Baird September 2012 Facility Services Report

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RW Baird is the leading financial institution tracking the uniform industry. This is the September 2012 update which hallmarks a downward shift in outlook.

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Baird September 2012 Facility Services Report

  1. 1. September 17, 2012 Baird Equity Research Business ServicesFacility ServicesUniform Survey Shows Deterioration; Downgrading GKSR to NeutralNotably weaker survey results leave us cautious of uniform rental stocks in F2013, Prices as of 09/14/12 Rating Target Ticker Price Mkt Cap Current Currentparticularly when balanced against premium valuations (above five-year averages), high (mil) Prior Priorexpectations (estimates at the high end of guidance ranges), and less opportunity for CTAS $41.72 $5,278 N/A $41subsequent positive earnings revisions (slowing employment growth, increasing price .competition). While we still see modest opportunity at GKSR for longer-term investors, we GKSR $33.71 $637 N/A $37are downgrading to Neutral, citing fewer catalysts, a more balanced risk/reward, and strong .O/A $36YTD alpha performance. UNF $68.30 $1,339 N/A $73 . Sources: Bloomberg and Baird Datas Survey suggests noticeable deterioration. Survey results turned decidedly negative in September, paralleling recent BLS data trends and other macroeconomic softness.s Add/Stop Index turns negative - first time since September 2009. Our Baird Add/Stop survey diffusion index – a measure of uniform-wearer expansion/contraction at existing accounts – turned negative in 3Q12, its first negative print since September 2009. Importantly, we note that the last time our Index turned positive-to-negative (neutral=50.0) was March 2008, portending cautious sector positioning.s New customer (no-programmer) index declines, now flat. New customer ("no programmer") interest held essentially flat at 48.6 (a slight decline), but well below 55.1 in June and several quarters above 60 throughout 2011-1H12. No-programmer interest has been an important component of the current cycles recovery, with public uniform companies citing no programmers driving ~50% of new business wins. Slowing new business momentum likely reflects more difficult comparisons and economic slowdown.s Pricing deteriorates. Pricing deteriorated in 3Q12 with our diffusion index well below a neutral rating at 37.5, its lowest reading since December 2009 and its fifth consecutive reading below 50 (following slight gains in 2011). Slowing fundamentals could reinvigorate competitive pricing, in our view, with participants also citing risk from rising fuel costs.s Growth expectations move lower but generally consistent with our outlook. Forecasted 12-month growth rates have declined to +4.8% (from +5.4% in June), generally consistent with historical mid-late cycle growth. Our estimates contemplate 3.9%, 6.2%, and 4.2% FTM organic growth rates at CTAS, UNF and GKSR, respectively, , paralleling industry expectations.s Downgrading GKSR to Neutral; Neutral-rated across sector. Citing slowing industry fundamentals, high expectations, strong YTD performance, and a fair multiple, we are downgrading GKSR to Neutral, leaving us Neutral-rated across our uniform coverage. Separately, we are incrementally cautious on CTAS, citing somewhat elevated expectations and paper price risk though believe guidance is likely maintained on the companys earnings report, this week. Finally, UNF may offer the next opportunity should expectations reset lower post-initial F2013 guidance (October) given potential balance sheet catalysts. [ Please refer to Appendix - Important Disclosures and Analyst Certification ]Andrew J. Wittmann, CFA Justin P Hauke .awittmann@rwbaird.com jhauke@rwbaird.com414.298.1898 314.445.6519
