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What Cintas Can Teach Investors About This Bear Market?

Published 09/30/2022, 01:17 AM
Updated 09/29/2021, 03:25 AM
  • Cintas (NASDAQ:CTAS) notched a double beat in earnings, but its forward guidance is the real story.
  • There are always good companies to invest in in a bear market.
  • As a stock trade exclusively, there may be better options.

Cintas is down just over 1% the day after it reported strong earnings. On the top line, the company posted revenue of $2.17 billion, up from the $2.08 billion forecast by analysts. The bottom line number was equally strong. Earnings per share (EPS) came in at $3.39, which was significantly higher than the forecast of $3.13.

But the notable part of the company’s earnings report is that it raised its guidance for the rest of 2022. If this happened a year ago, or even two years ago, many investors wouldn’t have thought anything about it. CTAS stock might have been falling because the results weren’t “good enough.” But there aren’t a lot of companies that are beating on earnings and raising their guidance. Cintas did that. And that’s the lesson that investors should remember.

There are going to be companies that perform well even during a bear market. But finding them is going to require more effort. Cintas has a couple of factors working for it. This article will explore a few reasons why Cintas may be a good option for long-term investors and why there may be better options for short-term traders.

A Strong Customer Base

As Dave Gilreath, chief investment officer and portfolio manager for Innovative Portfolio’s mentioned on The MarketBeat Podcast, the workers Cintas supplies uniforms for are essential. Remote work is not an option for them. And, with factory output showing signs of increasing in the country, there’s another reason to believe in the company’s forecast.

And some of it is because the company is diversified in many areas, such as personal protective equipment (PPE). One example of this is the company’s Ready for the Workday (NASDAQ:WDAY) program allows businesses to have essential products and services delivered in a contactless way.

Solid Financials

It’s interesting to note that Cintas, which is largely seen as a company that would depend on in-person work, saw its revenue increase on a sequential and year-over-year basis during the pandemic. Part of this was, as Gilreath noted because it captures essential workers.

But capturing revenue and making efficient use of it are two different things. Cintas scores well on key profitability metrics such as Return on Equity, Assets, and Profit Margin. And the company has been growing its free cash flow (FCF) at an impressive pace.

A Growing Dividend

Cintas falls into the category of Dividend Aristocrats. This category comprises companies that have increased their dividend for at least 25 consecutive years. Cintas has now managed to increase its dividend for 38 consecutive years.

With a yield of just over 1% (1.19%), the stock may not catch the attention of dividend investors. But once again, I’ll point out something Gilreath mentioned. A significant reason for the low yield is that investors have received a 169% gain in the CTAS stock share price over the past five years.

The Stock May be Overvalued in the Short-Term

I’ve given long-term investors several reasons to consider Cintas as a company that can help them weather the current bear market. But if you’re a short-term trader, I’ll admit there may be better options.

CTAS stock currently trades at a P/E ratio of over 30x earnings, and while it’s trading in the middle of its 52-week range, it has met resistance on the upper end of that range twice in the last year.

That leaves the company little margin for error at a time when the company admits it faces higher operational expenses. So far, the company has offset that with higher prices and growth in new customers. But if the country faces a prolonged recession, that model will be tested.

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