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Industrial, Business Support Services Date: 01/19/2015 Current Price: $78.93 Recommendation: HOLD (9.27% Downside) Ticker: CTAS NASDAQ Target Price: $72.23

Cintas: Strong Performer with Future Growth Concerns We issue a HOLD recommendation for Cintas. Our valuation models yield a fair value per share of $72.23. As of January 19, 2015, the stock price was over-valued by 9.27% at $78.93. We believe the strong underlying business, current tailwind from falling commodity prices and sound management skills have already been reflected on its current price. Acquisitions and Cyclical Growth Drive EPS Cintas has achieved solid EPS growth through a two pronged strategy: aggressive acquisition during periods of lower valuation and organic growth during periods of higher valuation. This has enabled the company to achieve scale, maintain high margins and improve its cost structure. A massive, four-year share repurchase program of 39.4 million shares for $1.5B also helped boost share value. Reducing Exposure of Underperforming Business Cintas discontinued its underperforming Document Management Segment (4.5% net margin compared to 13.1% for firm) and sold its document destruction business to form a joint venture (42% equity stake) with Shred-it during Q4 FY14. The company also announced that it had sold the remaining document storage and imaging segment during the Q1 and Q2 FY15. These transactions resulted in a $0.85 special dividend in FY15 and a $0.14 increase in EPS for FY15 Q2. Forecasted special one-time will add $0.29 to EPS in FY15. Fewer Attractive Opportunities to Deploy Cash The company currently has $826.7M ($7.05/share) in cash after receiving $180M from the Shred-it transaction. Recent high equity prices have made it harder to find reasonably priced acquisition targets. We expected Cintas to execute fewer acquisitions and to focus on internal growth through their ancillary services while continuing to grow their core uniform business. The high share price also prevents Cintas from fully employing its share repurchase strategy; the stock price has increased 94% (adjusting for dividend payments) over the past 2 years. We expect repurchases to be significantly curtailed unless the stock experience a pullback. Low Margin for High Growth Segment Although we expect the First Aid and Fire Protection segment to have sound annual growth of 11% over the next 5 years versus 5.5% for the uniform rental segment, it comprises only 12.8% of revenue and is expected to have a net profit margin of 8.5% versus 16.1% for the core uniform rental business.

Market Profile

Closing Price 78.93

52-Week Price Range 55.35 - 80.35

Avg. Volume (3m) 783,766

Shares outstanding 117.33M

Market Cap 9.26B

Div. Yield 1.08%

P/E (ttm) 21.58

P/B 4.20

EV/EBITDA(ttm) 12.3

Est. Diluted EPS (FY15 ) 3.19

Est. Basic EPS (FY15) 3.48

Key Ratios of Cintas 2013 2014 2015 2016 2017 2018 2019

Revenue Growth Rate 5.2% 5.5% -0.02 6.1% 5.8% 5.6% 5.4%

Gross Profit Margin 41.4% 42.1% 42.6% 42.2% 41.6% 41.7% 41.7%

Net Profit Margin 7.3% 8.2% 8.6% 8.6% 8.2% 8.2% 8.3%

ROA 7.3% 8.4% 8.3% 8.2% 7.9% 8.0% 8.0%

Dividend per Share 0.64 0.77 0.80 0.91 0.96 1.03 1.09

Diluted EPS 2.52 3.05 3.19 3.28 3.45 3.50 3.71

Cintas Corporation

Stock Performance Compare to S&P500

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Cintas S&P 500

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Business Description

Cintas is the largest uniform rental company in the United States, providing uniforms, laundry

service, entrance mats, restroom supplies, tile & carpet cleaning, promotional products, and first

aid, safety, fire protection products and services, for approximately 900,000 businesses. The

companys three main business lines are: Rental Uniforms and Ancillary Products (RUAP),

Uniform Direct Sales (UDS) and First Aid, and Safety and Fire Protection Services (FAFP), which

represent 77.0%, 10.5% and 12.5% of revenues respectively (Figure 1). During the fiscal year

ended May 31, 2014, the company discontinued its Document Management Services (DMS)

segment and sold the Document Destruction Business to form a joint venture of which Cintas

retains 42% ownership. From the $4.6B revenue generated in FY14 (Figure 2), over 90% comes

from US operations, and the remaining comes from Canada, Latin America and Europe. Cintas

holds 25% of the $12.9B uniform market. Their three main competitorsAramark, UniFirst and

G&Khold 12%, 10%, and 7% respectively.

Cintas has recently had strong earnings and fast earnings growth, with a record diluted EPS of

$3.05 in FY14, diluted EPS growth rate for FY13 and FY14 of 11% and 21%, and revenue growth

of 5.2% and 5.5% (Figure 2-3). Cintas beat EPS estimates for Q2 ended Nov 30. 2014, with

$0.86 vs. consensus estimates of $0.78. For FY14, operating income from RUAP topped $500M

for the first time. Revenue from FAFP also topped $500M for the first time.

Cintas has a highly diversified customer base. No customer accounts for more than 1 percent of

Cintas' total revenue and no industry accounts for over 10 percent of revenue (Exhibit A). Cintas

operates 8,200 local delivery routes and employs nearly 30,000 people across its 446 operation

facilities and eight distribution centers. Although 85% of its products are from outside suppliers,

Cintas still produces some of its finished products and operates five manufacturing facilities

The firm was founded by Richard T. Farmer, who was CEO until 1995 and remains on the board

of directors. The current CEO is Scott D. Farmer, son of Mr. Richard Farmer. Insiders hold 17.2%

of the outstanding shares. Institutional ownership is 77.9%. Outsiders hold 6 of the 9 seats on

the Board of Directors.

Recent Events and Future Strategy

Document Management Division Spin-off

The document management segment of Cintas has shown compound annual revenue growth

rate of 3.7% versus 6.1% for the firm overall over FY12-FY14. On March 19, 2014, Cintas spun

off its document destruction segment to create a joint-venture in which Cintas retained 42%

ownership and received $180M in cash. According to Cintas CEO Scott Farmer, this newly

formed partnership will be the industry leader and benefit from increased scale, resources and

strong cash flow. The remaining document storage and imaging segments were sold during

FY15 Q2 and added $0.14 to FY15 Q2 EPS.

Rapid Growth in Dividends, but Slow Down in Repurchases

Since FY09, Cintas has repurchased 39.4 million of shares worth $1.5B. The average

repurchase price of $36.83 implies a 33.64% IRR for the four-year period (Figure 4), given the

current stock price of $78.93. The stock price has increased 36.06% over the past 12 months

(adjusted for dividends). The rapid growth in market price suggests a slowdown in future

repurchases reducing the potential of what has been a significant strategy for EPS growth.