  2. 2. September 17, 2012 | Facility Services Prices as of 09/14/12 Market Cap (mil) Rating Target F2012 F2013 F2014 COMPANY Current Current Current Current Current TICKER - PRICE Prior Prior Prior Prior Prior Cintas Corporation $5,278 N/A 41 2.27 2.57 2.78 CTAS - $41.72 2.59 G&K Services, Inc. $637 N/A 37 2.07 2.39 2.73 GKSR - $33.71 O/A 36 2.38 2.71 UniFirst Corporation $1,339 N/A 73 4.48 4.92 - UNF - $68.30 -DetailsIndustry Perspective and Outlook s Survey results suggest noticeable deterioration. Survey results turned decidedly negative in September, paralleling recent BLS data trends and other macroeconomic softness. - While our sense is that trends remain more supportive than a high-level review of our survey results would otherwise suggest, we are cautious of uniform rental stocks, particularly when balanced against fair valuations (above five-year averages), high expectations (estimates at the high-end or above company guidance ranges), and less opportunity for subsequent positive earnings revisions (slowing employment growth, increasing price compression, and fewer opportunities for fixed cost leverage, with revenue at or above prior peaks). s Valuation levels fair levels relative to history; estimates at high-end of guidance. With uniform stocks riding recent market gains, valuation -- previously in line with five-year historical levels -- has now moved to a modest premium relative to historical levels, despite slowing fundamentals. Balanced with Street estimate expectations at the high end (or above) company guidance ranges, were a bit cautious of additional opportunities for alpha, at least near term. The sector is now trading at a forward 12-month EV/EBITDA multiple of 7.6x (6.8x average) and 14.9x earnings (14.8x average) -- see chart. Uniform Industry Valuation EV/EBITDA, ftm P/E, ftm Company Ticker Price Price Target Rating MktCap ($M) FTM AVG FTM AVG Cintas CTAS $41.72 $41 N $5,384 8.3x 7.5x 16.3x 15.7x G&K Services GKSR $33.71 $37 N $638 8.0x 7.2x 14.1x 15.7x UniFirst UNF $68.30 $73 N $1,342 6.4x 5.7x 14.4x 12.9x Average: 7.6x 6.8x 14.9x 14.8x FY1 Avg. S&P 500: 14.2x 16.4x As of 09/14/2012; AVG = 5-year average Source: FactSet Research Systems and Baird estimates s Earnings expectations are relatively high. We note that consensus estimates across our coverage list are at the high end of company guidance ranges (see chart below). Furthermore, we note that "whisper" expectations are likely a bit higher, highlighting the sectors recent track record of beating consensus earnings expectations (see charts below). High expectations warrant some caution, in our view.Robert W. Baird & Co. 2
  3. 3. September 17, 2012 | Facility Services Uniform Rental Guidance and Estimates CTAS GKSR UNF F2013 F2013 F2012 Guidance $4.25-4.35 billion $890-910 million $1.252-1.257 billion Revenue Consensus $4.29 billion $906.3 million $1.26 billion Guidance $2.47-2.55 $2.20-2.40 $4.39-4.49 EPS Consensus $2.52 $2.36 $4.45 Source: Company reports; FactSet Research Cintas Corp. Quarterly EPS vs. Consensus $0.70 Consensus $0.60 Actual Average EPS beat = +6.5% $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 F2Q12 F3Q12 F4Q12 Source: Company reports G&K Services Quarterly EPS vs. Consensus (since initiation of company "Game Plan") $0.70 Consensus $0.60 Average EPS beat = +11% Actual $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 F2Q12 F3Q12 F4Q12 Source: Company reportsRobert W. Baird & Co. 3
  4. 4. September 17, 2012 | Facility Services UniFirst Quarterly EPS vs. Consensus $1.40 Consensus Average EPS beat = +20% $1.20 Actual $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 F1Q09 F2Q09 F3Q09 F4Q09 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 F2Q12 F3Q12 Source: Company reports s Recent fuel cost increases suggest incremental caution. While natural gas prices remain low, keeping facility (electricity) costs contained, the recent rise in fuel (gasoline/diesel) costs creates an incremental headwind relative to previous guidance expectations (and potentially exacerbated following last weeks Federal Reserve actions). Gasoline/diesel costs have now increased ~12% since the end of June and are up ~6% on a YOY basis. (We note energy typically represents 3-5% of revenue.) While fuel prices remain volatile (last quarter, fuel prices were a net YOY benefit), were cautious of subsequent margin gains for the sector (which are now, increasingly, led by gross margin improvement), particularly amidst renewed price