Cintas: How High Will It Go?

Business services provider Cintas (CTAS) has experienced decent appreciation in their stock over the past month, essentially the up-trend started soon after they lowered guidance for the second half of their fiscal year. As a provider of uniforms and other related business services products like fire safety equipment that help other businesses operate more smoothly, the recession and its effect on employment has been rough on Cintas. However, since they revised guidance downward, management has said they are heartened by the slowing in job losses and can perceive a general improvement in the economy. Apparently, the market agrees with this outlook as the stock has moved steadily higher by about 18% in just over a month.

The last quarterly results came in above the more conservative guidance, as EPS came in at $.32 and beat consensus analysts’ estimates of $.30. Sales fell 5.2% to about $862 million, but topped Wall Street’s view of $854 million. The market’s reaction has been a muted 1% rise, as these results would have fallen short of expectations before the downward guidance. For the quarter ahead, management left the EPS outlook unchanged at $.30 to $.34. Cintas is currently trading at just over 18x trailing twelve month earnings, but only 15x 1-year forward earnings per share. Clearly, some improvement to the employment situation is baked into the forward looking estimates.

As you can see from our valuation history chart, we have rated CTAS as Undervalued for the last few years and we are reiterating that rating this week. Given the current fundamentals, Cintas trades for about 10.1x price-to-cash earnings, while CTAS has normally traded for 11.8x to 17.1x cash earnings per share over the last ten years. Better operating performance has enabled the company to maintain strong cash flow even while sales are down. Furthermore, the historically normal range of price-to-sales is about 1.56x to 2.23x, but the metric for this fiscal year’s sales is well below that range at just 1.2x. Based on the market’s historically normal valuation ranges, we think it is reasonable to believe the stock may be able to attain $32 per share before we would consider a downgrade to fairly valued.

We think that jobs will begin to return to the US economy in the next few months, but they will not soon recover to pre-recession levels. That being said, Cintas may not be the most attractive stock in this environment, but we think it does have decent underlying value, and if the job recovery surprises to the upside CTAS would be a clear beneficiary of that trend.

Cintas: How High Will It Go?

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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