Cintas has increased its dividend each year since the first dividend in 1993 and has a compound

average dividend growth rate of 14.8% during the past 21 years. Due to the spin off transaction

of the document management division, the companys Board of Directors approved an 85 cents

per share special dividend paid on December 5, 2014. On January 13, 2015, the board

authorized repurchase of another $500M in shares, increasing its total share repurchase

authorization to $737.5M. However, with current valuations, we expect repurchases to be

curtailed until the stock returns to a more reasonable valuation.

77.0%

10.5%

12.5%

Uniform Rental & Ancillary

Uniform Direct Sales

First Aid & Fire Protection

Figure 1: Revenue Breakdown FY15 Q2

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Figure 2: Revenue & Dividend Trend (M)

Source: Company data



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Net Income

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Figure 3: Net Income (M), Net

Income Growth (%) & Margin (%)


Figure 4: Share Repurchases (M)

2

Continuous Acquisitions

The firm has historically been reliant on acquisitions to grow, and the firm has the debt capacity

to continue in this area. Since FY10, Cintas has spent over $352M on 65 acquisitions (Figure 5-

7). This strategy has allowed Cintas to reduce costs in the short run by cutting target companies

overhead cost and integrating their business into Cintas route-based system. Despite these

acquisitions, the firms overall cost of capital remains low due to the current low interest rate

environment and the firms currently high credit rating (Moodys: A2; Morningstar: A).

Acquisitions have also reduced price competition in those local markets, which improve margins.

Develop Ancillary Service Market

Of the 65 acquisitions Cintas has made during past five years, 24 were in FAFP (Figure 5).

Cintas will deploy more resources to this segment, to attempt to exploit cross-selling

opportunities and provide bundled services to its existing customer base. We forecast 11%

revenue growth for FAFP in FY15, compared to the 6% for RUAP and 3% for UDS.

Investment Risks

Macro-economic risk

Cintas' share price is highly correlated with the S&P500 and bears less idiosyncratic risk relative

to peer firms. The correlation between Cintas weekly stock price and the weekly S&P500 index

is 0.76; Aramark, UniFirst and G&K have respective correlations of 0.56, 0.65 and 0.67. This

exposes the relatively high level of cyclicality that Cintas faces even within a cyclical industry

(Figure 8-9).

While the companys stock price is contemporaneously correlated with the market, there is a lag

between macroeconomic changes and company revenues/profits due to the companys ability

to secure term contracts with its clients. Figures 7 and 8 show how percentage changes in US

GDP growth and changes in US employment affect RUAP and FAFP revenue growth across

several quarters. The UDS segment has no lag effect.

Acquisition risk

Cintas has long entered new markets through acquisitions by engaging in a strategy of buying

out smaller competitors. Acquisitions peaked in FY11 at $171.6M, representing 94.0% of CAPEX

(Figure 12). However, with much greater market saturation and other major players practicing

the same strategy, acquisitions may not be as feasible and cost effective in the future. There

was a down trend in cash acquisitions during the past 4 years (Figure 9). In addition, in the past

5 years, the average P/B of the Cintas and its 3 main peers has grown at an annual rate of

17.5%, from 1.33 in FY10 to 2.98 in FY14 (Figure 10); while the average trailing P/E of Cintas

and its three main competitors has grown at the annual rate of 10.8%, from 17.04 in FY10 to

28.43 in FY14 (Figure 11). This implies that the valuations of Cintas potential targets within the

industry were also increasing substantially during the period. This trend suggests a slowdown in

Cintas future acquisition opportunities, with corresponding growth consequences. The firm may

pursue more stock acquisitions rather than using cash, but this is generally recognized as a

second-best option.

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2010 2011 2012 2013 2014

Uniform First Aid Document

Figure 5: Number of Acquisitions

Deal in Each Sector


Figure 6: Acquisition Activities


Figure 7: Revenue Growth Breakdown

Figure 8: Market Model Regression Output

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Figure 9: Correlation of Quarterly

Revenue Growth with Lagged

Quarterly GDP Growth FY04-14



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Figure 10: Correlation of Quarterly

Revenue Growth with Lagged Quarterly

Change in Employment Rate FY04-14



3

Energy Cost risk

Cintas operates over 8,200 local delivery routes and fuel costs account for 1.7% to 2.5% of

revenue for uniform rental industry. The recent plummeting of fuel prices will improve profit

margins in the uniform rental industry, and thus improve the stock performance. However, we

think this is a short-term phenomenon; in our valuation, we forecast lower fuel prices to persist

for no longer than 18 months.

Industry Overview and Competitive Positioning

Competitor Analysis:

Cintas has dominated UniFirst, G&K and Aramark in RUAP for many years. Gross margins have

been relatively stable for all four companies, which implies no fierce price competition and

moderate competitor rivalry during the past five years (Appendix 3 gives a detailed breakdown

of industry forces analysis). We expect this stable pricing environment to continue. The top four

uniform rental companies employ a very similar strategy of acquiring smaller firms to enter a

new geographical market. But as noted previously, we expect acquisitions to slow due to high

valuations. While we remain concerned that this will harm future growth for Cintas, it also means

that its three peers will also be challenged to gain advantage over Cintas through external growth

(Figure 13-15). UniFirst: UniFirst is Cintas chief competitor. The company generated $1.35B of

revenue in FY14. It operates in the Uniform Rental, Specialty Garment and First Aid

segment, each representing 90%, 7%, and 3% of its revenue. UniFirst serves over

260,000 customer locations and provides three to five year contracts. In the past five

years, no single customer in the uniform rental segment generated more than 1% of

revenue. The company has second highest operating margin of 14.5% in the uniform

rental business; 1.2% lower than Cintas 15.7% in FY14.

G&K: G&K is a pure-play uniform rental company with $900M revenue the smallest

player in terms of revenue among the top players. The company also has the lowest

operating margin of 10.7% in FY14. Despite this, G&Ks stock had the highest return

and Sharpe ratio during last 3 years due to fast bottom line growth, highest payout ratio

of 38.9% and two $6 special dividends (Figure 13). During the latest fiscal year, G&K

had repurchased 205,000 shares for a total $11.7M.

Aramark: Aramarks revenue in FY14 was $14.8B, with 90% coming from its Food and

Support Services segment and 10% generated from Uniform Rental. The food and

support services is a low margin business that lowers Aramarks gross margin to 10%,

one-third of the average number of other three uniform rental companies. Aramark has

a huge customer base in the Education and Hospitality markets, two industries Cintas

has been unable to serve, the relationship with these customers is an advantage for

Aramark to extend its uniform rental business to these sectors. The company has a

less stable management and ownership structure; it was privatized in 2006 and then

offered shares in an IPO in December 2013.

Consolidated, Mature Industry

Uniform Rental is a mature business in United States with a 3.3% CAGR over the past 22 years.

