What happened
Shares of uniform provider Cintas (CTAS 0.34%) lost a painful 35% of their value in March, according to data from S&P Global Market Intelligence. That was much worse than the 13% decline in the S&P 500 Index. The general reason for the selloff was the COVID-19 pandemic, but what's really got investors worried are longer-term issues.
So what
Cintas' business model is pretty simple from a big-picture perspective -- it provides uniforms and other facility-upkeep services to businesses. As COVID-19 began to spread rapidly across the country, state and local governments have either mandated or firmly requested that most people stay home as much as possible, and that all non-essential businesses close. That's a big headwind for a company that makes all its revenues by supporting other businesses' operations. In the near term, Cintas will see a drop in demand because of the widespread social distancing efforts being taken.
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However, even during normal times, Cintas' business is highly cyclical. It ebbs and flows along with the broader economy, and there's really nothing that can be done about that. That's the longer-term concern driving investors to sell the stock today. The efforts to slow the spread of COVID-19 have basically caused economies around the world to stop in their tracks. It appears almost certain that, in the months and quarters ahead, the economic data will show that a global recession has already begun.
In fact, any near-term hit Cintas feels from the immediate impacts of COVID-19 might be relatively modest compared to the business decline associated with that apparently unavoidable recession. Thus, the drop in Cintas' share price is hardly unreasonable.
Now what
Cintas is a financially strong company that has managed its way through downturns before. That said, the stock's dividend yield is higher than it has been in a long time -- though still below the levels it reached during the depths of the Great Recession. That suggests that there could still be more pain ahead for shareholders as the immediate concerns surrounding COVID-19 recede and the longer-term ripples from the containment effort start to show up in the global economy. Investors might want to keep this stock on their watch lists for now.
