Cintas Corporation (NASDAQ: CTAS) offers a range of products and services to businesses, including the supply of uniforms, cleaning equipment, first aid products, fire extinguishers, and safety courses. The stock price has jumped over 40% year-to-date to over $211 as of October 23, with multiples expanding to a record 30X EBITDA. However, weakening fundamentals and the company’s challenging growth algorithm could pose future challenges for the US-based firm. This article summarizes a July bearish thesis on CTAS published by Motherlode on Value Investors Club.
A corporate office with staff members wearing company branded uniforms.
The uniform industry witnessed high demand post-pandemic as employers weren’t able to source uniforms amid a tight supply of truck drivers and low-skill labor. This offered companies like CTAS major pricing power boosted by labor market expansion. The company has transformed into efficient dense-route operators and cross-sellers of goods, which has resulted in higher margins. Furthermore, company workers aren’t unionized, which makes it easier to make route adjustments and offers relatively better incentives for cross-selling. The CTAS also executed a 4:1 stock split in early September in a bid to boost liquidity and stock access to investors.
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However, CTAS growth and market prospects could be on the verge of decelerating as uniforms have become abundantly available due to a faltering jobs market that peaked in late 2023. Furthermore, corporations increasingly seek to trim operational overheads, which is likely impacting CTAS’s sector. Although the incumbent has snatched a fair bit of market share from its rivals, they are expected to present stiff competition moving forward. Investors should note that CTAS’s annual price hikes for supplying uniforms can also begin to deflect customers towards rivals. The company’s revenue growth target of around 7% for FY 6/25 can also be challenging to achieve. With the jobs market peaking last year amid stiff market competition, CTAS could be compelled to secure more market share to reach the 7% target. This could prompt rivals to fight hard for their turf, ultimately dragging down industry-wide product pricing and impacting bottom lines.
Despite these looming sectoral risks, the CTAS stock price has rallied this year, overlooking several high-frequency red flags. It is estimated that if markets price in a US labor force contraction by up to 2%, it could result in significant multiples compression for CTAS. Bulls are confident CTAS can capitalize on the shortcomings of rival services to attain 7% growth. Still, it could lead to aggressive pricing action that could also compress CTAS renewals in the process. Questions remain, such as whether CTAS benefits from lag in contractual pricing as they aim for 7% growth amid a volatile labor force outlook.
This isn’t the first time we see someone shorting CTAS. Five years ago, activist short seller Ben Axler also pitched shorting CTAS. The stock tripled since then.
Cintas Corporation is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 46 hedge fund portfolios held CTAS at the end of the second quarter, which was 46 in the previous quarter. While we acknowledge the risk and potential of CTAS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CTAS, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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