The four largest players - Cintas, Aramark, UniFirst and G&K - represented 25%, 12%, 10%,

and 7% of the $12.9B market (Figure 16), with more than 400 smaller companies sharing the

remaining 46%. High capital requirements and returns to scale have triggered consolidation; in

1992, the top four firms had combined market share of just 19% (Figure 17). During the past

three years, the companies that mainly focus on uniform rental business - G&K, UniFirst and

Cintas - have spent $31.5M, $34.3M and $128M on acquisition activities.

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Figure 11: Market Multiple

Source: Capital IQ

Figure 12: CAPEX for Cintas for FY10-14 (M)

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Others

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Aramark

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G&K

Figure 16: Market Share 2014

Source: U.S. Economics Census & team estimates

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Figure 13: Stock Performance

Figure 14: Key Ratios FY14

Figure 15: Revenue by Segments

FY14 (In Thousands)

Source: Yahoo! Finance



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4

Local Market Control Leads to Higher Margins

While uniform rental is viewed as a commodity business, Cintas is able to differentiate its

products through extensive marketing efforts to sustain higher prices, and maintain its high gross

margin of 42.1% compared to peer average of 26.7% for uniform rental segment since FY10

(Appendix 4). The companys average revenue per employee for the past five years is $130,963,

which is 17% higher than its peers (Appendix 4). Scale, efficiency and pricing will be the keys to

future growth.

Promising Macroeconomic Trend but Unfavorable Growth Structure

With nominal GDP growth rate of 5% during the third quarter of 2014, a consensus forecast of

2.9% GDP growth, and 5.6% unemployment rate as of December 2014, the overall economy

has been recovering (Figure 20). Among the industries of Cintas clients, however, 3-year

average GDP growth rate has been a mere 1.3%, well below the 2.2% for the entire U.S.

economy and job growth has been at 1.5% annually versus 1.9% overall for the past 3 years.

The macro trend is positive yet growth in the uniform rental industry is likely to be modest given

the growth of its clientele.

Expansion Strategy: Other Specialized Services

Due to slower growth in uniform rentals, Cintas and UniFirst are trying to break into different

markets such as first aid and fire protection. By doing so, companies can provide customers with

more services and integrate these different products into the established selling system. In order

to provide efficient service and lower its costs, Cintas restructured its sales team and trained its

sales representatives to sell all the products the company provides instead of specializing on

one segment starting FY07. Sales per employee has grown 26.5% since then (Appendix 4). The

revenue growth rates in the adjacent business are higher on average; however, although the

growth potential is better, we believe these companies competitive advantage in adjacent

business is not as strong as their core uniform rental service given lower profit margin (Appendix

8).

Falling Commodity Prices Help Margins

Fuel cost is estimated to be 1.7% - 2.5% of revenue for uniform rental industry. Oil price has

plummeted over 50% within six months, which increases the margin for the industry by 80 to

120 bps (Figure 18). However, in light of OPECs historical pricing behavior, we expect the oil

price to increase gradually over the next 18 months. Cotton cost, which are estimated to be 2-

3% of industrys revenue, has dropped 27% due to the slowdown of Chinas demand since

January 2014 (Figure 19). The drop of cotton price is expected to increase Cintas operating

margins by 10 to 20 bps. These recent declines in commodity prices will support temporary

margin expansion.

Stable Supply Chain

While UniFirst and G&K produce 70% and 47%, respectively, of their garment products, Cintas

purchases 85% of its products from over 400 independent suppliers worldwide, giving it greater

cost control compared to UniFirst and G&K. Cintas position is more flexible and well-diversified

compared to its peers, who rely mostly on production from their Latin American plants. This

broad network of suppliers protects Cintas from uniform shortages, a problem that G&K, with its

small number of Latin American-based factories, has faced in the past. Cintas also has the

lowest percentage (1%) of unionized labor among its peers - UniFirst, Aramark and G&K has

2%, 15% and 20% respectively. As a result, Cintas is less likely to encounter supply chain

disruptions.

Investment Summary

We issue a HOLD recommendation on Cintas with a target price of $72.23, which offers a 9.27%

downside from the closing price of $78.93 on January 19, 2015. We derive our target price from

81%

6.4%

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4.3%3.1%

OthersCintas

Aramark

UniFirstG&K

Figure 17: Market Share 1992

Figure 20: Economy Forecast

Source: U.S. Economics Census & team estimation

$40

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Figure 18: WTI Crude Oil Price

Source: Fred.org

Figure 19: Cotton Price ($/LB)

Source: national Cotton Council


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a weighted-average of a Discounted Free Cash Flow to Firm (DCF) Model (80% weight) and

Relative Valuation (20% weight).

Modest Core Growth Opportunities within a Matured Fully Priced Industry

We project that the recent economic upturn will allow RUAP to grow at 6% in FY15. Cintas has

historically been reliant on acquisitions to grow, spending $352M (31% of CAPEX) on 65

acquisitions over the past 5 years. However, in an increasingly expensive acquisition market,

and with no significant plans on endogenously exploiting the unserved hospital, education and

government sectors, RUAP will face growth deceleration of 1% over the next 5 years.

Inadequate Margin in Growth Segment

With the potential to bundle auxiliary products to Cintas sizable customer base, we forecast 9-

11% growth in the FAFP segment. However, the segment is unlikely to improve its net profit

margin (8% to 9%) significantly due to competition form dominant industry players such as Tyco

and Ansul.

Margin Improvement from Falling Commodity Prices

Falling fuel and cotton prices will improve margins. Together, these commodities comprise

9.5%% to 13.6% of total COGS. As a result, we expect improvements in EPS of $0.23 and $

0.15 for FY15 and FY16 before these price fluctuations normalize.

High Market Correlation Tying Down Long Run Growth

With no major international expansion strategy, Cintas stock will continue to be very closely tied

to the US macro economy. Observing a beta of 1.08 and a correlation of 0.76 with the S&P 500,

we expect free cash flow to firm to grow at long run nominal GDP growth rate of 3.5%. Any

improvements in this growth rate will be accompanied by rising cost of capital, which will offset

upside potential for the stock.

Financial Analysis: Historical and Forecasted (Pro-forma financial statements for forecasts can be found in Appendix 15-18)

Revenue Growth Rate

RUAP: The revenue of the RUAP segment, which constituted an average of 71% of Cintas

revenue for the last 3 years, has grown at 6.2% over the same period. This was mainly due the

creation of long term (typically more than 5 year) contracts in the post-recession period.

However, we anticipate this rate to decline since the industry is relatively mature and competition

is strong. While opportunities to exploit unserved markets, particularly in the hospital, education,

and government sectors do exist, according to company management no clear strategy for such

a move is apparent. In addition, Cintas has not taken any initiative to expand its international

operations in the RUAP segment. With these considerations, we expect the growth rate to start

off at 6% in FY15 and linearly decline to 5% in 5 years (Figure 21).