compression -- an area of concern anecdotally highlighted in our survey response pool. - Separately, we highlight recent paper price declines as an area of incremental caution for CTAS (we estimate a ~$0.02/share headwind to current guidance at current price levels, reflected in our reduced estimates -- see below). U.S. Retail Fuel Prices 440 U.S. Retail Gasoline Prices (cents/gallon) 420 U.S. Retail Diesel Fuel Prices (cents/gallon) 400 380 360 340 320 300 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Source: Energy Information Administration s Recent stock performance has been pretty good, potentially limiting further upside. The uniform stocks have been very strong alpha generators since 2011. Previously this strength was based on cyclical momentum as employment recovered and the uniform rental companies posted meaningful operating leverage. We believe this strength was also supported by previously low expectations. Return of capital initiatives have also been an important component of total returns (particularly at GKSR and, to a lesser extent, CTAS). Today, with estimates more reasonably set,Robert W. Baird & Co. 4
  5. 5. September 17, 2012 | Facility Services valuation at a premium, and fundamentals deteriorating, we see less opportunity for additional gains. - In addition, we believe investor appetite may move away from the uniform rental companies, at least near term, as QE-induced equity inflows are more likely to chase higher-beta sectors, at least initially. The chart below shows the stocks recent performance. Uniform Stock Performance One-Month Percentage Price Change YTD Percentage Price Change G & K S ervices G & K S ervices U niFirs t U niform Index S & P 500 C intas C intas U niFirst U niform Index S & P 500 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Three-Month Percentage Price Change Trailing 12 Months Percentage Price Change U niFirst G & K S ervic es G & K S erv ices U niform Index C intas U niFirst U niform Index C intas S & P 500 S & P 500 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Note: Dividend reinvested compound returns Source: FactSet Research Systems s Stock performance at the uniform rental companies has historically paralleled our survey results, suggesting caution. Correlation between our Add/Stop Diffusion Index (which is computed from directional commentary from our survey respondents) and uniform stock performance has historically been quite high, particularly at CTAS/GKSR (see charts below), suggesting caution given the sectors recent decoupling. Uniform Stock Index vs. Add/Stop Diffusion Index (Baird survey data) 100 220 90 200 80 70 180 60 50 160 40 Baird Add/Stop Diffusion Index (left) 140 30 Uniform Index Stock Performance (1Q03 = 100), right 20 120 10 0 100 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 Note: Uniform index is a capitalization-weighted index of uniform stock performance Source: Baird Research; FactSetRobert W. Baird & Co. 5
  6. 6. September 17, 2012 | Facility Services Cintas Stock Performance vs. Add/Stop Diffusion Index (Baird survey data) 100 160 90 150 80 140 70 130 60 120 50 110 40 Baird Add/Stop Diffusion Index (left) 100 30 CTAS Stock Performance (1Q03 = 100), right 90 20 10 80 0 70 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 Source: Baird Research; FactSet s Downgrading GKSR to Neutral. Citing the above industry factors, fewer operating catalysts, high expectations (consensus estimates now assume achievement of managements 10% EBIT margin goal), significant YTD outperformance (~20% alpha versus the S&P 500 which its $6/share special dividend is included) and a more balanced risk/reward (premium valuation), we are downgrading GKSR from Outperform to Neutral. - That said, a very strong F4Q12 earnings report last month continues to lend credibility to the companys multi-year turnaround efforts and we believe GKSR still offers the best risk-adjusted opportunity for investors among the public uniform companies. Net, while the stock may offer fewer immediate catalysts, we believe GKSR may offer longer-term opportunity and modest upside from current levels.Robert W. Baird & Co. 6
