Cintas: After Taking a Fresh Look, We Maintain Our Thesis

We raise wide-moat-rated Cintas’ CTAS fair value estimate to $384 from $381, driven by the time value of money. We remain more optimistic about Cintas’ successful long-term sales strategy; however, we still think the stock remains materially overvalued.

hhh Furthermore, we are more bullish on long-term sales growth in its core uniform rentals segment. We now model a five-year sales CAGR of nearly 9% in uniform rentals, which bakes in some acquisition spending. Cintas dominates the U.S. uniform rental/sales and related ancillary-services industry, with about a 31% market share. The firm continually enlarges the pie by targeting nonprogrammers, or potential customers that don’t yet outsource these services, which makes up 60% of Cintas’ annual total revenue. With its current market penetration rate below 20%, the remaining unvended market remains sizable.

We still award Cintas a wide economic moat, because of scale-based cost advantages derived from route density. Cintas’ infrastructure dominates the U.S. with 11,300 delivery routes and 462 operational facilities spanning across 330 cities. Its broad geographic footprint enables drivers to minimize the amount of time spent on the road traveling from customer to customer, significantly decreasing the cost of service, including labor and fuel, which account for around one third of the total expenses. In addition, Cintas has been successfully making strategic acquisitions to expand its number of routes at a historical CAGR of near 4%. The more Cintas widens its route network, the more its operating expenses should decrease as a proportion of revenue. Hence, we forecast total operating margins to grow over 400 basis points in the next 10 years from 20.2% in 2022, the base year.