Super Stock Case Study: Cintas Corp

Cintas Corp (CTAS) provides corporate identity uniforms and related business services primarily in North America, Latin America, Europe, and Asia. It operates through Uniform Rental and Facility Services and First Aid and Safety Services segments. The company rents and services uniforms and other garments, including flame resistant clothing, mats, mops, and shop towels, and other ancillary items; and provides restroom cleaning services and supplies, and carpet and tile cleaning services, as well as sells uniforms. It also offers first aid and safety services, and fire protection products and services.

Cintas is a boring business.

But this boring business has returned over 1,000% for investors since 2009.

Our CTAS case study dives into the early days of the company. We examine initial investor sentiment. What did the company do well? What were investors’ priorities? We place ourselves in the shoes of those first investors. Those that saw what others could only recognize in hindsight.

We’ll review past newspaper articles and investor write-ups. The bull and bear cases.

Consider this case study a time-travel machine.

Our goal: to know what really made these super stocks soar.

Analyzing past winners won’t guarantee future success. But it does paint a picture of what a winner might look like and hopefully after doing a number of these we can tease out some commonalities that’ll help us identify super stocks down the road.

So let’s dive into the wonderful world of uniform renting, cleaning, and laundering.

The Early Days: Acme Industrial Laundry Company

Richard “Doc” Farmer founded Cintas in 1929 under the name Acme Industrial Laundry Company. Doc got his start collecting chemical-soaked rags from various factories. He would then wash and re-sell the rags to factories for a fee.

By 1956, Doc Farmer’s grandson Richard “Dick” Farmer joined the family business. Fresh with ideas from an undergraduate degree, Dick Farmer grew sales from $300K in 1959 to $847K in 1963. Dick assumed the role of CEO in 1968.

Farmer then drew up a new business plan for the company: Open uniform rental plants across the United States.

Acme opened its first uniform rental plant in Cleveland, OH in 1968. In 1972 they changed the name to Cintas. Then in 1983 Cintas went public and traded on the OTC (Over-The-Counter) market.

Let’s learn how CTAS became today’s Super Stock.

Lesson 1: Cintas’ Fast (and Early!) Growth

CTAS hit the ground running after its IPO. A 1990 newspaper article highlights CTAS’ success as a public company.

(Click on image to enlarge)

During its seven years on the market, CTAS put up:

    • 24% compounded annual earnings growth
    • 24% compounded annual sales growth
    • 20% average ROE

Growth, growth, and more growth. That was the key to CTAS’ early success. The company’s strategy was working. And investors could see it on the top and bottom-line.

Where did that growth come from? Expansion into new and existing markets. By 1990, CTAS commanded a 10% share in the uniform rental market. The more uniform rental plants CTAS could fit on the map, the more money they made. This snippet from a 1995 interview outlines CTAS’ core business strategy (emphasis mine):

In good economic times, uniform companies grow by increasing the size of existing accounts and convincing companies that have never rented workers’ uniforms that it’s cost-efficient and enhances their corporate image, says analyst Jim Stoeffel of Smith Barney. In bad times, the big companies grow more through acquisition, because more of the 700 or so small uniform-rental companies become willing to sell their businesses for lower prices, says analyst Craig.”

Between its IPO and 1990, CTAS expanded to 37 new markets and operated in 26 states.

Moreover, the company’s story made sense. Here was a boring business servicing a high-demand, highly fragmented market. The roll-up strategy worked. The business did near 17% EBIT margins and had a long runway for growth. Insiders owned over half the company. They had little debt on the balance sheet.

CTAS outlines the bull thesis in their 1996 Annual Report:

(Click on image to enlarge)

Is it a stretch to say that screenshot is all the due diligence needed to invest in the company in 1996?

1 2 3 4
View single page >> |

Disclaimer: All statements are solely opinions and are for educational purposes only.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.