  7. 7. September 17, 2012 | Facility ServicesBaird Uniform Industry Survey: 3Q12 SURVEY BACKGROUND. The Baird uniform industry survey, conducted quarterly since June 2003, is meant to gauge the sentiment of industry participants and the key industry drivers affecting the uniform market. The participants are senior executives from private uniform rental companies located throughout the United States and Canada. The collection of companies is intended to mimic the national coverage and size of the public uniform rental companies and offers anecdotal insight into emerging industry trends. We survey ~100 independent uniform rental and linen companies. Our 3Q12 survey generated responses from 36 companies, representing an annual revenue pool and geographic distribution roughly equal to that of the national uniform rental companies. s Add/Stop Index turns negative - first time since September 2009. Our Baird Add/Stop survey diffusion index – a measure of uniform-wearer expansion/contraction at existing accounts – turned negative in 3Q12, its first negative print since September 2009. Importantly, we note that the last time our Index turned positive-to-negative (neutral=50.0) was March 2008, portending cautious sector positioning. - Recall that a diffusion index is calculated by adding the percentage of respondents reporting improvement in add/stops to one-half of the percentage of respondents reporting no change. Thus, a reading above 50 indicates sequential add/stop improvement, while a reading below 50 indicates sequential deterioration. - Our diffusion index has historically exhibited strong correlation (~0.9) with BLS employment data within uniform-wearing industries (which we refer to as our Add/Stop Employment Index). Baird Add/Stop Diffusion Index: During the past 90 days add/stop rates at existing accounts have been 100 250 90 200 Add/Stop Employment Index (000s), right Improving 80 150 Add/Stop Diffusion Index (Survey data) 70 100 60 50 <-----|-----> 50 0 40 -50 Correlation = 0.90 Deteriorating 30 -100 20 -150 10 -200 0 -250 Jun03 Sep03 Dec03 Mar04 Jun04 Sep04 Dec04 Mar05 Jun05 Sep05 Dec05 Mar06 Jun06 Sep06 Dec06 Mar07 Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Source: Bureau of Labor Statistics and Baird Research s Revenue continues to fall modestly below expectations, reflecting (in our view) relatively high expectations. 19% of respondents cited results below expectations in September, similar to 21% last quarter. That said, nearly half of respondents met internal expectations. We note that this is a distinct change from previous response rates last year, in which results exceeded internal expectations. We believe this is consistent with our expectation that consensus estimates for the public uniform companies likely similarly have more limited upside. See chart below.Robert W. Baird & Co. 7
  8. 8. September 17, 2012 | Facility Services Survey Revenue Trends: September 2012 vs. June 2012 100% 90% 8% 4% 31% 80% 26% 70% W ell above expectations 60% Slightly above expectations 50% Near expectations 46% 47% Slightly below expectations 40% W ell below expectations 30% 20% 3% 0% 10% 21% 19% 0% June 12 Survey Sep 12 Survey Source: Baird Research s Pricing deteriorates further. Pricing deteriorated in 3Q12 with our diffusion index well below a neutral rating at 37.5, its lowest reading since December 2009 and its fifth consecutive reading below 50 (following industry pricing gains in 2011). Slowing fundamentals could reinvigorate competitive pricing, in our view, with participants also citing risk from rising fuel costs. - We note that pricing has historically been a source of modest pressure within the industry though has been additive to growth rates over the past ~12 months. Prior pricing initiatives followed the rise in commodity prices (particularly cotton) but appears to have lost momentum in recent quarters. Baird Price Index: "During the past 90 days the base price quoted for new accounts has 90 80 Deteriorated <-----|-----> Improved 70 Long-term secular compression Economic compression Recovery Today?? 