Topic: Growth Stocks

CINTAS CORP. $39 – Nasdaq symbol CTAS

CINTAS CORP. $39 (Nasdaq symbol CTAS; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 129.7 million; Market cap: $5.1 billion; Price-to-sales ratio: 1.3; Dividend yield: 1.4%; TSINetwork Rating: Average; www.cintas.com) provides a wide range of products and services to over 900,000 businesses, mainly in North America.

The company gets 71% of its revenue from renting uniforms, which it makes and cleans at its own factories, and renting a wide variety of related products, such as mats, towels, mops and cleaning supplies. It gets a further 11% of its revenue by selling uniforms.

In the past few years, the company has branched out into new areas. For example, it now gets 10% of its revenue by providing first aid kits, fire extinguishers, sprinklers and emergency-exit lights to businesses. In addition, Cintas helps its clients comply with local safety regulations.

The remaining 8% of the company’s revenue comes from its document-management division, which collects and shreds confidential corporate documents. Cintas also helps its clients convert paper records to electronic formats, and provides secure document storage.

Demand for these services is rising fast as businesses work to comply with increasingly complex privacy laws. Many companies also want to prevent embarrassing information from becoming public in the wake of high-profile security breaches, such as the Wikileaks disclosures.

Profits growing with the economy

Cintas’s revenue rose 6.2%, from $3.7 billion in 2007 to $3.9 billion in 2008 (fiscal years end May 31). Revenue fell to $3.8 billion in 2009, and to $3.5 billion in 2010, as the recession forced many businesses to cut back on uniforms and related services.

However, revenue rose 7.4%, to $3.8 billion, in 2011 as the economy recovered. Cintas has also expanded its sales force. That’s helping it win new clients and sell more services to current customers.

Earnings rose 0.3%, from $334.5 million in 2007 to $335.4 million in 2008. Cintas is an aggressive buyer of its own shares. Because of fewer shares outstanding, earnings per share rose 2.9%, from $2.09 to $2.15.

The recession cut Cintas’s earnings by 31.8%, to $228.6 million, or $1.49 a share, in 2010. Earnings recovered in 2011, and rose 8.1% to $247.0 million, or $1.68 a share.

In its fiscal 2012 third quarter, which ended February 29, 2012, Cintas’s sales rose 7.9%, to $1.0 billion from $937.8 million a year earlier. The uniform business’s sales rose 8.4%, while sales at its other divisions rose 6.7%.

Earnings jumped 28.7%, to $76.0 million from $59.1 million. Earnings per share rose 41.5%, to $0.58 from $0.41, on fewer shares outstanding.

Cintas operates in highly fragmented markets with many smaller competitors. That gives it plenty of opportunity to make acquisitions and expand its client base. As well, the company can further expand its revenue by selling other services to its new customers (over 50% of its uniform clients also buy other products and services).

Acquisitions add to a strong core

In fiscal 2011, Cintas spent $171.6 million buying 27 smaller firms. It spent a further $20.9 million on acquisitions in the first nine months of fiscal 2012.

Most of these additions enhanced its fire-safety and document-management operations. The company is also using acquisitions to expand outside North America, which supplies 90% of its revenue.

Cintas’s steady string of purchases has pushed up its goodwill to $1.5 billion, or a high 29% of its market cap. However, by focusing on smaller firms that it can easily absorb, the company lowers the odds of a large writedown.

Cintas is in a strong position to keep making acquisitions. Its total debt of $1.3 billion is a manageable 25% of its market cap.

The company will have to repay $225.6 million of these loans in June 2012. However, it holds cash of $352.6 million, so it can easily meet this obligation. Cintas may also take advantage of today’s low interest rates to raise cash by selling new bonds.

The company is also continuing its share buybacks, which raise earnings per share and other per-share calculations, and give the remaining shareholders a larger stake. In the first nine months of fiscal 2012, Cintas bought back $262.7 million of its shares.

Long history of rising dividends

Cintas has paid dividends every year since it became a public company in 1983, and has raised its dividend for 29 consecutive years. It pays dividends once a year; the most recent payout was $0.54 a share in December 2011, for a 1.4% yield.

The stock has gained 40% in the past year. Even so, it still trades at a reasonable 17.8 times the company’s projected 2012 earnings of $2.19 a share.

Cintas is a buy.

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