UDS: The direct sale sector has been more volatile than the rental segment within Cintas. In

FY13, revenues jumped by 6.3% due to large, one-time purchases by United Airlines. Revenues

then fell by 1.3% in FY14. The possibility of such huge deals in the next five years is significant,

since Cintas spends extensively on its marketing efforts, which is reflected in its higher

SG&A/revenue ratios relatively to the industry (Figure 24). However, these deals are usually

sporadic with many years between repurchases, according to company management. On the

other hand, with much greater competition within the UDS industry, bargaining power of

customers in the UDS segment is significantly greater, reflected in the UDS COGS/revenue

which was at least 22% higher than that of the other segments of Cintas in each of the last 5

years (Figure 22). Thus, we estimate a modest revenue growth of 3% over the next five years in

this segment.

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Figure 21: Forecasted Revenue Growth Rates

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Figure 22: COGS/Revenue by Segment

Source: Company data, team estimate


Figure 23: Forecast Period Margins


6

FAFP: This segment has been a star in Cintas portfolio with an average growth rate of revenue

of 11.02% during the last 4 years with very little deviation. There is room for further growth in

this segment since Cintas can bundle FAFP products as auxiliary services to its existing

customer base. However, as it generates more revenue from this sector, Cintas will eventually

face greater competition from the likes of Tyco and Ansul, who are more focused on this sector

and have much greater diversity of product offering. Thus we estimate that revenue growth rate

for this sector will linearly decrease from 11% to 9% in the next 5 years.

Cost Margins

COGS Margin: As figure 22 illustrates, historical COGS/Revenue ratios have been stable at

57%, 71%, and 58% for RUAP, UDS, and FAFP respectively. Any shocks in the input prices

and/or pricing competition could potentially push up these ratios. However, Cintas had managed

to keep these ratios stable even in the financial crisis years. Consequently, we assumed that it

will remain constant at a level equal to the past five year average. An exception is made for the

recent drop in fuel and cotton costs. A 100bps decrease in COGS of all the product lines is

considered for only FY15 since we believe that such low fuel prices seem to be driven by short-

term oversupply. For FY16, we expected a 40bps decrease in COGS compared to FY14.

SG&A Margin: RUAP SG&A/Revenue has fallen from 30.5% to 27.5% over the last five years

due to increased tenure of their sales team, better training programs, and better capacity

utilization due to economics of scale. However, similar to the COGS/Revenue ratios,

SG&A/Revenue ratios for UDS and FAFP have remained very stable at an average of 18.6%

and 34.7% respectively over the past five years. This can be attributed to Cintas persistent

marketing efforts to enhance growth in these relatively smaller segments. We assume marginal

improvements of 50bps for RUAP and 30bps for UDS and FAFP from FY14 that will persist

throughout our forecast period.

Improving Profitability

Cintas ROE has grown sharply from 8.8% in FY10 to 17.1% in FY14. However, this is partly due

to major share repurchases of $1.5B from FY10 to FY14. As a result, ROA is a better indication

of recent performance. Cintas ROA has exceeded industry averages for each of the past five

years, increasing from 6.70% in FY10 to 8.39% in FY14. The ROA of both Cintas and its peers

are recovering after financial crisis exhibiting correlated motion with macroeconomic

environment of the US economy. Since Cintas has already spun off its low growth segment

(document management) and will concentrate on its high growth segment (FAFP), we believe

that Cintas ROA will increase to an average of 8.1% in the next 5 years compared to its 3 year

average of 7.5%.

Expensive Acquisition Market Stabilizing Efficiency Gain

Inventory turnover dropped from 3.94 (FY10) to 3.53 (FY14) as the economy recovered and

Cintas took advantage of economies of scale. As optimal scale is reached, we believe this ratio

will keep constant at 3.6 from FY16 to FY19. The total asset turnover increased from 0.92 (FY10)

to 1.03 (FY14); this tendency reflects upon Cintas business strategy of achieving economic

scale through value-adding acquisitions. We believe this ratio will keep constant at 0.99 from

FY16 to FY19, in light of an expensive acquisition market forcing Cintas to rely on internal

growth.

Significant Spare Debt Capacity

Due to the distorting effect that Cintas share repurchases have had on the D/E ratio, total debt

to EBITDA is a more appropriate leverage measure. Due to the acquisitions of Target

Commercial Interiors, Inc. and Code Shred Ltd and a 500 million share buyback program in

FY11, this ratio jumped from 1.4 (FY10) to 2.2 (FY11), then dropped to 1.5 (FY14). We believe

this ratio will decrease from 1.5 to 1.3, creating a spare debt capacity of $579.2M by FY19 given

no new debt is issued (Figure 27). As Cintas keeps generating substantial cash from its

18%

20%

22%

24%

26%

28%

30%

32%

2010 2011 2012 2013 2014

CTAS GK UNF

Figure 24: SG&A/Revenue for the RUAP


Figure 25: SG&A/Revenue by Segment for Cintas

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$m

Forecasted Debt Celling

Current Level of Debt





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Figure 26: ROA of Cintas

Figure 27: Potential Debt Capacity


7

operations, it will have adequate space for opportunistic acquisitions and further share

repurchases.

DuPont Analysis: High Margins Driving Returns

Based on our DuPont Analysis (Figure 28), the main driver of ROE is Cintas Net Income Margin,

which is 2.45% higher than the industry average. This reflects Cintas ability to achieve scale,

charge a higher price than the industry through product differentiation, and manage a stable

COGS margin. It is also an indicator of the success of recent marketing efforts to expand product

sales and improve revenue generated per employee.

Valuation

We based our valuation on two standard valuation models: Discounted Cash Flow (DCF) and

Relative Valuation. We use a weighted average of the results of these two models to calculate

our price estimate. We give 80% weight to the DCF valuation since it incorporates both

quantitative and qualitative data on the firms business strategies, macroeconomic environment,

peer performance, and industry trends. Since there are only two comparable firms for Cintas,

we gave a modest weight of 20% to relative valuation to avoid any outlier effect. Due to the

uncertain distorting effect of future share repurchases and special dividends, a dividend growth

model is not used in our valuation. The weighted average price yields a target price of $72.23.

Relative Valuation

The capital intensive nature of Cintas business motivated us to use EV multiples along with

general price multiples. The EV multiples negate biases created in differences in cost structure

of peer firms. We use the trailing price to earnings (P/E) ratio and price to book (P/B) ratio, along

with the enterprise value to EBIT (EV/EBIT) and to EBITDA (EV/EBITDA) ratios of Cintas two

main peers: UniFirst and G&K. We exclude Aramark since 90% of its business is in food and

support service. With just two peer firms, we focus on the averages of these values instead of

the maximum and minimum. This multiple valuation approach suggests a price range of $47.61

to $68.53, and a mean of $59.33. (Figure 32)

At the end of Q2 FY15, Cintas was trading at 22 times earnings, 3.43 times of its book value of

equity and 14.08 times EBIT. For the industry the comparable numbers were 19.70, 2.29, and

11.51 respectively. This indicates that investors are optimistic on Cintas future growth prospects

as they are extending a cyclical recovery in earnings, thus limiting the upside potential of Cintas

stock.

