Wide-moat Cintas CTAS reported strong 2024 first-quarter results with growth in all three business segments and in line with our annual forecast. We raise our fair value estimate by nearly 3% to $410 from $400, driven primarily by time value of money and our confidence in the firm’s growth strategy. We’re optimistic given Cintas’ long-term focus on margin expansion, new customer acquisitions, and strategic technological investments. However, we still think the stock is overvalued, as it currently trades in 2-star territory.
Total revenue for the quarter increased 8.1% year on year to $2.34 billion. We see solid growth across all segments, driven by high customer retention, new business offerings, and aggressive cross-selling sales efforts. The uniform rentals segment posted a revenue increase of 7.6%. Sales for first aid and safety increased 11.3%. The “all other” segment was up 8.7%, led by the fire protection business, growing at 16.6%. However, uniform direct sales declined by 5.4%. We think this is temporary. The direct sales business has mostly been a consistent sales grower since first-quarter2022, and it successfully recaptured most of its lost sales from the pandemic. We forecast the subsegment will grow at around a 4% CAGR over the next 10 years.
During the first quarter, moderating inflation forced Cintas to reduce its price increases in line with historical levels, ending several quarters of higher-than-normal pricing. Despite this, increased sales volume and decreased cost of goods sold (as a percentage of revenue) ensured continuous profit growth. Total operating margin increased 110 basis points to 21.4%, marking an all-time high. We expect this figure to improve incrementally as the firm shifts toward a higher-margin business mix. We believe Cintas’ margin improvements should more than offset the weaker price hikes and maintain high profitability.
Clarification: Cintas will be lowering price hikes (in line with historical levels), not reducing pricing.
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