If fast-growing stocks are your thing, uniform renter and business services provider Cintas (NASDAQ:CTAS) may have shown up on your radar. Between 2015 and 2020, the company’s stock soared 243%, briefly topping $300 per share. That outperformance crushed the overall stock market: The S&P 500 only rose 56.9% during that time.
Then, of course, 2020 happened. Cintas’ shares plummeted in March (like everyone else’s) and have crept back up since (like everyone else’s). They’re still more than 10% off their highs, though. That could be an opportunity to buy this proven growth machine…or is too high a price to pay for a business services specialist during a troubled time for businesses?
Let’s look closer to see if Cintas is a buy.
Boom and bust without the bust
Because Cintas’ primary business is uniform rental, you’d expect it to outperform during periods of low or declining unemployment, and underperform during periods of high or rising unemployment. After all, the more employees a business has, the more uniforms it needs for them. So today’s unemployment rate of 13.3% — the highest since the Great Depression — would seem to be a huge problem for Cintas.
However, past periods of rising unemployment haven’t had much effect on the company. In the wake of the dot-com bust of the early 2000s, unemployment spiked from less than 4% to above 6%. Cintas’ revenue and profits shrank 3.4% and 1.7%, respectively, over two quarters, and then returned to growth. During the Great Recession, the company’s profits took a steeper hit and took much longer to recover…but, then again, so did the U.S. economy as a whole. In both cases, Cintas’ share price recovered much faster than the S&P 500.
So, while Cintas’ business certainly doesn’t seem to be recession-proof, there’s no indication that high unemployment poses a particular threat to the company.
The new essential
We normally think of “essential services” for businesses as things like electricity, heat, trash pickup, phone and internet service, and the like. However, during the coronavirus pandemic, other services have suddenly increased in importance, including the ones Cintas offers.
Operating a sanitary business environment has always been important, of course. But as businesses reopen with the pandemic still ongoing, regularly changing out employees’ used uniforms for clean ones and frequently replacing floor mats has taken on new importance. Some employers are even providing branded face masks for employees. Ensuring that one’s restroom is fully stocked with soap and cleaner — not to mention toilet paper, the new hot commodity — is vital, as is making sure the first aid kit has plenty of disinfecting wipes or alcohol swabs.
Businesses aren’t likely to cut back on these services, all of which Cintas provides, unless they’ve shuttered their offices and are having employees work from home, in which case they can safely cancel all of them. It’s possible these two competing forces might cancel each other out, but there’s no way to be sure at this point.
Paying the price
Even though Cintas has been growing its revenue, profits, and cash flow for the past decade, its share price appreciation has far outstripped those metrics in percentage terms:
As a result, many of its valuation metrics are likewise at record levels. Even with shares down more than 10% from their February high, Cintas still trades at more than 29 times earnings, at the high end of its 10-year range. Likewise, the company’s price-to-sales ratio of 3.8 and its enterprise value-to-EBITDA ratio of 18.1 are both close to all-time highs, and much higher than those of peers Aramark (NYSE:ARMK) and Sysco (NYSE:SYY). Only its price-to-free-cash-flow ratio of 25.8 is in the middle of the company’s historic range, but still higher than Aramark’s or Sysco’s.
Of course, for a well-managed business that has successfully grown by triple-digit percentages over the past 10 years, you can expect to pay a premium. However, Cintas’ shares certainly don’t look cheap right now, especially with so much economic uncertainty.
Keep an eye on it
Although Cintas doesn’t seem likely to see a disproportionate impact from the high unemployment rate, and could even see more demand for its services as businesses focus on cleanliness, its valuation just looks too high to call it a buy right now. In the midst of a recession and a pandemic, there are plenty of safer options.
However, smart investors should keep Cintas on their radar screens to see how the company is faring as the economic situation continues to unfold. If the share price tumbles or if the fragile economy seems to be stabilizing, Cintas could very well turn out to be a buy.