DCF Valuation

We used the DCF analysis approach to arrive at a price of $75.46 per share. Since the last

quarter closed on November 30, 2014 for Cintas, the method involved calculating the present

value of free cash flow for the firm on December 1, 2014, adjusting the value to two months into

the future at January 19, 2015, and taking into account the value of last quarter long term debt

and cash balance.

In the DCF analysis, the operations of Cintas were broken down into its three core components:

RUAP, UDS and FAFP. Significantly different growth potentials and cost margins in each of

these segments motivated the decomposition of the DCF analysis into separate segments for

operating cash flows. However, cash flows from depreciation, capital expenditure, and changes

in new working capital were consolidated due to the overlap in functions among the three

segments. The analysis builds on the revenue growth rate and margin assumptions discussed

in the financial analysis section.

Figure 28: DuPont Analysis

White: Cintas; Blue: Competitors Source: Capital IQ

Figure 31: Price of Relative Valuation

Source: Capital IQ

Figure 30: Multiple of Relative Valuation

Source: Capital IQ

18%

19%

20%

21%

22%

23%

24%

25%

26%

2010 2011 2012 2013 2014

Net PP&E / Revenue

Depreciation / Net PP&E

Figure 29: Historical Ratios for Cintas


8

DMS, which was previously a major segment of Cintas revenue, was completely removed from

the operating income section due its recent spin-off. However, cash flows from the minority stake

of 42% in Shred-It was incorporated into the investment income section.

The DCF was broken down into two stages. The first five years cash flows were projected on a

year-to-year basis, taking into account the effect of factors such as macroeconomic impact,

competitor positioning, short term industry trends and so on. The second phase was constructed

using terminal growth figures derived from projections of long term trends in the industry.

Interest and Investment Income

The major change in investment has been the spin-off of the document business and the

introduction of in the minority stake in Shred-It. From the balance sheet we estimated that the

minority stake is worth around $343M. Because Shred-It is a private company, we used the

dividend yield from Iron Mountain, the only publicly traded company specializing in the document

management business, to estimate dividend yields for the minority stake. We used the average

dividend yield of 3% and a growth rate of 1.9% for estimating the returns on the minority stake.

However, according to the companys management no income was expected from Shred-it in

FY15 due to integration costs.

Interest Expense

According to Cintas management, the targeted debt structure is a Debt/EBITDA ratio between

1.5 and 2. With greater earnings, the maximum debt ceiling for Cintas would gradually increase. This may motivate the management to take on more debt, particularly in the pursuit of

acquisitions. However, the timing and circumstances of such events remains uncertain. Thus, it

was assumed that Cintas would continue to pay the same interest expense as it has paid in the

last year.

Net PP&E and Depreciation

The Net PP&E/Revenue ratio has been falling for the last 5 years from 22% to 20% According

to the company management, this can be attributed to advantages from economies of scale and

the introduction of lean production systems over the last 5 years. This motivated us to estimate

that this ratio will linearly fall from its current level of 17.5% to 16% in 4 years starting from FY16.

In FY15, however, CAPEX was assumed to be $260M to account for the planned introduction

of the SAP system in that year. With cash balances of $826.7M and a current ratio of 3.2, we do

not perceive Cintas to face any difficulty in maintaining this level of CAPEX.

An important assumption for the terminal period is that the CAPEX will equal depreciation. This

is assumed to restrict the real value of assets from inflating perpetually. Observing the very

stable Depreciation/Net PP&E, we assumed it to remain constant at 20% for our forecast period.

NWC/Revenue

NWC/Revenue has fluctuated throughout the last five years, as shown in Figure 34. Since the

introduction of lean production methods in the last few years, total asset turnover has improved

from 0.9 in FY10 to 1.0 in FY14. As a result, it can be expected that the ratio may remain at the

lower end of the fluctuation range in the near future. We thus assumed the ratio to stay constant

at 25%.

Terminal Growth Rate

According to the company management, Cintas has no plans to undertake any major expansion

into markets outside North America in the near future. Thus, given the very high cyclicality of

product demand and the mature nature of the uniform sector in the US, we assumed that the

terminal growth rates of cash flow for Cintas will be closely tied to the long run US GDP growth

and inflation rate. We assumed the long term real GDP growth and long term inflation to be 2%

and 1.5%1 respectively, giving us a terminal growth rate of 3.5%.

1 GDP Forecast Source: Congressional Budget Office; Inflation Forecast Source: IMF.

Figure 33: Summary of Investment Return from Spin-off

Figure 32: Weighted-Average Price per Share

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014

Figure 34: NWC / Total Revenue

Source: Capital IQ

Source: Company data and team estimate

Source: Team estimates

9

WACC

The cost of equity for Cintas is calculated by using the CAPM. Beta is computed as 1.08 by

regressing the weekly return on Cintas stock and S&P 500 of past 5 years. We use a risk free

rate of 2.72% which is the 30 day (as at January 15, 2015) average rate of the 30 year US

Treasury Bond and a market risk premium of 5.4% according to an industry survey2. By using

these data points, we calculate the cost of equity to be 8.55%. In addition, we calculate the

weighted average pre-tax cost of debt to be 4.71% (Appendix 10). The effective tax rate we use

is computed by the average rate from FY01 to FY14 which is 37.38%. This lead to a WACC

estimate of 7.82%.

Sensitivity Analysis of Share Price

To estimate the variability of the share price due to variations of key drivers, we run a Monte

Carlo simulation for all the assumptions in the DCF model (Appendix 19). This produces a

median share price of $73.85. The current stock price of $78.93 is within the one Standard

Deviation range of $66.36 to $82.95 (Figure 36), supporting our HOLD recommendation. We

also find a 56.37% probability of the stock price being in a range of 10% around the current stock

price ($71.03 to $86.82). We also find the key drivers of the stock value to be the WACC and

terminal growth rate, followed by cost margins and revenue growth of RUAP (Appendix 20-21).

The sensitivity table (Figure 37) reveals that a terminal growth rate of 3-4% and a WACC of 7-

9%, respectively, produces a price range of $51.76 to $106.85. However, we are convinced that

if the US economy was to sustain a terminal growth rate as high as 4%, the WACC for Cintas

would also have to increase. Thus we believe that valuations would be bounded within the

shaded area in Figure 37, which is $56.15 to $81.14, with limited upside, but significant

downside, from the current share price. Thus we issue a HOLD recommendation for a stock that

is fairly priced.

