Tuesday, April 25, 2006

Boring Business = Great Stock: Cintas

Ask Warren Buffett, kids: boring business will make some of the best investments you'll make in your lifetime. Case in point -- Cintas (CTAS), a solid company that demolishes its peers in what it is an utterly basic business.

Overview Cintas rents and sells corporate identity uniforms to some of the biggest players in our economy. Cintas also provides rentals and sales of restroom, cleaning and first aid supplies. As you can see, there is nothing sexy about this. However, Cintas has spent the last 35 years growing and building real shareholder value -- that elusive type you get when you mix top management with operating leverage. Cintas' senior execs have been with the company for over 15 years and the company has capitalized on scale economies to drive the bottom line to industry-leading numbers. Today, 5M people wear Cintas-made uniforms during the workweek.

Even with higher energy costs cutting into its figures, Cintas still spits out profit margins approximately 4 percentage points above those of its closest peers. Simply due to its size, CTAS can negotiate volume discounts with its customers -- evidence, of course, of a wide moat company. Besides this competitive advantage, we also admire CTAS's track record in the acquisitions department. CTAS decided early on that it wanted to be a national player (vs. a regional one), a bet we believe has paid off. With a 17% debt/total capitalization ratio, Cintas looks to be in decent financial health. We like that founder Scott Farmer is still with the company and owns a reasonable chunk of the stock. As long as Farmer is at the helm, we think CTAS will grow by leaps and bounds as it fortifies and cross-sells its impressive customer base.

Valuation/Summary At 22.5 x 2006 EPS consensus and 21 x forward earnings, CTAS looks fairly priced. Analysts are expecting EPS to jump 13% from F06 to F07, which makes CTAS a tad expensive on a forward PEG basis. On the other hand, we'd expect investors to pay a premium for an industry leader, especially one that can still grow revenues at a 10% clip. Rival Aramark (RMK) trades a much lower multiple (17 x 2006 EPS), but is much more leveraged (showing $48M cash and $2B in debt on its balance sheet). Ultimately, we hope CTAS stock sells off sharply sometime in the next 6 months. Rest assured that when it does, we'll be all over it like a bad rash. After the current oil shock dies down, we see shares of Cintas climbing back to their 52 week high. Our near term price target is $47.50.

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