Corporate uniform and facility services company Cintas (CTAS +1.41%) is definitely a big loser from the aftermath of the COVID-19 pandemic. The virus is now the cause of a series of abrupt and severe actions taken by governments in order to curtail its spread. That's not great news for a business services company like Cintas, but is the market overreacting to events or not? Let's take a look at the investment case for the stock.
The novel coronavirus
Frankly, no one knows exactly when this outbreak will ultimately be contained. Unfortunately, this fact is creating so much uncertainty in the marketplace that many companies are abandoning giving guidance altogether. Indeed, Cintas became the latest company to do so when it recently reported its fiscal third-quarter earnings. It's a disappointing outcome, as CFO Mike Hansen outlined that Cintas was actually planning to increase its full-year revenue and earnings guidance "based on our year-to-date results and fourth-quarter outlook" prior to the events of last week.
Image source: Getty Images.
There's no way of getting around it. Cintas counts hotels, restaurants, and industrial companies as being some of its key customers, so when whole economies are being shut down in response to the novel coronavirus pandemic, it's highly likely that Cintas's core rental uniform business is going to suffer. Moreover, an extended shutdown could put some of its customers under financial duress, or at the least reduce demand for Cintas's services in the light of a recession or an economic slowdown.
In this context, it's perfectly understandable that the market has heavily sold off Cintas stock. All of this leads to a highly unusual situation whereby a company with good earnings momentum is being sold off to valuations at multi-year lows due to an event (the shutdowns) which happened in an extremely short space of time.
CTAS PE Ratio data by YCharts
The bullish case
With all the doom and gloom of the current situation out of the way, it's time to turn to a more optimistic outlook. There are three key points. The first has partially been addressed in the chart above -- Cintas's valuation is looking relatively attractive on current earnings basis.
Second, while it's wrong to be flippant about the crisis, and definitely wrong to try and predict its severity or when it will end, the fact is that the measures being taken in Europe and the U.S. have arguably been proven to work in China. As such, it's probably a matter of time before they work in the rest of the world as well. Moreover, the so-called "v-shape" recovery that occurred in Asia after a previous coronavirus outbreak, SARS, in 2002-2003 serves as a useful precedent.
Third, it's worth noting that in some ways Cintas could be a net beneficiary of a post-COVID-19 world. After all, the company also sells safety and sanitizing products and services. As Hansen outlined on the earnings call, it's a business that's "performing very well" and "the cleanliness and the safety aspects have really risen, and we've got a lot of products and services that can help in those areas. And those have been asked for quite a bit over the course of the last couple of weeks."
In addition, Cintas's core business of uniform rental (which involves routinely cleaning uniforms) might also receive a boost from a heightened sense of cleanliness in the workplace.
Is Cintas a buy?
The price has gone down, and arguably Cintas's long-term growth potential has gone up -- if the argument that COVID-19 will lead to an increase in awareness of cleanliness in the workplace is correct. In this context, the stock is attractive. However, its core hospitality, hotel, and restaurant customers are likely to take a severe hit for at least a quarter or two, and there may well be a lingering reluctance to visit public areas even after the COVID-19 pandemic subsides.
For cautious investors and those worried about a recession, the stock is probably worth avoiding, but if you believe an economic recovery will occur after the virus is contained, then Cintas is an attractive stock for a long-term investor. Just be aware that the near-term headlines are not going to be good.