2 Source: Market Risk Premium Used in 88 Countries in 2014, Fernandez, Linares and Acin, IESE Business School.

Figure 35: Statistics for Simulated Stock Price

Source: Team estimate

Figure 37: Sensitivity of Share Value from Changes in WACC and Growth Rate

Figure 36: Monte Carlo Simulation of Share Price

10

Appendices

Appendix 1: Cintas Customer End Market

Source: Cintas Corporation

Appendix 2: Segment Revenue Growth Structure Breakdown

RUAP UD FASP DMS

Revenue Growth Organic Acquisition Organic Acquisition Organic Acquisition Organic Acquisition

2014 6.3% - -0.9% - 9.4% 2.7% 6.6% -3.9%

2013 4.9% - 6.3% - 6.8% 4.4% 0.4% 2.9%

2012 6.7% 1.1% 3.1% - 8.4% 1.3% 2.1% 3.3%

Source: Capital IQ

Auto Dealers and Gasoline Svc Stations , 9%

Auto Repair, Svcs, and Parking, 8%

Eating and Drinking Places, 7%

Wholesale Trade -Durable Goods, 7%

Wholesale Trade -Nondurable Goods, 4%

Food Stores, 3%

Construction -Special Trade, 3%

Hotels, Rooming, Housing, Camps,

and Other Lodging Places, 3%

Business Svcs, 3%

Industrial and Commercial

Machinery, and Computer

Equipment, 3%

Fabricated Metal Product, Except Machiinery, 2%

Chemicals and Allied Products, 2%

Motor Freight Transportation, 2%

Health Svcs, 2%

Misc Retail, 2%

Transportation Equipment, 2%

Building Materials, Hardware, Garden Supply & Mobile

Home Dealers, 2%

Other , 33%

11

Appendix 3: Porters Five Forces Model

Bargaining Power over Suppliers: Moderate

-- Cintas purchases 85% of its products from over 400 independent suppliers, which want to keep this relationship

with Cintas, determining the moderate bargaining power over suppliers.

Bargaining Power over Customers: Moderate

-- Low switching costs.

-- Cintas usually provide the 5-10 year contracts, which increase the bargaining power over customers.

Threat of New Entrants: Low

-- Cintas has high brand identity.

-- Requiring high capital investment.

-- Economies of scale.

Threat of Substitute Products: High

-- Ability to make uniform by customers, instead of renting uniforms.

-- Low products differentiation.

Competitive Rivalry within Industry: Moderate

-- 3 main competitors, Aramark, UniFirst, G&K, and Cintas control 54% of the 12.9B market, each representing

25%, 12%, 10% and 7%. Over 400 small competitors share the rest of the market

-- Low switching costs for some customers.

-- The customers loyalty is relative high, since Cintas usually has multi-year contracts for the rental uniform service.

12

Appendix 4: Gross Margin & Revenue Per Employee


Appendix 5: Cintas Customer GDP Growth

2012 2013 2014

I II III IV I II III IV I II Average

Gross domestic product 2.3 1.6 2.5 0.1 2.7 1.8 4.5 3.5 -2.1 4.6 2.2

Finance, insurance, real estate, rental, and leasing -0.67 1.50 0.94 0.37 0.06 0.59 0.77 0.43 -0.85 0.55

Professional and business services 1.32 -0.02 0.28 0.91 -1.04 0.59 1.04 0.48 0.16 0.90

Educational services 0.05 -0.02 0.00 -0.01 -0.07 0.01 0.02 0.00 0.00 -0.03

Accommodation and food services 0.17 -0.06 0.01 0.14 0.08 -0.08 0.04 0.13 0.00 0.08

GDP - Non-Uniform-Using Industry 1.43 0.20 1.27 -1.31 3.67 0.69 2.63 2.46 -1.41 3.10 1.3

Source: US Economic Census

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

2010 2011 2012 2013 2014

CTAS Employee G&K Employee UNF Employee

ARMK Margin UNF Margin G&K Margin

CTAS Margin

13

Appendix 6: Uniform Wearing Jobs in the United States

Appendix 7: U.S. Employment (thousands)

Source: Bureau of labor statistics

134,000

136,000

138,000

140,000

142,000

144,000

146,000

148,000

150,000

2011/01 2011/06 2011/11 2012/04 2012/09 2013/02 2013/07 2013/12 2014/05 2014/10

14

Appendix 8: Segment Operating Margins

UNF 2010 2011 2012 2013 2014

First Aid 6.8% 8.7% 10.6% 11.3% 8.8%

Uniform Rental 12.6% 10.6% 12.0% 14.1% 14.5%

ARMK

Food Service 3.8% 4.1% 4.2% 3.8% 4.6%

Uniform Rental 7.7% 8.8% 8.7% 8.3% 11.6%

Cintas

Uniform Direct Sale 10.4% 11.5% 11.3% 11.5% 10.3%

First Aid, Fire Protection 4.0% 5.7% 8.5% 9.4% 9.5%

Document Management 9.6% 9.7% 7.6% 4.5% 19.8%

Uniform Rental 13.1% 12.6% 14.7% 14.9% 15.7%

G&K

Uniform Rental 7.2% 7.9% 5.2% 9.7% 10.7%

Source: Capital IQ

Appendix 9: Historical and Projected Financial Ratios

2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F

Efficiency Ratio

Inventory Turnover Ratio 3.94 3.84 3.51 3.51 3.53 3.41 3.57 3.60 3.60 3.59

Total Asset Turnover Ratio 0.92 0.92 0.96 1.01 1.03 0.98 0.99 0.99 0.99 0.99

Leverage Ratio

Total Debt to EBITDA 1.39 2.18 1.84 1.70 1.51 1.52 1.48 1.45 1.38 1.32

Debt to Equity Ratio 0.31 0.56 0.60 0.59 0.59 0.56 0.51 0.48 0.45 0.42

Segment Revenue Growth Rate

RUAP -6.74% 4.78% 8.17% 4.54% 5.89% 5.50% 5.25% 5.00% 4.75% 4.50%

UDS -9.80% 8.50% 3.52% 6.30% -1.27% 3.00% 3.00% 3.00% 3.00% 3.00%

FAFP -10.43% 11.52% 10.07% 10.80% 11.69% 11.00% 10.50% 10.00% 9.50% 9.00%

Source: Capital IQ, team estimates

15

Appendix 10: WACC

Cost of Equity

Beta 1.08

Risk Free Rate 2.72%

Market Risk Premium 5.40%

Cost of Equity 8.55%

Pre-tax Cost of Debt

Description Principal Due (USD M) Weight of Debt Type Coupon/Base Rate Weighted Cost

