If you need any more convincing that great companies don't have to be tech superstars or positioned on the crest of the next megatrend, check out Cintas (NASDAQ:CTAS). This company has an enviable track record of earnings and cash flow growth, and it's diligently distributed those earnings through dividends.
Now, the other side of the lesson isn't quite so much fun. Even with the greatest companies, there is a point where valuation is just too high. In the case of Cintas, the P/E was in the high 30s in the late 1990s, and the stock has ultimately gone almost nowhere since then (though trading has been somewhat volatile in the intervening years).
Valuation and stock action aren't something that a company can really control (nor should it try), so let's get back to looking at what management can control. For the company's fiscal third quarter, revenue rose nearly 11%, with organic revenue growth of "about 8%," according to management. While rental revenue was a little sluggish (but up more than 8%), revenue from other services rose nearly 19%.
Even though the company has had to cope with the disruptions caused by 2005's hurricanes and the highest-ever natural gas prices in the company's history, margins still came out basically OK. Gross margins slid very slightly (due to the rental business), and operating margins were just barely down. Through share repurchases and lower shares outstanding, the company turned 9% income growth into more than 12% earnings-per-share growth.
Recently, the company also made another acquisition, buying industrial uniform company Van Dyne Crotty. This well-regarded company is the eighth-largest supplier in a still-fragmented market, and Cintas's acquisition means that competitors like ARAMARK (NYSE:RMK) and G&K Services (NASDAQ:GKSR) won't get it. Sometimes offense is the best defense.
I've got a lot of respect for this company, with its strong financial performance and its industry-leading control of maybe one-quarter of its market. Unfortunately, I still don't see the stock as a bargain. This would be a fine company to own at the right price, but as the last six years have shown, even excellent companies can tread water for years at a time when the valuation gets ahead of the story.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
