1 More Reason To Avoid Cintas
Two months ago, I showed you 1 Reason To Avoid Cintas stock even though it’s a prestigious Dividend Aristocrat.
Today I tell you 1 More Reason To Avoid Cintas after it released its most up to date annual report.
You can read the original article in full at the link above.
But if you don’t want to; here’s a quick recap of why I said you should avoid Cintas – even though it’s a Dividend Aristocrat.
1 Reason To Avoid Cintas
It’s Enormously Overvalued
Normally in these articles I talk about other things like profitability, cash flow, the affects coronavirus is having on a company’s financials, and other things.
But frankly none of those matter with Cintas Corp (CTAS) due to its huge valuation.
As of this writing Cintas is a $31.1 billion market cap uniform and professional products company.
Here’s a visual look of some of Cintas’ product and service lines…
These products and services are necessary and will remain necessary during this coronavirus pandemic… Which is a great thing for the company.
But because of this stability and safety this company gives shareholders people keep buying its stock.
And this is pushing the stock to overvalued levels.
Its P/E is 37.2.
It’s P/CF is 25.
And its forward P/E is 39.7.
I look to buy companies at valuations below 20 on each of these metrics.
These show that Cintas is overvalued by a large margin right now.
Why does this matter to you?
Because if you buy overvalued stocks it means you’re paying too high a price for the stock compared to its profits and cash flows.
When you buy overvalued stocks, it makes the investment riskier. And usually also means your investment returns will be lower owning its stock going forward.
Because the long-term value of stocks is based on the amount of profits and cash flow it produces.
Not on emotions and rampant speculation like we’re seeing today.
When you buy overvalued stocks, it increases the risk of owning the investment. And this lowers the margin of safety.
Think of margin of safety like a rainy-day fund…
I want as much of a margin of safety and room for error as possible when investing in stocks because bad stuff always happens at some point in a company and the world.
If you’re buying Cintas stock today there’s little room for error due to its huge valuation.
And this makes it a risky investment today even though it’s likely to continue performing well.
If you want to buy Cintas put it on your watchlist and buy it when it’s cheaper and there’s a better chance for you to earn higher investment returns.
If you own its stock already and plan to hold for the long term you should continue holding due to its profits, cash flow, and overall solid business model.
If you own Cintas and don’t plan to hold for the long term you should sell it now while its overvalued to lock in some of your returns.
This thesis to avoid Cintas stock continued to play out after it released its most up to date annual report on September 15th, 2020.
- Revenue fell 3.6% in its full year 2020 results to $1.81 billion.
- Operating income rose 14.2% to $349.7 million.
- Net income rose 19.6% to $250.8 million.
- And earnings per share rose 19.8% to $2.32 per share.
These are fantastic results. Especially during the worst economic crisis in 100 years.
So why do I recommend you continue avoiding its stock?
Because its still massively overvalued, which is the reason I recommended you avoid its stock before.
In fact, it’s even more overvalued now than it was 2 months ago when I told you to avoid it.
Its P/E is 38.5.
It’s P/CF is 26.6.
And its forward P/E is 39.8.
Does this mean I think Cintas stock will implode? No, I don’t.
This overvaluation means there’s a lower margin of safety owning Cintas stock… Which makes the stock riskier… And these combined mean you should expect to earn lower returns owning its stock due to the overvaluation.
For this reason of its overvaluation I recommend you continue avoiding Cintas stock.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.