Senior Notes 1 250 17.95% 6.150% 1.10%

Senior Notes 2 300 21.54% 6.125% 1.32%

Senior Notes 3 250 17.95% 2.850% 0.51%

Senior Notes 4 250 17.95% 4.300% 0.77%

Senior Notes 5 250 17.95% 3.250% 0.58%

Other LT Loan 93 6.67% 6% 0.42%

Total 1393 4.71%

Cost of Debt 4.71%

Capital Structure

Number of Shares (In Million) $117.33

Average Share Price (In Million) $78.62

Market Value of Equity (In Million) $9,224.48

LT Debt & current portion of LT Debt (In Million) $1,392.94

Firm Market Value (In Million) $10,617.43

E/V 86.88%

D/V 13.12%

Tax Rate 37.38%

WACC 7.82%

Source: Capital IQ, team estimate, Google Finance

16

Appendix 11: Industry Average Data

For the Fiscal Period Ending 2010 2011 2012 2013 2014

Profitability

Return on Assets % 5.43% 5.45% 5.95% 6.65% 6.98%

Return on Equity % 7.18% 8.85% 10.30% 11.38% 13.10%

Margin Analysis

Gross Margin % 30.30% 30.13% 29.83% 30.35% 31.15%

SG&A Margin % 19.05% 19.05% 18.25% 17.90% 18.18%

Net Income Margin % 4.28% 4.45% 4.65% 5.45% 5.78%

Asset Turnover

Total Asset Turnover 1.03 1.05 1.10 1.08 1.10

Fixed Asset Turnover 5.45 6.03 6.35 6.60 6.83

Short Term Liquidity

Current Ratio 227.50% 235.00% 230.00% 212.50% 237.50%

Quick Ratio 127.50% 125.00% 115.00% 115.00% 130.00%

Avg. Cash Conversion Cycle 69.00 73.75 81.15 80.10 78.60

Long Term Solvency

LT Debt/Equity 119.73% 199.15% 183.80% 182.95% 114.10%

Total Liabilities/Total Assets 50.08% 52.33% 55.23% 53.65% 53.48%

Total Debt/EBITDA 245.00% 252.50% 250.00% 227.50% 222.50%

Growth Over Prior Year

Total Revenue -3.35% 5.65% 5.43% 5.23% 4.13%

Gross Profit -3.38% 5.55% 4.75% 6.28% 7.63%

EBIT -3.33% 8.73% 11.05% 13.98% 8.48%

Net Income -2.00% 50.93% 10.25% 22.33% 21.33%

Common Equity 7.35% -6.30% -1.68% 7.18% 24.75%

Capital Expenditures -25.38% 29.28% 22.55% 19.08% -7.13%

Dividend per Share -3.60% 17.93% 21.37% 17.27% 19.60%

Source: Capital IQ

17

Appendix 12: Historical Segmented Income Statement

2010 2011 2012 2013 2014 2 Year Average 5 Year Average

Revenue Growth Rates

Rental Uniforms & Ancillary Products -6.74% 4.78% 8.17% 4.54% 5.89% 5.22% 3.33%

Uniform Direct Sales -9.80% 8.50% 3.52% 6.30% -1.27% 2.52% 1.45%

First Aid, Safety & Fire Protection -10.43% 11.52% 10.07% 10.80% 11.69% 11.24% 6.73%

Document Management 18.65% 27.00% 5.85% 2.92% 2.29% 2.60% 11.34%

Total Revenue -6.02% 7.42% 7.65% 5.23% 5.45% 5.34% 3.95%

COGS/Revenue

Rental Uniforms & Ancillary Products 56.42% 56.85% 56.61% 57.69% 56.75% 57.22% 56.86%

Uniform Direct Sales 69.89% 69.83% 70.13% 70.74% 71.46% 71.10% 70.41%

First Aid, Safety & Fire Protection 61.10% 58.68% 57.07% 56.73% 56.22% 56.47% 57.96%


Total COGS/Total Revenue 57.78% 57.77% 57.62% 58.60% 57.94% 58.27% 57.94%

SG&A (Including Dep)/Revenue

Rental Uniforms & Ancillary Products 30.48% 30.54% 28.64% 27.43% 27.53% 27.48% 28.93%

Uniform Direct Sales 19.73% 18.66% 18.57% 17.72% 18.29% 18.00% 18.59%

First Aid, Safety & Fire Protection 34.93% 35.64% 34.48% 33.92% 34.27% 34.09% 34.65%


Total SG&A (Including Dep)/Revenue 32.53% 31.93% 30.90% 29.82% 29.23% 29.52% 30.88%

Net Profit from Restructuring 0.00 0.00 -1.60 0.00 89.60 44.80 17.60

Net Interest Expenses 46.90 47.70 68.70 65.30 65.60 65.45 58.84

Income Tax Rate 37.30% 37.10% 36.80% 36.90% 38.40% 37.65% 37.30%

Net PP&E 894.52 946.22 952.59 986.70 855.70 921.20 927.15

Net PP&E / Revenue 25.22% 24.83% 23.22% 22.86% 18.80% 20.83% 22.99%

Depreciation 193.14 193.47 194.17 189.38 190.86 190.12 192.20

Depreciation / Net PP&E 21.59% 20.45% 20.38% 19.19% 22.30% 20.75% 20.78%

NWC 1137.18 1266.64 862.40 1068.57 1175.55 1122.06 1102.07

NWC / Total Revenue 32.06% 33.24% 21.02% 24.76% 25.83% 25.29% 27.38%

Source: Capital IQ

18

Appendix 13: Common Size Balance Sheet

Source: Bloomberg

In Millions of USD except Per Share FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

12 Months Ending 2010-05-31 2011-05-31 2012-05-31 2013-05-31 2014-05-31

Total Assets 3969.736 4351.94 4160.906 4345.632 4462.452

Assets

+ Cash & Near Cash Items 10% 10% 8% 8% 12%

+ Short-Term Investments 4% 2% 0% 0% 0%

+ Accounts & Notes Receivable 9% 10% 11% 11% 11%

+ Inventories 4% 6% 6% 6% 6%

+ Other Current Assets 11% 11% 12% 12% 12%

Total Current Assets 38% 39% 37% 37% 40%

+ LT Investments & LT Receivables 0% 0% 0% 0% 10%

+ Net Fixed Assets 23% 22% 23% 23% 19%

+ Gross Fixed Assets 47% 47% 52% 54% 48%

- Accumulated Depreciation 24% 25% 29% 31% 29%

+ Other Long-Term Assets 39% 39% 40% 40% 30%

Total Long-Term Assets 62% 61% 63% 63% 60%

Total Assets 100% 100% 100% 100% 100%

Liabilities & Shareholders' Equity

+ Accounts Payable 2% 3% 2% 3% 3%

+ Short-Term Borrowings 0% 0% 5% 0% 0%

+ Other Short-Term Liabilities 8% 7% 8% 10% 11%

Total Current Liabilities 10% 10% 16% 13% 14%

+ Long-Term Borrowings 20% 30% 25% 30% 29%

+ Other Long-Term Liabilities 7% 8% 7% 7% 8%

Total Long-Term Liabilities 27% 37% 32% 37% 37%

Total Liabilities 36% 47% 49% 49% 51%

+ Total Preferred Equity 0% 0% 0% 0% 0%

+ Minority Interest 0% 0% 0% 0% 0%

+ Share Capital & APIC 5% 5% 6% 7% 9%

+ Retained Earnings & Other Equity 58% 48% 45% 44% 40%

Total Equity 64% 53% 51% 51% 49%

Total Liabilities & Equity 100% 100% 100% 100% 100%

19

Appendix 14: Common Size Income Statement

Source: Bloomberg

In Millions of USD except Per Share FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

