximately 10% by its closest competitor, Unifirst (UNF).
It’s the economies of scale that set Cintas apart from competitors.
The company has been delivering solid results, beating consensus forecasts since 2017. Even compared to peers, results have been better. While revenues at CTAS grew at a compounded annual growth rate of 8.62% over the last five years, Unifirst delivered 4.73% growth.
The company’s broad range of products and services allows it to cater to a broad range of cleaning requirements. Other players do not offer end-to-end rental and cleaning solutions.
In addition, CTAS’ large scale of operations and strong distribution network allows it to cater remote locations in a timely manner, which is otherwise difficult for its competitors
In its latest 10-K, management reported none of the company’s customers represent more than 1% of its revenues. This means CTAS maintains a highly diversified customer base.
Further, 95% of these customers are on a long-term contract, providing enough revenue visibility. For FY 2022, management expects revenue to reach $7.7 billion, reflecting a growth rate of 8.2% year-over-year.
Management is enhancing shareholder value through regular share repurchases and dividend distributions. The company had increased dividend payments by more than 20% over the last five years till 2020.
CTAS’ attractive dividend history is another reason for value investors to find it compelling. Strong cash flows allow management to pursue these initiatives.
Going forward, the company should be able to carry out its growth plans without any hindrance.
On the flip side, CTAS derives nearly 80% of its revenues from its Uniform Facility service business. Other businesses such as First Aid and Safety Services, and Fire Protection products and services contribute only 11% and 9%, respectively.
High revenue concentration in one line of business makes it vulnerable to changes in market conditions. For example, while CTAS was allowed to operate during the pandemic, its business was impacted by customers’ abilities to pay their bills.
Wall Street’s Take
Turning to Wall Street, CTAS has a Strong Buy consensus rating, based on six Buys and one Hold rating assigned in the past three months. The average Cintas price target of $468 implies 19.6% upside potential.
Cintas has a track record of delivering solid results. It holds a dominant position in its industry.
The company’s large scale of operations, wide customer base and high margins support an optimistic outlook.
However, these positives are already reflected in the share price.
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