Cintas Corporation (NASDAQ:CTAS) is best known for handling the uniform needs of companies throughout the United States. Boring? Yes. A good business? Sure is! But you need to understand a few things about Cintas before you buy the stock.
A good business
Cintas has two main businesses -- managing the uniform needs of customers and providing safety and first aid equipment. The uniform side of things makes up over 85% of revenues, so this is the most important business to watch.
Basically, Cintas does everything from selling uniforms to renting them. A big part of what Cintas does, however, is keeping the uniforms it sells and rents clean and usable. This is not an exciting business, but it is a vital one. And there's a widespread need -- Cintas has around a million business customers.
But here's the thing. Demand from the businesses Cintas serves ebbs and flows with the broader economy. So while there's a strong underlying demand, the top and bottom lines can be a little more cyclical than you might expect. If employment levels fall during a recession, there's less need for Cintas' uniform services. For example, the company's top line dipped in 2009 and 2010, the tail end of the last recession.
The takeaway here is that when Cintas appears to be hitting on all cylinders, there's an economic component. If investors are bidding the shares up because of great results, you might want to sit on the sidelines before jumping aboard. The next economic contraction might offer up better prices.
Where's the growth?
The company is already one of the largest players in the competitive uniform space. So gaining market share is actually a hard thing to do. That means acquisitions will probably play a role along with new contract wins. But don't expect huge swings in the customer count.
That's why Cintas has tried to expand what it offers. For example, although uniforms are the big item here, the company's safety and first aid products are a fairly new offering. This division currently accounts for around 15% of the top line. But what's exciting about it is that these products can be sold to Cintas' existing customers. That cross-selling opportunity should help push growth.
So as you watch the core uniform business, make sure to see how well Cintas' other business is doing. Look for it to keep making inroads into the uniform customer base. And note that not only is this good for the top and bottom lines, but it also increases the stickiness of customers. The more services Cintas provides, the harder it will be to get rid of the company.
In fact, if you do a deep dive here, you'll see that Cintas offers everything from cleaning services (such as for restrooms and floors) to welcome-mat rental and cleaning. So it's already well along the path of diversification. It's just that first aid and safety is an entirely new space added not too long ago.
A mistake to remember
That's why, while we're discussing the successful rollout of the safety and first aid service, you'll want to know that Cintas just jettisoned a document management business. Like safety and first aid, this operation was supposed to allow Cintas to gain more business from existing customers. Good idea.
However, the realization of the idea didn't turn out to be as great as the idea itself. To Cintas' credit, it has managed to handle this misstep in stride. However, as the company looks to keep growth strong, watch to make sure it doesn't fly too far afield of its core. That's a mistake that many companies make, but it can be costly. And since Cintas has already "been there and done that" once, you should be a little extra concerned if happens again.
Not just a laundry service
While it would easy to characterize Cintas as a glorified wash-and-fold business, it's really more complicated than that. For example, the cyclical nature of the business may surprise investors who don't recognize the importance of employment stats on customer demand. But that could allow you to get a better price if you're patient.
And while expansion in the uniform business is important, scale will probably mean slow growth at best. There's more opportunity for Cintas' ancillary businesses to grow as they make inroads into the existing customer base. But be sure to keep a wary eye on new ventures, since the now-jettisoned document business proves that Cintas makes mistakes here, too.
In the end, Cintas is a good company with a boring business. Over 30 years of dividend increases proves that out. But make sure you understand the dynamics underneath the big picture before you buy Cintas stock. It might change the way you decide to proceed.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Cintas. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.