Cintas Corporation's (NASDAQ:CTAS) stock was up roughly 33% year to date through July. It's up 50% over the past year and 325% over the trailing five years. There's no question that Cintas has rewarded shareholders very well. But that's the past, and investing requires balancing cost and value as you look to the future. In the end, investors shouldn't get overly excited about the stock right now because it's looking pretty expensive. Here's why this great company's stock isn't a great buy at this moment.
Credit where credit is due
I have no doubt about the quality of Cintas as a company. Revenues have grown in 8 of the last 10 years, with earnings per share higher in 9 of those years. Over that 10-year span, revenues grew 70% and earnings more than 300%. (Note that fiscal 2018 earnings received a substantial one-time boost from the tax law changes. Pulling that gain out, the earnings-per-share increase was closer to 250%, still a huge number.) And all of that from a company that makes most of its money from the boring business of renting out uniforms.
Financially speaking, the company is fairly strong, too. Long-term debt is roughly 45% of the capital structure, not an unreasonable number for a business that's spread across 1 million customers. However, leverage is higher than it was a couple of years ago when long-term debt was closer to 35% of the capital structure. The reason for the change was the acquisition of competitor G&K Services in fiscal 2017 for $2.2 billion, including debt. Cintas is already working to return its debt levels to more historic levels, though, reducing its long-term debt by nearly 9% in fiscal 2018. Looking at the shorter end of things, a current ratio of 2.5 times leaves little concern about the company's ability to cover its near-term bills.
In addition, the company has amassed an impressive dividend record. It has increased its dividend every year for 25 consecutive years. The annualized increase over the past decade was an incredible 15%. That's roughly five times the 3% historical rate of inflation growth.
Looking ahead, Cintas is expecting revenue to grow around 5% in fiscal 2019, with earnings advancing as much as 25% when you take out the impact of the tax law changes. (Earnings growth will only be in the low single digits if you don't adjust for the tax impact.) The main driving force will be the benefit from the ongoing integration of the G&K acquisition. And I am highly confident that Cintas will extend its annual dividend streak to 36 years.
As for the longer term, the company notes that its roughly 1 million customers account for just 6% or so of the addressable North American market. There's no reason to believe that Cintas can't keep gaining share via organic expansion and through bolt-on acquisitions like the recent G&K purchase. The outlook for Cintas as a company is quite bright.
So Cintas is really hitting on all cylinders and has been for a very long time. It is a great company with a solid outlook. But great companies aren't always great investments because, usually, everyone knows they are great. That's the problem here.
Cintas' trailing price-to-earnings ratio is currently around 27, which is higher than its five-year average PE of 22. Its forward PE is roughly 28, even higher than its trailing PE. To be fair, the current earnings picture is a bit distorted by the tax law change. However, PE isn't the only metric that suggests that Cintas appears to be expensive today. For example, the current price-to-book value of 7.3 times is well above the company's five-year average of 4.8 times.
And the valuation concerns don't stop there. Cintas' price-to-sales ratio of roughly 3.5 is also well above its five-year average of 2.3. And price-to-cash flow from operations per share of 23.5 is notably above the company's five-year median of 18. Meanwhile, the dividend yield, at just 0.8%, is the lowest it has been in 10 years.
The only reprieve is the company's price-to-earnings-to-growth, or PEG, ratio, which is roughly equal to its five-year average of 1.9. This valuation metric measures valuation in relation to growth potential but suggests that, at best, investors are paying full price for Cintas relative to its growth prospects. However, when combined with the PE, PB, PS, and price-to-cash flow metrics above, Cintas is clearly looking pretty expensive. In other words, this is a great company, everyone knows it, and investors have bid it up accordingly.
There's no rush
Cintas' history is clearly impressive. It also appears to have a solid future ahead. It is a great company. But that's no secret on Wall Street, and investors have bid the shares up to the point that they look overpriced. This is a great company that isn't a great investment right now because the stock has been priced for perfection. You may want to put Cintas on your wish list (it's on mine), but I wouldn't put it on my buy list today.