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Why Cintas and Rollins Are Outfitted for Success

04/03/2018 3:57 pm EST

Focus: STOCKS

Jon Markman

Editor, Tech Trend Trader, The Power Elite,and Strategic Advantage

Cintas Corp. (CTAS) is not the kind of company that gets a lot of attention. Its business seems like a throwback to a bygone era. Yet, managers continue to mint shareholder wealth, writes Jon Markman, editor of The Power Elite and Tech Trend Trader.

You have probably seen their white trucks around town. The simple branding on the side says they are the uniform people.

Most people would not think corporate uniform rentals is a growth business. The entire concept feels dated, like something out of a 1950s sitcom. Ralph Kramden, I like the cut of your jib.

But first impressions can be deceiving.

This Cincinnati company is sitting on a $5.3 billion business. It has high-single-digit sales growth, and very little competition.

That last bit is the key…

Why Cintas is outfitted for success

Cintas managers are following the straightest path to success. They are prudently rolling-up competitors to maintain margins … using scale to cut costs and improve productivity…and raising prices.

Following 2018 fiscal fourth-quarter earnings, this strategy was on full display.

chart 1

The Wall Street Journal reported sales shot up 26.6% to $1.6 billion. Top-line numbers got a boost from the consolidated results of G&K Services, the rival Minneapolis uniform rental service that Cintas acquired in August 2016 for $2.2 billion.

Even without G&K, Cintas still saw 7.8% organic sales growth.

During a mid-March conference call, CEO Scott D. Farmer was careful to note that the company continues to integrate G&K operations. So far, 60 facilities have been shuttered because they were redundant. Some 65% have been converted to the Cintas enterprise resource planning system.

In 2009, Cintas selected SAP intelligence as its enterprise resource planning (ERP) consultant.

Enterprise resource planning has become a big part of modern business productivity. Using Big Data and analytics, enterprises manage planning, purchasing, inventory, sales, marketing, finance and human resources.

Optimizing these operations can add significantly to margins.

In April 2017, Cintas began moving all of its ERP functions to the SAP Hybris managed cloud.

SAP Hybris provides a unified platform for billing, service orders and customer support. The goal was to present a suite of services to all of Cintas’ customers. This meant seamlessly bundling its uniforms, fire protection and first aid/safety services.

Getting it right for 900,000 customers is no small feat. But it has been a major contributor to productivity at Cintas.

This is what well-managed companies do. They find ways to efficiently build scale through acquisitions. Then they use technology to build competitive advantages over their rivals. Eventually, they raise prices.

Finding these companies is not easy. They are not the types of businesses that get talked about in the financial press, or on business TV. You will not hear about them at cocktail parties. They are too dull. They seem to lack sizzle.

Yet, these are the stocks that should make up your portfolio.

I call them The Power Elite because they are elite businesses that perform in all environments. Their secret is simple:

• Smart, focused management teams
• Dominant positions in niche markets
• And recurring revenues.

Here’s another example …

You could have doubled your money every three years with this bug company.

Rollins Inc. (ROL) is another one of those businesses. Like Cintas, the company has dominant position with a highly recognized brand.

Unlike Cintas, you probably won’t see its name on the side of a truck in your neighborhood.

But again, don’t be deceived.

That’s because most communities have Orkin franchises. They might even have a HomeTeam or a Western pest service.

What residents might not know is that Rollins operates these businesses.

chart 2

Since 1964, Rollins managers have been selectively buying regional fumigation businesses. After folding them into Rollins, the strategy has been to eliminate redundancies…update systems…and raise prices.

See a pattern here?

This is a business strategy that works.

According to Morningstar, Rollins managers have been able to continuously grow sales and maintain high-teens operating margins. For shareholders, this has meant spectacular performance — with very low volatility.

The five-year compound rate of return is 26.5%. That means, on average, the stock doubles in price every three years.

The idea of investing in a bug or uniform business might be unappealing. First impressions can be deceiving. And you can miss out on a lot of profits if you’re looking the other way.

Best wishes,

Jon D. Markman

P.S. My Power Elite subscribers are sitting on a nice 16.5% gain in ROL since they added this stock back in October. And there’s not only plenty more upside where that came from, but there are even more stocks on our buy list with even bigger profit potential. Get my buy signals delivered straight to your inbox—start here.

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