Shares of Cintas Corp. (NASDAQ:CTAS) are down 20.66% since peaking on Sept. 6, 2018, and in my opinion, the shares of this supplier of corporate identity uniforms are a strong buy at current price levels. The company has a solid history of generating impressive earnings growth, and the future growth ratios point to continued growth over the next 12 months. I lay out my bullish argument for the company below by reviewing some pertinent fundamental and technical aspects of the stock.
My Momentum Growth Quotient (MGQ) plays a critical part when it comes to determining if I'm going to go long or short a stock. Generally, I only want to go long a stock with an MGQ higher than that of the S&P 100, and I want to go short a stock with an MGQ lower than that of the index (for a more detailed explanation of how I calculate the MGQ, please see my blog post).
As of the end of November 2018, the MGQ for the S&P 100 was 9.19.
The current MGQ for CTAS stands at 12.12, which implies a 31.94% higher growth rate compared to the S&P 100. This tells us that CTAS has strong future growth potential and is a good candidate for a long position.
Let's dig a little deeper into the financial data to get a better feel for how the company has performed on certain fundamental metrics and what these numbers imply for future growth.
Caveat Lector: I am a Quant Trader - that is, I seek to understand market behavior by using mathematical and statistical modeling, measurement, and research. So, you won't find much qualitative analysis in my work or in my trading process. The goal is to identify optimum entry points for trades based on my quantitative model and execute those trades as effectively as possible.
During the past 12 months, the average EBITDA per share growth rate of Cintas Corp was 18.80% per year. During the past three years, the average EBITDA per share growth rate was 15.20% per year. During the past five years, the average EBITDA per share growth rate was 12.70% per year. During the past 10 years, the average EBITDA per share growth rate was 10.90% per year.(GuruFocus). The earnings growth rate for this company has been steady and impressive over the last 10 years.
The operating margin percent for CTAS stands at 15.97%. Each dollar of revenue the company generated brought in 15.91 cents of earnings. The company's operating margin has grown at an average clip of 3% per year over the last five years, which is an acceptable rate of growth.
Knowing how a company has performed in the past is important in order to evaluate management's past record in running the business. But more important to us is how profitable the company will be in the future because we are investing going forward, not backward. And it's the forward-looking metrics that should really get you excited about CTAS.
I like to use two measuring sticks to gauge the future growth potential for companies: Forward P/E and forward rate of return.
I prefer to use the forward P/E ratio (current stock's price over its "expected" earnings per share) rather than historical P/E to gauge a company's expected future earnings power. A high forward P/E ratio means that investors are anticipating higher growth in the future and are willing to pay more for future earnings - momentum investing is all about following the trend (perceived or real).
CTAS has a forward P/E of 23.58 compared to a 16.99 forward P/E for the S&P 100. The forward P/E for CTAS is greater to that of the index, suggesting that the markets are expecting a market growth rate for the company greater than that of the broader markets.
The forward rate of return for a stock (created by Donald Yacktman) is one of my favorite quotients for gauging the market's expectation for future growth for a company. Yacktman defines forward rate of return as the normalized free cash flow yield plus real growth plus inflation. In simple terms, the forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.
The forward rate of return for CTAS stands at 14.68%. This implies that an investor buying the stock today should expect a 14.68% return over the next 12 months. The average forward rate of return for the S&P 100 as of the end of November was at 7.90%, so CTAS has an implied potential rate of return that's 1.85x greater than that of the index.
The risk inherent in the forward rate of return is that the calculation is reliable only if the company can grow at the same rate in the future as it did in the past. If the growth rate falters, the projected returns will not materialize. But we are willing to accept this risk as part of the difficult process of forecasting earnings and growth momentum.
As per my ChartMasterPro Daily Trade Model, there's a high probability of a rally to the $182.50 level from here, which would equate to a gain of around 8% for the shares:
I will buy call options for CTAS when I receive my momentum buy signal for the shares.
For investors in the shares, I recommend that you hold for three months or $182.50, whichever comes first. For longer-term investors, I believe CTAS is a solid addition to any growth portfolio over the next 12 months.
When looking for companies to invest in, I like to find management teams that have outperformed their peers in the same industry with regard to growing earnings, running the company efficiently, and generating higher than average returns for shareholders.
|EPS - 5 Yr Growth Rate||17.17%||11.18%|
|Gross Profit Margin TTM||44.86%||35.32%|
|Net Profit Margin TTM||10.32%||8.84%|
Return on Assets - 5 Yr Avg
This is a company that's posting higher profit margins than its peers, with a management team that's very good at growing earnings, and generating higher returns on equity than its competitors. The price drop in the shares over the last three months presents an excellent opportunity to initiate a position in CTAS.
The chart below shows the company's net operating profit after tax on a TTM basis - you can see that although NOPAT has been trending higher at a healthy pace through 2018, the share price has collapsed over the last three months. With the company's long history of being able to convert rising revenue into earnings in an efficient manner, this significant drop in the share price is an excellent opportunity to pick up these shares on the cheap - I view the recent drop in the share price as a gross overreaction to the downside given the company's strong future looking growth ratios.
When I go long a stock, I want to invest in a company that provides superior future growth potential, but I also want to time the entry into any position to try to maximize my return.
So, I use fundamental analysis to identify shares with a strong future growth rate, and then I apply technical analysis to identify ideal entry points.
In my opinion, CTAS is a strong buy at these levels from both a fundamental and technical perspective.
This article was written by
ChartMasterPro is a trading service which focuses both on the fundamental and technical analysis of stocks and equity markets. I use a proprietary trading model to trade Call and Put Options on US equities. I've been trading options for 15 years and have made all the trading mistakes that could possibly be made, but as Winston Churchill once said: "Success is the ability to go from one failure to another with no loss of enthusiasm." And by the way, the name is John, John DiCecco. I'm excited to announce that I now offer a MarketPlace service in partnership with SeekingAlpha called The Options Trader - if you like trading options, check it out.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CTAS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.