Analysts as UBS Group AG (NYSE:UBS) initiated coverage on Cintas (NASDAQ:CTAS) Corporation with a ‘Buy’ rating and hefty price target, citing margin improvement and a resilient growth pave way for continued upside.
In a note to clients, UBS noted that the Mason, Ohio-based company's above-consensus margin improvement supports "multiple expansion."
“We initiate coverage of Cintas (NASDAQ:CTAS) with a Buy rating and $550 price target. We model +100bps of cumulative EBITDA margin expansion in F2024/F2025, above consensus of +40bps,” said the UBS analysts.
Cintas stock traded up slightly to $476.50 on the Nasdaq in afternoon trade.
Cintas provides a range of products and services to businesses including uniforms, mats, mops, cleaning and restroom supplies, first aid and safety products, fire extinguishers and testing, and safety courses.
“Our forecast is supported by moderating inflation in labor costs, deflation in material cost including cotton, and Cintas’ track record on productivity,” added the analysts.
“With the stock multiple historically strongly correlated with margins, a 1X EBITDA multiple expansion from current 22X against projected EBITDA growth of +8% in F2024E would imply 15-20% stock upside over the next year.”
Margin expansion trajectory
Meanwhile, UBS estimated that labor and material which make up 60% of Cintas’ cost of service, should face “moderating inflation” in the 2024-2025 financial year.
“Per BLS data, hourly earnings of uniform and linen supply employees were +9% in C2022 but moderated to +3% as of March 2023,” said the analysts.
“On the material side, some of the rental uniforms put in place in F2022 are starting to fall off the 18-month amortization schedule, while cotton prices (which influence current costs) are down 40% year-over-year. We model +100bps of EBITDA margins cumulatively in F2024/F2025, above the Street’s +40bps.”
UBS said stronger margins have been responsible for the company’s strong return on equity (ROE).
“Fundamentally, the stronger margins have been a critical component (more than three-quarters) of Cintas’ return on equity (ROE) increasing from 15% in F2013 to 38% in F2022,” concluded the analysts.
Contact the author Uttara Choudhury at uttara@proactiveinvestors.com
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