60 50 40 30 20 10 Sep03 Dec03 Sep04 Dec04 Sep05 Dec05 Sep06 Dec06 Sep07 Dec07 Sep08 Dec08 Sep09 Dec09 Sep10 Dec10 Sep11 Dec11 Sep12 Jun03 Mar04 Jun04 Mar05 Jun05 Mar06 Jun06 Mar07 Jun07 Mar08 Jun08 Mar09 Jun09 Mar10 Jun10 Mar11 Jun11 Mar12 Jun12 Source: Baird Research s New customer (no-programmer) index declines, now flat. New customer ("no programmer") interest remains held essentially flat at 48.6 (a slightly decline), but well below 55.1 in June and several quarters above 60 throughout 2011-1H12. No-programmer interest has been an important component of the current cycles recovery, with public uniform companies citing no programmers driving as much as 50% of new business wins. Slowing new business momentum likely reflects more difficult comparisons and economic slowdown.Robert W. Baird & Co. 8
  9. 9. September 17, 2012 | Facility Services Baird No-Programmer Diffusion Index (Survey Data) 80 70 Improving 60 <-----|-----> 50 40 Deteriorating 30 20 Jun03 Sep03 Dec03 Mar04 Jun04 Sep04 Dec04 Mar05 Jun05 Sep05 Dec05 Mar06 Jun06 Sep06 Dec06 Mar07 Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Source: Baird Research s Growth expectations move lower but generally consistent with our outlook. Forecasted 12-month growth rates have declined to +4.8% (from +5.4% in June), generally consistent with historical mid-late cycle growth. Our revised estimates contemplate 3.9%, 6.2%, and 4.2% FTM organic growth rates at CTAS, UNF and GKSR, respectively, paralleling industry expectations. , At what rate do you expect your revenue to grow excluding acquisitions in the next 12 months?" 7.0% 5.8% 5.9% 6.0% 5.7% 5.7% 5.6% 5.4% 5.3% 5.4% 5.4% 5.0%5.0% 5.1% 4.7% 4.8% 5.0% 4.6% 4.5% 4.3% 3.8% 4.0% 3.3% 2.9% 3.0% 2.7% 2.3% 2.0% 1.5% 1.0% 0.3% 0.0% 0.0% Note: Growth rates reflect average responses of survey participants Source: Baird Research s Most respondents are expecting growth rates of roughly +3% to +5% in 2012 (unchanged). Mean growth rates continue to be skewed by several outliers of 9%+ organic growth, mostly reflecting company-specific or localized-gains.Robert W. Baird & Co. 9
  10. 10. September 17, 2012 | Facility Services Organic Rental Growth Expectations (FTM) 40% 36% 35% Percentage of Respondents 30% 25% 19% 20% 17% 14% 15% 11% 10% 3% 5% 0% 0% 0% 0% 0% 0% Less than - more than -9% to -7% -7% to -5% -5% to -3% -3% to -1% -1% to 1% 1% to 3% 3% to 5% 5% to 7% 7% to 9% 9% 9% FTM Organic Revenue Growth Expectations Source: Baird ResearchRobert W. Baird & Co. 10
  11. 11. September 17, 2012 | Facility ServicesInvestment Perspective, Valuation and Estimate Changes UNIFIRST (UNF) s We rate UniFirst (UNF; $73 price target) at Neutral. With shares trading at a modest premium to 5-year averages, we believe shares more properly value the companys franchise, recognizing recent execution success and share gains. Moreover, it is our sense that a continuation of recent strong trends of solid execution both on the top line and on margins are increasingly priced into the shares, heightening risk and justifying a Neutral position. - That said, should expectations be sufficiently tempered post-initial F2013 guidance (expected in conjunction with the companys October earnings report), we believe the stock could find a potential entry point as we continue to note the potential for a major positive catalyst in UNFs overcapitalized balance sheet which has ~$15/share ($300 million) excess capital available for acquisitions or dividend/buyback, by our estimates. s Valuation. Our estimates are unchanged and our $73 price target assumes a 6.0x EBITDA multiple on our FTM estimates one year from today. The multiple is above the companys five-year historical average of 6.0x recognizing the lower risk profile offered by the debt-free balance sheet today as well as the companys long track record of above-average execution. On a PE basis our price target assumes 14.0x FTM estimates one year from today also a premium to historical (five-year) levels of 12.9x, but when adjusted for excess cash, is more likely in line with historical averages. We believe these multiples are justified in a decelerating operating environment. UniFirst Valuation Chart F3Q12 Multiples Forward P/E Forward EV/EBITDA Current 14.4x 6.4x