In this article, let's take a look at Cintas Corporation (CTAS, Financial), a $7.92 billion market cap company that provides highly specialized products and services to businesses of all types primarily throughout North America, as well as Latin America, Europe and Asia.
Scale advantages
The company has scale advantages, better than its peers, for its route-based network. It has done a good job when negotiating favorable terms in contracts from its suppliers, like fuel or apparel fiber cost. The firm has a good operating leverage and will continue to have it over the next future.
Segments
We can distinguish between segments that contribute in an important way. That´s the case with the mature core uniform rental business. This one generates 75% of sales and more than 80% of profitability. But other noncore segments, like Direct Sales and First Aid and Fire, could begin to grow faster because it is related to economic growth and productivity; both, we think, are improving in the actual U.S. scenario.
The Direct sales segment represents about 10% of sales and less than 10% of operating profitability. The first aid and fire protection services represent about 12% of revenues and less than 10% of operating profitability. However, both are highly commoditized markets and so subject to fierce competition.
In these two segments, the firm doesn't have significant competitive advantages so profitability in these lines could become hard to reach.
Revenues, margins and profitability
Looking at profitability, revenue grew by 0.16%, but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.93 vs $0.63), it has improved earnings per share by 47.6%. During the past fiscal year, the company increased its bottom line. It earned $3.05 versus $2.52 in the previous year. This year, Wall Street expects an improvement in earnings ($3.14 versus $3.05).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| CTAS | Cintas Corporation | 18.40 |
| CPRT | Copart Inc | 20.26 |
| RBA | Ritchie Bros Auctioneers Inc | 14.97 |
| MINI | Mobile Mini Inc | 5.05 |
| UNF | UniFirst Corp | 11.64 |
| Â | Industry Median | 8.97 |
The company has a current ROE of 18.4% which is higher than the industry median and the ones exhibit by Ritchie Bros Auctioneers (RBA, Financial), Mobile Mini (MINI, Financial) and UniFirst (UNF, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Copart (CPRT, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.1x, trading at a discount compared to an average of 22.2x for the industry. To use another metric, its price-to-book ratio of 3.47x indicates a premium versus the industry average of 1.98x while the price-to-sales ratio of 1.79x is above the industry average of 0.79x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
As outlined in the article, the scale advantages allow the company to lead its peers in operating efficiency. Further, we believe the employment growth should help to boost growth and operating leverage.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund guru Jim Simons added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
