CTAS - Cintas Corporation: A Good Company But Not The Right Entry Point

2023-06-09 09:56:27 ET

Summary

• Cintas Corporation has seen a 21.94% increase in share price over the last 12 months due to an improved product portfolio and investments in technology.
• The company has formed strategic alliances with businesses like Carhartt, Diversey, Rubbermaid, and Chef Works, and has implemented SAP Success Factors solutions and SmartTruck technology to optimize operations.
• Despite cost-related headwinds, Cintas has maintained healthy margins and generated increasing revenues and profits, making it an attractive investment opportunity but not at the current valuation.

Investment Thesis

Cintas Corporation ( CTAS ) provides a range of products and services to various businesses, including first aid supplies and services, identity uniforms, restroom hygiene supplies and services, and products and services for fire protection. The company was established in 1968 and has its headquarters in Cincinnati, Ohio.

Its share price has increased by about 21.94% during the last twelve months. Several reasons I think explain this price movement. First, the company has an improved product portfolio thanks to the strategic alliances it has formed with businesses like Carhartt, Diversey, Rubbermaid, and Chef Works. Additionally, Cintas has invested in technology and, in efforts to reduce its GHG emissions, has reduced energy-related costs.

CTAS has been reporting increasing revenues and profits and is still resilient. Moreover, despite cost-related headwinds, the company has attained positive and healthy margins. I believe this solid growth has led the market to reward the company with a high price, explaining why it has premium pricing in relation to industry medians. As a result, I rate this company a hold until the relative valuation metrics fall below the industry median.

Enhanced Product Portfolio

Cintas offers its customers a vast range of solutions and has been enhancing its offerings over the years. Their offerings are categorized into segments, as discussed below.

Uniforms and work apparel: CTAS offers rental uniforms plus full services, including laundry, repair, and maintenance services, to businesses. To address the issue of missing or lost clothing, the company manages its inventory by tracking all uniforms or work gear throughout the laundry service using TruCount . The company also provides custom-made apparel, from design to delivery. Its most recent bespoke apparel was for the onboard staff on the Ritz-Carlton Yacht Collection. Offerings from this segment include flame-resistant and cleaning garments, visibility apparel, scrubs, and food processing gear.

Facility Services: The company offers commercial mats and services for its rental mats, restroom cleaning services and supplies, and mop and towel services. These services include ordering, laundering, stocking, and storing.

First aid and safety: Cintas provides safety and PPE supplies, automated external defibrillators [AED] and emergency products, eye station services, and water delivery services to offices. Some of the services involve installations, inspections, and maintenance.

Fire protection: services offered by Cintas in fire protection include inspecting, testing, and maintaining devices and systems for fire protection, such as extinguishers, exit and emergency lights, and sprinkler systems, among others. To supplement these solutions, the company also offers training on fire protection.

Training and Compliance: CTAS also provides online and onsite trainings, such as first aid and AED trainings and safety courses. In addition to that, to help businesses adhere to federal regulations, the company facilitates onsite testing of hearing and respiratory protection and dosimeter levels.

Facilitative Partnerships

Since 2010, CTAS has forged meaningful alliances with various partners to provide powerful solutions to its customers. To start with, Cintas’ alliance with Carhartt has enabled the provision of Carhartt-branded rental uniforms such as workpants and flame-resistant garments. Carhartt supplies clothing to Cintas, and in turn, the company, through its rental program, provides this clothing along with laundry, replacement, and repair services to its customers.

Cintas has also partnered with Diversey Inc. to provide custom Signet Cleaning Chemicals . In this arrangement, Diversey provides its Signet cleaning and hygiene products, such as floor and surface cleaners and mechanical ware washing products, to Cintas, which also provides these products to its clients, along with cleaning and stocking services. Additionally, the collaboration with Rubbermaid has facilitated the offering of cleaning and hygiene products and services. Through the partnership, the company’s customers benefit from Rubbermaid’s cleaning products, such as microfiber wipes and mops, alongside other products, regular servicing from Cintas, including laundering and inventory management, and technical expertise.

Lastly, the company has partnered with Chef Works to provide apparel necessary in the culinary industry, such as aprons, chef coats, shirts, and pants. These apparel items are designed exclusively for the company by Chef Works. Cintas, in turn, takes care of laundering and delivering clean and fresh Chef Works culinary apparel.

Investments in technology

Cintas has been implementing SAP Success Factors solutions to run its business. The platform has facilitated customer relationship management [CRM] by providing information and large data sets that the company can analyze. This information helps target potential customers and encourage deeper , meaningful customer relationships and cross-selling.

Its partnership with SAP has led to Cintas joining its Strategic Customer Program, which has presented opportunities to transform its business. With the implementation of SAP solutions, according to the MRQ transcript, the company witnessed robust volume growth, reflected in its revenues,s which had a double-digit increase of 11.7% from the same period prior year to $2.19 billion, especially from its new customers and its cross-selling efforts. This has resulted in notable operating leverage, reflected in the increased operating income. The MRQ’s operating income was $446.8 million, an increase from last year’s Q3 of $407.6 million. Further, the My Cintas portal is also one of the company’s investments in technology. Through the platform, customers can access it at any time of the day and manage their accounts. The platform has provided its customers with flexibility and made messaging, ordering, billing, and delivery time efficient.

