Why Cintas' Core Uniform Business Is Under Pressure From Its G&K Acquisition, And Why Its Fast Growing Fire Inspection Business Faces New Risks

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About: Cintas Corporation (CTAS), Includes: ABM, ARMK, EME, HCSG, MSA, SERV, UNF
by: Ben Axler
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Ben Axler
Hedge fund manager, long/short equity, tech, large-cap
Summary

Cintas is a Wall Street darling, with shares +54% ytd on the misperception that its underlying business is healthy and the levered G&K deal in 2017 is a success.

Our forensic review shows significant signs of stress with receivables up 2x sales, bad debts rising, and dependence on short-term debt increasing.

New disclosures show its fastest growing business is fire inspection. A lack of qualified labor resulted in Cintas being charged with fraud in Illinois for falsifying inspection records.

New private and public capital is entering fire inspection services, which we believe will impede Cintas' growth and cause margin pressure and shorter contract lengths: all negative to Cintas.

Cintas' valuation multiple is highest among its peers and above deal precedents. The stock trades 1% above analyst price targets. A nuanced sum-of-the-parts valuation suggests 60-75% downside risk.

Spruce Point is pleased to issue a unique investment research opinion on Cintas Corp. ( CTAS or "the Company"), a uniform rental, safety, and fire inspection service company. The report outlines why we believe shares