Cintas Anticipates 'Slow and Lengthy' Jobs Recovery

Dec.24.09 | About: Cintas Corporation (CTAS)

While unemployment seems to have crested, the outlook for jobs growth is as dark as ever. Cintas (NASDAQ:CTAS), a maker of work uniforms, reported disappointing earnings on Tuesday and provided a dour outlook on the jobs market:

“We anticipate that when job recovery does occur, it will be a slow and lengthy process. In addition, the third quarter of our fiscal year is traditionally our most challenging, with fewer workdays and customer holiday closures. This year, we anticipate customer holiday closures will be longer and more widespread than they have been in better economic climates. For these reasons, we believe that current analyst expectations for Cintas revenue and earnings are too optimistic.”

It is not clear to me why or how analysts got overly optimistic, but today’s 10% drop probably indicates expectations are quickly converging back to reality. Regardless, I took interest in CTAS because of its strong cash flow performance (emphasis mine):

“Our solid foundation and focus on cost control and cash generation continue to enable us to weather this difficult economic environment. Over the last six months, we have significantly increased our cash flow. We generated $246 million of free cash flow in the first six months of this fiscal year, which is a $167 million increase over the first six months of last year. This cash flow has helped strengthen an already robust balance sheet. We continue to be a market leader in all of our businesses, with state-of-the-art technology, efficient operations and dedicated employee partners. When market conditions improve, we expect these competitive advantages will provide us enhanced opportunities.”

Given this performance and a “reasonable” valuation of 1.2x sales, 1.9x book, and forward P/E of 13.7, I decided to initiate a small position in CTAS. The stock is currently hovering directly over its 200-day moving average (DMA) (daily chart not shown). If this support level fails, I may add to my position if CTAS successfully retests its July lows at $21.25 (also assuming CTAS does not cut its dividend – current yield is 1.6%).

Note well that CTAS is NOT a long-term growth play and is more of a trade. CTAS is currently trading at 1998/2000 prices; I expect once the job market starts notable improvements in the next 2-3 years, companies like CTAS can return to pre-recession levels – for CTAS that would be the middle of a 10-year trading range and at least a 35% return (see weekly chart below). With any luck, CTAS will fill the current gap down relatively quickly in anticipation of a jobs recovery (and provide a possible early exit from the position).

(Weekly chart is as of mid-day trading on Wednesday):


CTAS trading at 1998/2000 pricesClick to enlarge

CTAS trading at 1998/2000 prices


*Chart created using TeleChart:

Full disclosure: long CTAS