Historical Range (5-Year) 6x-17x 3x-7x Historical Average (5-Year) 12.9x 5.7x $73 Price Target Assumes: 14.0x 6.0x Source: Baird Research s Risks. Risks to our price target include a highly competitive market/pricing, employment trends, energy and other commodity price fluctuations and a 10:1 super-voting dual-class insider share structure. G&K SERVICES (GKSR) s We rate G&K Services (GKSR; $37 price target) at Neutral. With fewer operating catalysts, high expectations (consensus estimates now assume achievement of managements 10% EBIT margin goal by the end of F2014), significant YTD outperformance and a more balanced risk/reward (premium valuation), we are downgrading GKSR from Outperform to Neutral. s Estimate changes. Despite our downgrade, we took our F2012-F2013 estimates modestly higher (by $0.01/$0.02, respectively), though largely unchanged, reflecting confidence in the companys margin trajectory. We also moved our EBITDA estimates modestly higher, adjusting for the companys recent (and planned) uptick in growth-oriented capital expenditures (higher depreciation expense).Robert W. Baird & Co. 11
  12. 12. September 17, 2012 | Facility Services G&K Services Estimate Changes ($M) F2012A F2013E F2014E New Old New Old Revenue $869.9 $906.4 $904.4 $934.6 $931.6 Consensus $906.4 $962.9 Guidance $890-910 EBIT $68.2 $78.6 $78.5 $89.2 $88.9 Margin 7.8% 8.7% 8.7% 9.5% 9.5% Adjusted EPS $2.07 $2.39 $2.38 $2.73 $2.71 Consensus $2.36 $2.72 Guidance $2.20-2.40 Source: Baird estimates; Thompson FirstCall s Valuation. Our revised $37 price target (from $36) assumes a relatively constant 7.6x EBITDA multiple (a modest premium to its historical average of 7.2x) and 13.7x earnings (a modest discount to its historical average of 15.7x), both of which we believe are supported by continued good execution and stronger earnings growth (from a lower base) relative to peers. Assuming little change in the direction of the economy, we see the stock as likely to trend modestly higher G&K Services Valuation Chart F4Q12 Multiples FTM P/E FTM EV/EBITDA Current 13.7x 7.9x Historical Range (5-Year) 8x-23x 5x-9x Historical Average (5-Year) 15.7x 7.2x $37 Price Target Assumes: 13.7x 7.6x Source: Baird estimates s Risks. Risks to our price target include a highly competitive industry/pricing, employment trends, and energy and other commodity price fluctuations. CINTAS (CTAS) s We rate Cintas (CTAS; $41 price target) at Neutral. With valuation now above CTAS five-year average and fewer immediate catalysts ahead, we remain on the side lines until employment trends reignite sector interest. Wed look to turn more constructive in the low-mid $30s or on lower expectations (management has also demonstrated share repurchase appetite in this range). Indeed, our estimates (while lower) remain modestly above guidance. s Estimate Changes. We lowered our F2013 EPS estimate by $0.02 entirely due to lower gross margin assumptions in the Document Management business as scrap paper prices have recently moved lower and are below managements guidance of ~$175/ton for the fiscal year (currently at $163.66 through September). Our operating assumptions remain unchanged at this time.Robert W. Baird & Co. 12
  13. 13. September 17, 2012 | Facility Services Cintas Estimate Changes ($M) 2012A 2013E 2014E New Old New Old Revenue $4,102 $4,263 $4,263 $4,421 $4,421 Consensus $4,288 $4,499 Guidance $4,250-$4,350 N/A EBIT $534.9 $575.8 $581.5 $618.2 $618.2 Margin 13.0% 13.5% 13.6% 14.0% 14.0% EPS $2.27 $2.57 $2.59 $2.78 $2.78 Consensus $2.52 $2.79 Guidance $2.47-$2.55 N/A Source: Baird Research; Thompson FirstCall s Valuation. Our 12-month, $41 price target assumes 7.3x FTM EBITDA one year from today and 14.7x earnings, a discount to current levels but generally consistent with the stocks five-year average of 7.5x and 15.7x, respectively. We believe our estimates reflect the companys continued good execution, modest top-line growth opportunity for modest margin expansion and balance sheet opportunities, but balanced by a slowing employment environment and a difficult macroeconomic backdrop. Cintas Valuation Chart Valuation (FTM) F4Q12 Multiples P/E EV/EBITDA P/FCF Current 16.3x 8.3x 13.9x Historical Range (5-Year) 10x-24x 5x-10x 5x-26x Historical Average (5-Year) 15.7x 7.5x 15.2x $41 Price Target Assumes: 14.7x 7.3x 14.7x Source: Baird Research s Risks. Risks to our price target include a highly competitive industry/pricing, employment trends, energy and scrap paper price fluctuations and acquisition integration.Robert W. Baird & Co. 13
