There's long been a strong case for arguing that corporate uniform services company Cintas (NASDAQ:CTAS) is a set to be a long-term beneficiary of the COVID-19 pandemic. There's little doubt that there will be an extra emphasis on companies ensuring safe and healthy working environments, and that plays well to Ciintas' offerings. That said, the stock is up nearly 72% since the end of March, so it's time to ask whether it remains a good value or not.

How Cintas makes money

Cintas generates revenue from two main sources, namely uniform rental and facility services, and first aid and safety services. For reference, the industrial stock's fiscal year ends on May 31.

The uniform rental and facility services business has taken a near-term hit as lockdown measures have closed businesses and reduced end demand. As the economy opens up again, however, it's likely that end demand will improve. Moreover, the increased emphasis on cleanliness could spur demand for companies to outsource uniform provision and cleaning to Cintas.

A group of workers wearing corporate uniform.

Corporate uniform rental demand will pick up as the economy improves and factories reopen. Image source: Getty Images.

As you can see below, there's no shortage of demand for first aid and safety services in the current environment. Cintas has seen strong demand as a consequence.

These trends are expected to continue into the first quarter as CFO Michael Hansen gave the following guidance for the quarter during the recent earnings call: "Uniform Rental and Facility Services segment organic revenue decline of 8% to 9%. First Aid and Safety Services segment organic revenue increase approaching 10%." 

Cintas Segment Revenue

Q4 2020

Q4 2019

Change

Full-Year 2020

Full-year 2019

Change

Uniform rental and facility services

$1.21 billion

$1.43 billion 

(15.4)%

$5.64 billion 

$5.55 billion

1.6%

First aid and safety services

$0.2 billion

$0.16 billion

20%

$0.71 billion

$0.62 billion

14.4%

All other

$0.15 billion

$0.2 billion

(24.5)%

$0.73 billion

$0.72 billion

1.8%

Total

$1.56 billion

$1.79 billion

(13.2)%

$7.09 billion

$6.89 billion

2.8%

Data source: Cintas presentations.

The investment case

Putting it all together, the case for buying Cintas is based on the idea that there could be a pickup in uniform rental demand after the pandemic subsides. Indeed, CEO Scott Farmer believes that "Cintas is well-positioned to benefit from this new normal."

Meanwhile, first aid and safety demand will stay strong, even if its growth rate will moderate from the torrid rates inspired by the onset of the pandemic. Throw in the cross-selling opportunity to sell more uniform rental to customers buying more safety and cleaning services, and there's even more upside to come.

Valuations

It's a strong case, or at least it is because the market has been buying the stock recently.

The following chart shows its current price-to-earnings multiple, the forward PE ratio for its fiscal 2021, and also the PE ratio (forward one year) for its fiscal 2022. The valuation implies that Cintas' PE multiple will still be above its recent historical range by the end of its fiscal 2022 in May 2022. At this point, investors are entitled to start asking questions about what exactly they have to assume for Cintas to get there.

CTAS PE Ratio (Forward 1y) Chart

Data by YCharts

It's not a done deal

Cintas is an attractive stock, but it's going to be a rocky road on the long march to value, and a few factors need to be considered.

First, the strong growth in first aid and safety services is likely to moderate, and demand for uniform rental from the healthcare sector might moderate in the future as the pandemic threat eases.

Second, Cintas is still a company with a dependency on job growth and employment conditions, and a sluggish economic recovery would not be good news for the company.

Third, around 70% of Cintas' sales go to "services providing" industries. While this includes healthcare, it also includes hospitality, foodservice, and other industries that are likely to experience a slow recovery.

Indeed, during the earnings call, COO Todd Schneider noted that the uniform direct sale business (which lies in the "all other" segment and includes airline, cruise line, hospitality, and gaming customers) saw an organic revenue decline of nearly 40% in the fourth quarter. As Schneider said during the earnings call, "These industries have been among the hardest hit by the pandemic."

Looking ahead

There is a case for buying Cintas, but not at its current valuation. With Cintas trading on an estimated 2022 PE multiple of almost 36 times earnings, it appears that the market is taking a very optimistic view on matters. Cintas still faces very uncertain end markets, though, and there's no margin of safety for error built into the valuation. As such, there are probably several better stocks out there on a risk/reward basis right now than Cintas.