CTAS - Cintas: Richly Priced Ahead Of Earnings Technicals Mixed

2023-03-27 09:08:01 ET

Summary

• The Industrials sector has underperformed the broad equity market in 2023 following a stellar 2022.
• With earnings season on tap, Cintas offers its latest numbers to the street, and the company has an impressive EPS beat rate history.
• I'm a hold on the stock based on valuation and lackluster technicals, and I provide key prices levels to watch going into earnings Wednesday.

The Industrials sector was a big relative winner during the tumultuous year of 2022. So far in 2023, however, the Industrial Select Sector SPDR Fund ( XLI ) is down slightly, and the ETF notched fresh relative lows not seen since Halloween.

Cintas reports Q3 results on Wednesday, and I expect a beat if the trend is any indicator, but shares are richly valued, and the technical situation is not impressive at current levels.

Industrials' Relative Strength Drifts to 5-Month Lows

According to Bank of America Global Research, Cintas ( CTAS ) is the leading North American provider of corporate uniform rental programs. The company also provides mats, restroom cleaning and supplies, first aid and safety products, and fire protection services, all delivered through its recurring route-based service model. In FY22, Cintas generated $7.8bn in revenue through 400+ facilities in the US and Canada.

The Ohio-based $44.3 billion market cap Diversified Support Services industry company within the Industrial sector trades at a high 35.5 trailing 12-month GAAP price-to-earnings ratio and pays a small 1.1% dividend yield, according to The Wall Street Journal.

Cintas produced strong cash flows with robust margins, and the firm was a Covid beneficiary for its line of safety and cleaning products and services. As the economy looks beyond the pandemic and ahead to recession risks, there are cyclical reasons to avoid the name for now.

Still, I notice that sales were up more than 13% in its most recent quarter while gross margins, at a beefy 47%, beat expectations, though SG&A costs were higher than expected. Cintas raised its EPS guidance in its Q2 report amid a higher sales outlook – that's all the more impressive because the firm usually sandbags its guidance a bit. A key risk is labor costs – keep your eye on that figure within its operating costs to see what the future could hold with respect to operating leverage in a deteriorating global economy.

On valuation , analysts at BofA see earnings rising at a steady clip in the low teens through 2025. Following ample EPS growth in 2021 and 2022, the Bloomberg consensus forecast is near what BofA projects. Dividends, meanwhile, are seen as rising over the coming quarters, but the yield will still be modest on this high-growth and strongly profitable name.

Value investors may be concerned with the high operating and GAAP P/Es along with CTAS’s above-market EV/EBITDA multiple, but the firm is free cash flow position.

Overall, with a forward PEG just under 3.0, that is actually a slight discount to its 5-year average while the forecasted operating earnings P/E is at a modest premium to its long-term average, so I don’t see the stock as a strong value here at ~ 30x free cash flow. And with higher interest rates in the market, the growth stock is likely about 10% overvalued.

Cintas: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q3 2023 earnings date of Wednesday, March 29 before the open with a conference call immediately after the numbers cross the wires. You can listen live here .

Corporate Event Risk Calendar

The Options Angle

While CTAS appears stretched on valuation, the company has topped analysts’ earnings estimates in each of the past 12 quarters, according to data from Option Research & Technology Services (ORATS). Shares have also traded higher post-earnings in the previous four reports. So, there are some tailwinds heading into Q3 earnings.

As of the close on Friday, the at-the-money straddle expiring soonest after Wednesday’s reporting date shows a 4.6% expected stock price move. That is in line with recent changes after earnings. Total EPS is seen at $3.04 which is a 2% increase from $2.97 of per-share profits earned in the same period last year. Overall, I expect a beat based on the trend and the options appear fairly priced.

CTAS: Fairly Priced Options, Perfect Recent EPS Beat Rate

The Technical Take

CTAS has a messy chart. Notice in the graph below that shares put in a bearish false breakout at the peak late last year and have since pulled back near its 2022 double-top highs in the low to mid $400s. What I like, though, is that the 200-day moving average is rising and there is a general uptrend off the $343 low notched last June.

The stock made a higher low in October as the broad market penetrated its Q2 nadir – so that’s impressive relative strength. Overall, I see near-term support in the $415 to $425 range, so long here with a tight stop under $415 might work for a trade, but I would look to buy the stock around longer-term support in the mid to upper $300s or on a momentum breakout above $470.

CTAS: Minor False Breakout, Holding An Uptrend

The Bottom Line

Heading into earnings, I see shares of CTAS as slightly overvalued while the technicals show waning relative strength in 2023. I am a hold on the stock for those reasons.

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