Uniform rental and facility services company Cintas (CTAS 2.92%) has been a stellar performer over the years, with the stock rising nearly 300% in the last half-decade. The reason comes down to its success in convincing more companies to outsource their uniform provisioning to it, and also convincing them to buy an array of everyday facility servicing products (mops, floor mats, fire protection services, etc.) from it. The company has been a great long-term story, and as the economy reopens, Cintas is surely positioned to benefit. However, the key question potential new investors need to answer is whether the stock is a good value now.
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Cintas as a reopening play
The case for Cintas being a reopening investment is simple: As workers return to their jobs in factories, healthcare facilities, foodservice outlets, hospitality industries, etc., revenues from its core uniform rental business will rebound. In addition, the COVID-19 pandemic has created a heightened interest in cleanliness and healthiness in the workplace. That should benefit Cintas' business of providing and routinely cleaning working uniforms, as well as its facility services segment.
None of the above is in doubt. Indeed, on the recent fiscal 2021 fourth-quarter earnings call, for the period that ended May 31, management guided toward revenue in the range of $7.53 billion to $7.63 billion for its fiscal 2022, which would amount to growth in the range of 5.8% to 7.2%. That's in line with the company's annual organic growth rates of 5% to 7% over the last decade.
Those are also the kind of numbers that gave CEO Todd Schneider the impetus to explain during the earnings call that Cintas' "successful long-term financial formula is organic revenue growth in the mid-to-high single digits, double-digit earnings-per-share growth, significant cash generation."
Frankly, any business that can grow its earnings at a rate above 10% over the long term deserves to be priced like a growth stock, and investors should be willing to pay up for it in terms of valuation. In addition, management's guidance assumes that sales of personal protection equipment (PPE) won't maintain their fiscal 2021 levels, on the basis that the pandemic is easing. However, Schneider did say that Cintas' revenue growth would be above 8% if PPE sales did match those levels again -- a wild card for investors to look out for.
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Two flies in the ointment
The two caveats regarding Cintas' stock are arguably conjoined. First, the fact that its revenue guidance is only for growth within its long-term average range is somewhat disappointing. There's an argument to be made that fiscal 2022 should be a year of above-trend growth. As the economy reopens, workers get back on site, and uniforms get used, Cintas should see strong growth in uniform rentals. Moreover, comparisons with fiscal 2021 should set a relatively low bar to measure growth against.
For reference, the core uniform rental segment (half of which is uniform rentals) saw revenue decline in the first three quarters of fiscal 2021. It's very hard to know exactly what the PPE-related sales will be, but management only forecasts 8% plus growth if PPE-related sales stay at the highly elevated levels of fiscal 2021. That seems to imply uniform rental business sales might not trump the easy comparisons with fiscal 2021 as much as might be expected.
Some Wall Street analysts responded to the company's latest report by upgrading their price targets for the stock and suggesting that the relatively weak-looking guidance was a reflection of conservatism on the part of management. Time will tell if those analysts are right or not.
Second, the company's earnings and guidance must, as ever, be looked at in the context of its valuation -- in this case, its enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) -- a commonly used valuation metric.
As you can see below, Cintas trades at an EV-to-forward-EBITDA ratio of 22.5. Moreover, based on Wall Street estimates, its EV is 20.7 times its estimated fiscal 2023 EBITDA. These valuations look expensive compared to the stock's historic levels. Moreover, it's worth noting that these calculations are based on analyst estimates that forecast Cintas growing revenue at an average annual rate of 7.4% over the next two fiscal years -- above the high end of management's guidance for 2022.
Data by YCharts
Is Cintas a reopening stock?
The answer is an emphatic "yes," but that doesn't make the stock a buy at its current valuation. It looks like Cintas will need to beat its own guidance and Wall Street estimates to make the stock look a good value. There's a theory that in the post-pandemic environment, companies will find outsourcing their uniform provisioning to be a more compelling choice than it was before. That bullish investment thesis for Cintas will have to prove accurate for the company to outperform the analysts' forecasts.
Furthermore, around half of Cintas' uniform rental segment revenue actually comes from facility services like "dust" (mats, mops, etc.), hygiene products (soap, air fresheners, etc.), and linens. The company could also grow sales of these complimentary products as it expands its customer base.
All told, shareholders will have to hope Cintas can, indeed, beat guidance and estimates, because its stock is not looking a great value right now.
