Cintas is one of the companies, which share price performance I do not understand at all. Business is growing by single digit number and share price for the last five years is around +230%. This is mainly due to multiple expansion, but let’s have a look on fundamentals.

Reminding, Cintas was founded in 1929 (as Acme Industrial Laundry Company, then rebranded for Cintas in 1972). Company provides services for different businesses mainly in North America. Most of revenues come from Rental Uniforms and Ancillary Products.

We should note, that company’s business is negatively correlated with unemployment rate. When unemployment rate is low then more uniforms are rented. Now unemployment rate in U.S. is very low and truth to tell I do not see so much space for improvement. image001

Let’s look on financial results:

image002

At first sight EPS was crushed, but when we look that it was due to income from discontinued operations in 2015 then adjusted EPS increased, by 21.9%. That’s somehow extraordinary as operating income was up only by 6.2%. Even adding some buybacks, which impacts diluted EPS there shouldn’t be so much growth, which is in long term non sustainable.

Company is paying dividend annually, not quarterly. It is worth to note that:

  • CAGR in dividends is very high, dividend doubled 2016 vs 2012
    • $1.33 in 2016
    • $1.05 in 2015
    • $0.85 in 2014 + special dividend $0.85
    • $0.77 in 2013
    • $0.64 in 2012
  • Payout ratio is still very low, around 30%
  • On the other hand dividend yield is low, around 1.2% OK, CAGR is high but comparing to 2.5-3% yield which many aristocrats are paying it is way below.

 

Current valuation:

EV/EBITDA = 13

P/E = 25

Dividend yield 1.2% +3-4% for buybacks.

Valuation is in my opinion very high for such simple and not so fast growing business. I think that share price performance is mainly driven by buybacks. It is hard to play against strong buybacks, but for me current share price doesn’t justify fundamentals.

 

Summing up, don’t take my note as I am against Cintas. I admire company for a sustainable growth and reasonable cash deployment. What I do not like is share price, which is in my opinion way too high. I think that market, supported by buybacks, elevated share price too high, way too quickly than business is growing. Also I see a risk of unemploment rate to increase. All in all, I think that Cintas is a good high quality company, with competent management, but currently share price is too expensive. On the other hand keep in mind that at $90 I was also bearish… buybacks are powerful!

 

Disclosure CTAS – no position