One of Wall Street’s Highest-Flying Stocks — a Nearly 125,000%-Gainer Since Its IPO — Has Officially Completed Its Latest Stock Split
2024-09-12 11:51:00
While it’s perfectly normal for a hot trend to be captivating the attention of Wall Street and investors, two buzzy trends at the same time are somewhat rare. In addition to investors piling into stocks associated with the artificial intelligence (AI) revolution, they seemingly can’t get enough of companies announcing stock splits.
A stock split is a tool on the proverbial utility belt for publicly traded companies that allows them to adjust their share price and outstanding share count by the same magnitude. Despite these nominal changes, stock splits are purely cosmetic and have no impact on a company’s market cap or its operating performance.
Despite Cintas’s long-term success, additional near-term upside could be a tough ask
While Cintas has a pretty clear path to long-term growth, thanks largely to being tied at the hip to the U.S. economy, additional upside for shares of the company over the next couple of years could be a tough ask.
For one, there are mounting concerns that a U.S. recession is brewing. A couple of data points and predictive metrics, including the first notable decline in U.S. M2 money supply since the Great Depression, as well as the longest yield-curve inversion in history, suggest coming weakness for the economy and stock market.
Though stocks don’t move in-tandem with the U.S. economy, Cintas is undeniably cyclical. Most of its clients are liable to feel some degree of pain if economic growth slows or contracts, which would, in turn, be expected to slow down its own growth rate.
To build on this point, both the broader market and Cintas are historically expensive.
According to the S&P 500‘s Shiller price-to-earnings (P/E) ratio, which is also commonly referred to as the cyclically adjusted price-to-earnings ratio (CAPE ratio), the stock market has only been as pricey as it is now two other times, when back-tested to January 1871.
On Sept. 10, the S&P 500’s Shiller P/E, which is based on average inflation-adjusted earnings from the prior 10 years, closed at 35.33, or more than double than 153-year average of 17.16. More importantly, previous instances where the S&P 500’s Shiller P/E topped 30 during a bull market rally were, eventually (key word!), followed by declines of at least 20%.
Cintas ended Sept. 10 at roughly 54 times its trailing-12-month (TTM) earnings per share (EPS) and a nosebleed 44 times forward-year EPS. You’d have to go back to the late 20th century to find the last time Cintas was valued at 54 times TTM EPS.
While a forecast sales growth rate of 7% in the current and upcoming year is admirable for a company of its size, it doesn’t come to close to justifying a forward P/E ratio of 44.
This is a rare instance of a rock-solid business whose stock simply isn’t worth buying at the moment.
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Sean Williams has positions in Sirius XM. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.
One of Wall Street’s Highest-Flying Stocks — a Nearly 125,000%-Gainer Since Its IPO — Has Officially Completed Its Latest Stock Split was originally published by The Motley Fool
