Is Cintas Stock a Good 'Buy the Dip' Candidate?

Cintas Corporation (CTAS) in Cincinnati, Ohio, provides primarily corporate identity uniforms and related business services in the United States, Canada, and Latin America. The company is also the originator of the Total Clean Program, a first-of-its-kind program that combines scheduled delivery of essential cleaning supplies, hygienically clean laundry, and sanitizing and disinfecting products and services.

The company's shares have gained 25.1% in price year-to-date and 11.8% over the past three months. Closing yesterday's trading session at $442.08, the stock is currently trading 4.2% below its 52-week high of $461.44, which it hit on December 13, 2021. CTAS topped analysts' estimates in its fiscal second-quarter earnings report. Its total revenue grew 9.4% year-over-year to $1.92 billion. Its operating income increased 8% from the year-ago value to $381.2 million. In addition, its EPS rose 5.3% from the prior-year quarter to $2.76.

However, last week, the stock declined 1.8% in price because CTAS provided disappointing fiscal 2022 guidance, citing uneven economic recovery caused by COVID-19. In addition, Jefferies Financial group has reduced its EPS estimates to $2.46 from $2.49 for the fiscal third quarter.

Here is what could shape CTAS' performance in the near term:

Strong Profitability

CTAS' 46.5% trailing-12-months gross profit margin is 58.8% higher than the 29.3% industry average. Also, its ROC, net income margin and ROA of 14.5%, 15.5% and 14.4%, respectively, are 115.5%, 143.4%, and 179.3% higher than their industry averages. Furthermore, its $1.38 billion trailing-12-month cash from operations is 562.6% higher than the $208.5 million industry average.

Premium Valuation

In terms of forward EV/Sales, the stock is currently trading at 6.2x, which is 210.2% higher than the 2x industry average. Also, its 12.97x forward Price/Book is 338.9% higher than the 2.96x industry average. Furthermore, CTAS' 5.88x forward Price/Sales is 257.4% higher than the 1.64x industry average.

POWR Ratings Reflect Uncertainty

CTAS has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CTAS has a D grade for Value. The company's higher than industry valuation is consistent with this grade.

Of 46 stocks in the B-rated Outsourcing – Business Services industry, CTAS is ranked #17.

Beyond what I have stated above, one can view CTAS ratings for Growth, Stability, Quality, Momentum, and Sentiment here.

Bottom Line

Despite challenges in the labor market and rising inflation, CTAS recorded strong earnings in its fiscal second quarter. In addition, while CTAS raised its fiscal 2022 guidance, it cautioned that "guidance does not contemplate significant COVID-19 pandemic-related setbacks, such as stay-at-home orders or costs necessary to comply with government COVID-19 mandates," implying a possible slowdown in its operational performance in the coming quarters. So, we believe investors should wait for the company's prospects to stabilize before investing in the stock.

How Does Cintas Corporation (CTAS) Stack Up Against its Peers?

While CTAS has an overall C rating, one might want to consider its industry peers, TriNet Group Inc. (TNET), Ituran Location and Control Ltd. (ITRN), and ARC Document Solutions Inc. (ARC), which have an overall A (Strong Buy) rating.

CTAS shares were trading at $444.05 per share on Tuesday morning, up $1.97 (+0.45%). Year-to-date, CTAS has gained 26.76%, versus a 29.55% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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