  14. 14. Andrew J. Wittmann, CFA (414) 298-1898Justin P. Hauke (314) 445-6519Date Printed: 9/14/2012 Cintas CorporationYear End: May Annual ModelIncome Statement 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E Rental Uniforms and Ancillary Products 2,201,405 2,363,397 2,568,776 2,734,629 2,834,568 2,755,015 2,569,357 2,692,248 2,912,261 3,036,094 3,142,357 Uniform Direct Sale 612,654 703,886 834,832 501,443 517,490 428,369 386,370 419,222 433,994 442,674 455,954 First Aid, Safety and Fire Protection - - - 362,417 403,552 378,097 338,651 377,663 415,703 434,310 451,683 Document Management - - - 108,411 182,290 213,204 252,961 321,251 340,042 350,269 371,285Total Revenue 2,814,059 3,067,283 3,403,608 3,706,900 3,937,900 3,774,685 3,547,339 3,810,384 4,102,000 4,263,347 4,421,279Cost of Sales and Service 1,627,567 1,762,524 1,948,816 2,125,545 2,256,300 2,196,314 2,049,522 2,201,097 2,363,392 2,446,746 2,519,707 Rental Uniforms and Ancillary Products 1,222,638 1,295,992 1,406,829 1,515,185 1,581,617 1,553,830 1,449,576 1,530,456 1,648,551 1,707,994 1,761,489 Uniform Direct Sale 404,929 466,532 541,987 340,767 349,280 306,236 270,034 292,747 304,380 309,651 318,029 First Aid, Safety and Fire Protection - - - 217,978 242,729 230,917 206,925 221,603 237,238 247,410 256,403 Document Management - - - 51,615 82,674 105,331 122,987 156,291 173,223 181,691 183,786Gross Income Rental Uniforms and Ancillary Products 978,767 1,067,405 1,161,947 1,219,444 1,252,951 1,201,185 1,119,781 1,161,792 1,263,710 1,328,100 1,380,868 Uniform Direct Sale 207,725 237,354 292,845 160,676 168,210 122,133 116,336 126,475 129,614 133,023 137,925 First Aid, Safety and Fire Protection - - - 144,439 160,823 147,180 131,726 156,060 178,465 186,900 195,280 Document Management - - - 56,796 99,616 107,873 129,974 164,960 166,819 168,578 187,499Gross Income 1,186,492 1,304,759 1,454,792 1,581,355 1,681,600 1,578,371 1,497,817 1,609,287 1,738,608 1,816,601 1,901,572Selling, general and administrative 727,618 810,232 907,954 1,010,163 1,104,145 1,082,709 1,086,359 1,168,944 1,198,981 1,240,814 1,283,352 Rental Uniforms and Ancillary Products 581,380 633,488 690,707 757,039 801,692 769,275 786,145 822,230 834,210 860,633 888,398 Uniform Direct Sale 146,238 176,744 217,247 97,361 103,444 98,131 76,232 78,220 80,577 82,977 84,555 First Aid, Safety and Fire Protection - - - 106,171 125,184 127,126 118,284 134,604 143,338 149,554 154,632 Document Management - - - 49,592 73,825 88,177 105,698 133,890 140,856 147,650 155,766Operating Income Rental Uniforms and Ancillary Products 397,387 433,917 471,240 462,405 451,259 431,910 333,636 339,562 429,500 467,467 492,470 Uniform Direct Sale 61,487 60,610 75,598 63,315 64,766 24,002 40,104 48,255 49,037 50,045 53,370 First Aid, Safety and Fire Protection - - - 38,268 35,639 20,054 13,442 21,456 35,127 37,347 40,647 Document Management - - - 7,204 25,791 19,696 24,276 31,070 21,230 20,928 31,733 Adjustments - - - (6,254) - - - - - - -Total Operating Income 458,874 494,527 546,838 577,446 577,455 495,662 411,458 440,343 534,894 575,787 618,220 Interest Income 2,650 6,914 6,759 6,480 6,072 2,764 1,695 2,030 1,942 2,574 3,835 Interest Expense 25,101 24,448 31,782 50,324 52,823 50,236 48,612 49,704 70,625 59,923 59,403 Other Expense (Income) - - - - - - - - - - -Pretax Income 436,423 476,993 521,815 533,602 530,704 448,190 364,541 392,669 466,211 518,438 562,652 Taxes 161,482 176,475 194,637 199,016 195,299 167,618 136,258 145,680 173,307 193,377 209,869Net Income 274,941 300,518 327,178 334,586 335,405 280,572 228,283 246,989 297,637 325,061 352,783Adjusted EPS $1.60 $1.74 $1.94 $2.09 $2.15 $1.83 $1.49 $1.68 $2.27 $2.57 $2.78 Restructuring / Merger charges - - - - - (54,215) (12,663) - - - - Asset Write-offs - - - - - - - - - - - Other One-time Items & Discontinued Operations - - - (6,254) - - - - - - -GAAP EPS $1.60 $1.74 $1.94 $2.05 $2.15 $1.48 $1.41 $1.69 $2.27 $2.57 $2.78Diluted Shares 172,371 172,651 169,005 160,141 155,897 153,287 152,859 146,585 130,013 126,670 127,070Basic Shares 170,961 171,679 167,952 159,774 155,675 152,844 152,858 146,574 129,893 126,670 127,070Dividend 0.29 0.32 0.35 0.39 0.46 0.47 0.48 0.49 0.54 0.72 0.78Dividend payout 18.2% 18.4% 18.1% 19.0% 21.4% 32.1% 34.0% 29.0% 23.8% 28.0% 28.0%EBITDA 602,133 642,702 707,491 753,719 769,358 695,768 604,599 633,810 733,792 774,418 822,921 Change YOY 6.2% 6.7% 10.1% 6.5% 2.1% -9.6% -13.1% 4.8% 15.8% 5.5% 6.3% % of Sales 21.4% 21.0% 20.8% 20.3% 19.5% 18.4% 17.0% 16.6% 17.9% 18.2% 18.6%Margin Analysis 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014EGross Margin 42.2% 42.5% 42.7% 42.7% 42.7% 41.8% 42.2% 42.2% 42.4% 42.6% 43.0% Incremental GM% 52.8% 46.7% 44.6% 41.7% 43.4% 63.2% 35.4% 42.4% 44.3% 48.3% 53.8% Rental Uniforms and Ancillary Products 44.5% 45.2% 45.2% 44.6% 44.2% 43.6% 43.6% 43.2% 43.4% 43.7% 43.9% Uniform Direct Sale 33.9% 33.7% 35.1% 32.0% 32.5% 28.5% 30.1% 30.2% 29.9% 30.0% 30.2% First Aid, Safety and Fire Protection 39.9% 39.9% 38.9% 38.9% 41.3% 42.9% 43.0% 43.2% Document Management 52.4% 54.6% 50.6% 51.4% 51.3% 49.1% 48.1% 50.5%SG&A Margin 25.9% 26.4% 26.7% 27.3% 28.0% 28.7% 30.6% 30.7% 29.2% 29.1% 29.0% Rental Uniforms and Ancillary Products 26.4% 26.8% 26.9% 27.7% 28.3% 27.9% 30.6% 30.5% 28.6% 28.3% 28.3% Uniform Direct Sale 23.9% 25.1% 26.0% 19.4% 20.0% 22.9% 19.7% 18.7% 18.6% 18.7% 18.5% First Aid, Safety and Fire Protection 29.3% 31.0% 33.6% 34.9% 35.6% 34.5% 34.4% 34.2% Document Management 45.7% 40.5% 41.4% 41.8% 41.7% 41.4% 42.2% 42.0%Operating Margin 16.3% 16.1% 16.1% 15.6% 14.7% 13.1% 11.6% 11.6% 13.0% 13.5% 14.0% Incremental OM% 27.5% 14.1% 15.6% 10.1% 0.0% 50.1% 37.0% 11.0% 32.4% 25.3% 26.9% Rental Uniforms and Ancillary Products 18.1% 18.4% 18.3% 16.9% 15.9% 15.7% 13.0% 12.6% 14.7% 15.4% 15.7% Uniform Direct Sale 10.0% 8.6% 9.1% 12.6% 12.5% 5.6% 10.4% 11.5% 11.3% 11.3% 11.7% First Aid, Safety and Fire Protection 10.6% 8.8% 5.3% 4.0% 5.7% 8.5% 8.6% 9.0% Document Management 4.1% 6.6% 14.1% 9.2% 9.6% 9.7% 6.2% 6.0% 8.5%Pretax Margin 15.5% 15.6% 15.3% 14.4% 13.5% 11.9% 10.3% 10.3% 11.4% 12.2% 12.7%Tax Rate 37.0% 37.0% 37.3% 37.3% 36.8% 37.4% 37.4% 37.1% 37.2% 37.3% 37.3%Net Margin 9.8% 9.8% 9.6% 9.0% 8.5% 7.4% 6.4% 6.5% 7.3% 7.6% 8.0%Changes YOY 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014ETotal Revenue 4.7% 9.0% 11.0% 8.9% 6.2% -4.1% -6.0% 7.4% 7.7% 3.9% 3.7%Total Internal Revenue 3.0% 6.3% 7.8% 5.3% 4.7% -4.4% -6.5% 5.2% 6.1% 4.3% 4.1% Rental Uniforms and Ancillary Products 4.7% 7.4% 8.7% 6.5% 3.7% -2.8% -6.7% 4.8% 8.2% 4.3% 3.5% Internal 4.3% 6.8% 7.3% 4.2% 3.4% -2.4% -6.4% 3.3% 6.6% 4.7% 3.9% Uniform Direct Sale 4.8% 14.9% 18.6% 6.5% 3.2% -17.2% -9.8% 8.5% 3.5% 2.0% 3.0% Internal 4.4% 14.9% 18.6% 4.2% 3.2% -16.9% -10.1% 8.5% 3.5% 2.4% 3.4% First Aid, Safety and Fire Protection 11.4% -6.3% -10.4% 11.5% 10.1% 4.5% 4.0% Internal 6.2% -7.7% -10.8% 7.3% 8.5% 4.9% 4.4% Document Management 68.1% 17.0% 18.6% 27.0% 5.8% 3.0% 6.0% Internal 40.4% 9.2% 15.9% 15.3% 2.2% 3.4% 6.4% Organic, ex-paper 6.0% 12.7% 8.2% 4.4% 3.4% 6.4%Gross Income 6.0% 10.0% 11.5% 8.7% 6.3% -6.1% -5.1% 7.4% 8.0% 4.5% 4.7%Operating Expenses 4.6% 11.4% 12.1% 11.3% 9.3% -1.9% 0.3% 7.6% 2.6% 3.5% 3.4%Operating Income 8.3% 7.8% 10.6% 5.6% 0.0% -14.2% -17.0% 7.0% 21.5% 7.6% 7.4% Rental Uniforms and Ancillary Products 6.7% 9.2% 8.6% -1.9% -2.4% -4.3% -22.8% 1.8% 26.5% 8.8% 5.3% Uniform Direct Sale 19.6% -1.4% 24.7% -16.2% 2.3% -62.9% 67.1% 20.3% 1.6% 2.1% 6.6% First Aid, Safety and Fire Protection -6.9% -43.7% -33.0% 59.6% 63.7% 6.3% 8.8% Document Management 258.0% -23.6% 23.3% 28.0% -31.7% -1.4% 51.6%Pretax Income 10.3% 9.3% 9.4% 2.3% -0.5% -15.5% -18.7% 7.7% 18.7% 11.2% 8.5%Net Income 10.3% 9.3% 8.9% 2.3% 0.2% -16.3% -18.6% 8.2% 20.5% 9.2% 8.5%EPS 10.1% 9.1% 11.2% 7.9% 3.0% -14.9% -18.4% 12.8% 34.7% 13.0% 8.2% 14Source: Company reports and Robert W. Baird & Co. analysis

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