CINTAS CORP. $78(Nasdaq symbol CTAS; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 117.3 million; Market cap: $9.1 billion; Price-to-sales ratio: 2.1; Dividend yield: 1.1%; TSINetwork Rating: Average; www.cintas.com) provides a range of products and services to over one million businesses, mainly in North America.
The company gets 71% of its revenue by renting uniforms that it makes and cleans. This business also rents a variety of related products, such as mats, towels, mops and cleaning supplies. Cintas gets a further 10% of its revenue by selling uniforms.
In addition, the company sells first aid kits, fire extinguishers, sprinklers and emergency-exit lights (11%). It also shreds corporate documents (8%). In April 2014, it merged its shredding operations with Shred-it International. In exchange, Cintas received 42% of the combined company, which uses the Shred-it brand, plus $180 million in cash.
Sale prompted special dividend
Cintas used the proceeds from the deal to pay a special dividend of $0.85 a share. It also increased its regular annual dividend by 10.4%, to $0.85 a share from $0.77. The new rate yields 1.1%. The company has now raised the payout annually for the past 31 years.
Following the recession, Cintas’s revenue gained 28.3%, from $3.5 billion in 2010 to $4.6 billion in 2014 (fiscal years end May 31). Earnings rose 63.8%, from $228.6 million to $374.4 million. Per-share earnings jumped 87.2%, from $1.49 to $2.79, on fewer shares outstanding.
Cintas operates in highly fragmented markets with many smaller competitors. That gives it plenty of opportunities to make acquisitions and add clients. In fiscal 2014, it spent $33.4 million buying smaller firms outside of its main uniform-rental business.
Freeing up cash for expansion
Meanwhile, the company continues to simplify its operations, mainly by selling less important businesses. For example, in November 2014 it sold its remaining document storage and imaging operations for $180.0 million.
Cintas is in a strong position to keep expanding. Its long-term debt of $1.3 billion is a low 14% of its market cap, and it holds cash of $826.7 million, or $7.05 a share. Due to its string of acquisitions, its goodwill now totals $1.2 billion. But Cintas cuts the risk of a large writedown by focusing on smaller companies it can easily absorb.
The company also aims to buy back more shares. In January 2015, it increased its share repurchase authorization by $500.0 million. It can now buy back up to $737.5 million worth of shares, which is equal to 8% of its market cap.
Strong growth justifies high p/e
The company’s earnings will probably jump 25.8% to $3.51 a share in fiscal 2015. The stock trades at 22.2 times that forecast. That’s a high multiple, but it’s still acceptable in light of Cintas’s strong earnings outlook and well-established reputation. Moreover, lower oil prices will cut its fuel costs. Its non-union workforce also helps keep its labour costs down.
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