CTAS has invested in its SmartTruck technology, which has come in handy, especially in the rental business. Through this technology, the company has optimized its delivery operations by coming up with denser routes and better routing its vehicles, therefore decreasing the number of commercial vehicles required to service its customers. In my opinion, this saves the company time, better serves its customers, and reduces energy costs. It also increases its face-to-face engagement with customers.

In my opinion, I think these investments are worthwhile because, first, through CRM, the company will benefit from customer loyalty, satisfaction, and growth in sales. Second, through SmartTruck technology, the company is able to improve its operating efficiencies and cut down on energy costs.

Financial Performance

The company has reported positive and increasing revenues and profits over the past five years.

For the nine months of this fiscal year, Cintas reported a net profit of $1 billion, a 6.4% increase from the same period the previous year. This is a reflection of how well the company is performing in terms of profit generation.

Moreover, CTAS's total revenues for the same period were $6.5 billion, up from $5.7 billion the prior year. Getting into specifics, the rental uniform and facility services business net sales were $5.1 billion, and the other businesses revenues amounted to $1.4 billion. This was an 11.5% and 19% increase from the previous year's revenues, respectively. The reported gross profit margin was 47.2%, or $3.085 billion, compared to last year's $2.686 billion, a 1.5% increase. Its gross profit margin TTM of 46.8% outpaced the sector’s median of 29.85%, signaling that Cintas has greater profit margins than its peers. This performance in relation to gross profit margin can be attributed to the higher pricing approach taken by the company. Operating profit was $1.3 billion, which was 20.4% of its revenue and an increase from $1.2 billion in the previous year.

With its enhanced portfolio offerings and investments in technology, I expect the company to continue generating increasing revenues and profits. The company anticipates its annual revenues at the end of the 2023 fiscal year to range from $8.74 billion to $8.80 billion.

Environmental Sustainability

Cintas’ roots are embedded in engaging in sustainable practices and being environmentally conscious. The company’s operations revolve around reducing, reusing, recycling, and repurposing its textiles or products. Its environmental priorities are reducing greenhouse gas emissions and waste and water conservation.

By 2050, the company strives to attain Net-Zero greenhouse gas [GHG] emissions . To achieve this, the company has focused on three areas: its commercial vehicles, locations, facilities, equipment, and supply chain. Regarding its commercial fleet, Cintas has been using its SmartTruck technology, which has enabled them to reduce its idling hours since every idling hour equates to about 8.5kg of carbon emissions. The technology has helped in better routing its vehicles and coming up with denser routes, which reduces gas consumption, thus saving costs. In addition, Cintas has partnered with Motiv Power Systems to transition its vehicles from using carbon-sourced fuels to using electric vehicles.

In relation to its locations, facilities, and equipment, Cintas has partnered with Redaptive to help reduce its energy consumption and costs in its facilities. The company has installed LED lighting in old, large facilities that consume the most energy. LED lighting is anticipated to reduce yearly energy consumption by approximately 18.7 million kilowatt hours. The company has also installed a solar-powered system in its rental location in New Jersey. Lastly is the supply chain, where the company plans to develop strategies to support their suppliers to meet Cintas’ need to reduce emissions.

Cost-related Headwinds

CTAS has been facing challenges such as labor shortages and cost inflation, affecting its operational expenses.

As seen above, the company’s total cost of sales increased by about 11.5% to $5.1 billion for the nine months of the fiscal year 2023 from about $4.6 billion the prior year. Its selling and administrative expenses also experienced a 16.6% increase. Nevertheless, the company has been able to reduce its energy expenses in the MRQ by 15 basis points in comparison to the third quarter of last year. As mentioned, the company's efforts to lower greenhouse emissions can explain this. Additionally, Cintas adopted higher pricing than its historical prices, which, in my opinion, is in response to the higher costs and expenses. This has also enabled the company to maintain healthy margins, as discussed earlier.

Valuation

Based on relative valuation metrics, I find CTAS trading at a premium. All its valuation metrics are significantly higher than the industry medians making this company overvalued.

Going by this data, I think now is not the right time to buy this company because I believe it has a very strong downside than its upside. As a result, potential investors should wait for these valuation metrics to fall below the industry median before cashing in.

Conclusion

CTAS has been offering an array of solutions and investing in technology, which has and should continue to drive the company’s exceptional performance. Its strategic collaborations have made it possible for it to keep providing solutions. Despite cost-related headwinds, Cintas has still been able to generate attractive revenues and profits, especially regarding energy expenses flowing from its efforts in environmental sustainability. With the enhancement of its product portfolio, its investments in technology, and its ability to generate attractive revenues, I think the company is worth investing in. However, given company may be overvalued investors should wait for a cheaper entry point.

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