Cintas (CTAS) has seen its share price climb 105.04% above its 52-week low of $154.33 that it hit in March 2020 – at the time the entire stock market was hit with the impact of COVID-19. It currently trades near its 52-week high of $324.39, and at such a high valuation is a stock that prospective investors should be wary of investing in at present.
Wariness of Cintas may seem like a counter-intuitive opinion to hold, given the underlying quality of the business itself. Founded in 1968, Cintas is the industry leader in designing, manufacturing, and implementing corporate identity uniform programs. It holds pole position because of its vast distribution network: Cintas serves one million customers via more than 11,000 local delivery routes with products and services such as entrance mats, fire protection, first aid, promotional products, restroom cleaning and supplies, safety, and tile and carpet cleaning.
That Cintas is a profitable business is clear not only from its 16.41% operating margin and its reported free cash flow of $316.02 million, but from the revenue and net income figures the firm has reported over the past five years.
|Year||Revenue ($)||Net Income ($)|
|2016||4.8 billion||441.47 million|
|2017||5.32 billion||449.12 million|
|2018||6.48 billion||772.14 million|
|2019||6.89 billion||873.07 million|
|2020||7.09 billion||868.2 million|
Figures collated from annual reports and Q4 2020 report available from Cintas’ investor relations page.
This profitability is what has given Cintas its status as one of the S&P 500 Dividend Aristocrats (NOBL) – Cintas has rewarded shareholders with 37 years of consecutively rising dividends, and should continue doing so given its payout ratio of 30.60%. Its strong balance sheet also reinforces this contention, as long-term debt of $2.66 billion is offset by a net worth of $3.24 billion, and total current liabilities of $885.2 million are offset by total current assets of $1.46 billion, cash-on-hand worth $145.4 million, and total accounts receivable of $870.37 million.
Cintas has rewarded shareholders with consecutively rising dividends for 37 years. Image provided by Business Wire.
Cintas is also a growth stock, as it is content to divest business lines that are underperforming: this is why it sold its 42% interest in Shred-it International for $578 million in October 2015. Cintas also makes acquisitions that will help its growth, hence its $2.2 billion acquisition of G&K Services, Inc. in May 2017 which provided Cintas with a billion dollars in annual revenue. Prudent management of its portfolio will continue to benefit Cintas going forward, hence the estimated earnings-per-share growth (3-5 year CAGR) of 9.64%.
That said, no company is worth buying at any price, no matter how excellent. And Cintas stock has surged since the March low – a consequence of what businesses that are still operating putting greater priority on cleanliness, which of course Cintas profits from. That does not mean that prospective investors will profit if they buy Cintas now, however.
At close of market on 08/14/2020, Cintas traded at $316.44 per share. Chart generated by FinViz.
At close of market on 08/14/2020, Cintas Corporation traded at a share price of $316.44 with a trailing price-to-earnings ratio of 39.10 based on earnings-per-share of $8.09, and a forward P/E of 34.62 based on projected earnings-per-share of $9.14. Both metrics are higher than the stock’s five-year average P/E of 28.28, higher than the personal and laundry services sub-sector average of 33.88, and higher than the S&P 500 (SPY) average of 28.79. By every metric, Cintas trades at a premium to both its sub-sector and to the broader index.
Figures collated from FinViz, Morningstar, and TheStreet.
In addition, the current dividend yield of 0.81% is lower than the five-year average dividend yield of 1.00%. It seems clear, then, that Cintas is trading at a premium to fair value – prompting the question of what fair value for Cintas is.
To determine fair value, I will first divide the trailing P/E by the historical market average of 15 to get a valuation ratio of 2.61 (39.10 / 15 = 2.61) and divide the current share price by this valuation ratio to get a first estimate for fair value of $121.24 (316.44 / 2.61 = 121.24). Then I will divide the trailing P/E by the five-year average P/E to get a valuation ratio of 1.38 (39.10 / 28.28 = 1.38) and divide the current share price by this valuation ratio to get a second estimate for fair value of $229.30 (316.44 / 1.38 = 229.30).
Next, I will divide the forward P/E by the historical market average of 15 to get a valuation ratio of 2.31 (34.62 / 15 = 2.31) and divide the current share price by this valuation ratio to get a third estimate for fair value of $316.44 (316.44 / 2.31 = 136.99). Then I will divide the forward P/E by the five-year average P/E to get a valuation ratio of 1.22 (34.62 / 28.28 = 1.22) and divide the current share price by this valuation ratio to get a fourth estimate for fair value of $259.38 (316.44 / 1.22 = 259.38).
Next, I will divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 1.24 (1.00 / 0.81 = 1.24) and divide the current share price by this valuation ratio to get a fifth estimate for fair value of $255.19 (316.44 / 1.24 = 255.19). Finally, I will average out these five estimates for fair value to get a final estimate for fair value of $200.42 (121.24 + 229.30 + 136.99 + 259.38 + 255.19 / 5 = 200.42). On the basis of this estimate, the stock is overvalued by 37% at this time.
In summary, Cintas is an industry-leading business with an excellent dividend record that will continue rewarding current shareholders going forward. COVID-19 has not been as unkind to Cintas as it has to other businesses, but a recessionary environment may yet take a toll on Cintas as more businesses shutter their offices and/or move towards having their employees work from home. Both these factors may yet tell against Cintas and lead to a pullback. Consequently, it is a hold, but not a buy at a 37% premium to fair value.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.