12 Months Ending 2010-05-31 2011-05-31 2012-05-31 2013-05-31 2014-05-31

Revenue 3547.339 3810.384 4102 4316.471 4551.812

- Cost of Revenue 58% 58% 58% 59% 58%

Gross Profit 42% 42% 42% 41% 42%

+ Other Operating Revenue 0% 0% 0% 0% 0%

- Operating Expenses 31% 31% 29% 28% 30%

Operating Income 11% 12% 13% 13% 12%

- Interest Expense 1% 1% 2% 2% 1%

- Foreign Exchange Losses (Gains) 0% 0% 0% 0% 0%

- Net Non-Operating Losses (Gains) 0% 0% 0% 0% -2%

Pretax Income 10% 10% 11% 12% 13%

- Income Tax Expense 4% 4% 4% 4% 5%

Income Before XO Items 6% 6% 7% 7% 8%

- Extraordinary Loss Net of Tax 0% 0% 0% 0% 0%

- Minority Interests 0% 0% 0% 0% 0%

Net Income 6% 6% 7% 7% 8%

- Total Cash Preferred Dividends 0% 0% 0% 0% 0%

- Other Adjustments 0% 0% 0% 0% 0%

Net Inc Avail to Common Shareholders 6% 6% 7% 7% 8%

Abnormal Losses (Gains) 1% 0% 0% 0% -1%

Tax Effect on Abnormal Items 0% 0% 0% 0% 0%

Normalized Income 6% 6% 7% 7% 7%

Basic EPS Before Abnormal Items 0% 0% 0% 0% 0%

Basic EPS Before XO Items 0% 0% 0% 0% 0%

Basic EPS 0% 0% 0% 0% 0%

Basic Weighted Avg Shares 4% 4% 3% 3% 3%

Diluted EPS Before Abnormal Items 0% 0% 0% 0% 0%

Diluted EPS Before XO Items 0% 0% 0% 0% 0%

Diluted EPS 0% 0% 0% 0% 0%

Diluted Weighted Avg Shares 4% 4% 3% 3% 3%

20

Appendix 15: Assumptions for Pro Forma Income Statement and Cash Flow Statement

Initial Value 2015F 2016F 2017F 2018F 2019F 2020F

Revenue Growth Rates

Rental Uniforms & Ancillary Products 6.00% 5.75% 5.50% 5.25% 5.00%

Uniform Direct Sales 3.00% 3.00% 3.00% 3.00% 3.00%

First Aid, Safety & Fire Protection 11.00% 10.50% 10.00% 9.50% 9.00%

Document Management -100.00% 0.00% 0.00% 0.00% 0.00%

COGS/Revenue

Rental Uniforms & Ancillary Products 55.9% 56.3% 56.9% 56.9% 56.9%

Uniform Direct Sales 69.4% 69.8% 70.4% 70.4% 70.4%

First Aid, Safety & Fire Protection 57.0% 57.4% 58.0% 58.0% 58.0%

SG&A (Including Depreciation)/Revenue

Rental Uniforms & Ancillary Products 27% 27% 27% 27% 27%

Uniform Direct Sales 18% 18% 18% 18% 18%

First Aid, Safety & Fire Protection 34% 34% 34% 34% 34%

Minority Stake 343.33

Dividend Yield 3.0%

Dividend Growth Rate 1.9%

Interest Income 0.0 10.5 10.7 10.9 11.1

Income Tax Rate 39% 39% 39% 39% 39%

Net PP&E / Revenue 18.0% 17.5% 17.0% 16.5% 16.0%

Net PP&E 855.7 802.35 827.41 850.75 872.10 891.18

Depreciation / Net PP&E 20% 20% 20% 20% 20%

NWC / Total Revenue 25% 25% 25% 25% 25%

Terminal Growth Rate 3.50%


21

Appendix 16: Forecasted Uses of Funds

2015 2016 2017 2018 2019

Free Cash Flow for Firm 412.0 377.5 384.2 409.2 454.0

Interest Expense 65.5 65.5 65.5 65.5 65.5

Common Dividend Paid 106.2 113.1 120.5 128.3 136.6

Repurchase of Common Stock 150.0 150.0 150.0 150.0 150.0

Change in Cash 90.3 48.8 48.2 65.3 101.8


22

Appendix 17: Pro-Forma Balance Sheet

In $ Millions 2012 2013 2014 2015F 2016F 2017F 2018F 2019F

ASSETS

Cash And Equivalents 339.8 358.0 513.3 603.5 652.4 700.6 765.9 867.8

Accounts Receivable 473.1 505.1 508.4 494.7 527.7 562.3 597.2 633.7

Inventory 704.0 737.2 757.8 742.9 788.0 834.1 880.9 928.3

Prepaid Exp. 21.2 24.5 26.2 24.0 24.9 25.0 24.6 24.9

Total Current Assets 1,538.1 1,624.8 1,805.7 1,865.2 1,993.0 2,122.0 2,268.7 2,454.6

Gross Property, Plant & Equipment 2,171.6 2,342.2 2,143.7 2,250.8 2,441.4 2,634.8 2,830.6 3,027.9

Accumulated Depreciation (1,219.0) (1,355.5) (1,288.0) (1,448.5) (1,614.0) (1,784.1) (1,958.5) (2,136.8)

Net Property, Plant & Equipment 952.6 986.7 855.7 802.4 827.4 850.7 872.1 891.2

Long-term Investments 32.8 28.5 371.9 371.9 371.9 371.9 371.9 371.9

Goodwill 1,485.4 1,517.6 1,267.4 1,394.2 1,505.7 1,596.0 1,659.9 1,693.1

Other Intangibles 82.9 97.0 57.7 79.2 79.2 79.2 79.2 79.2

Other Long-Term Assets 74.0 91.0 104.1 124.9 149.9 179.9 215.8 259.0

Total Assets 4,165.7 4,345.7 4,462.5 4,637.7 4,927.0 5,199.7 5,467.6 5,748.9

LIABILITIES

Accounts Payable 94.8 121.0 150.1 175.3 187.2 200.0 211.2 222.4

Accrued Exp. 352.6 349.9 390.7 436.3 487.3 544.1 607.7 678.6

Curr. Port. of LT Debt 225.6 8.2 0.5 4.3 4.3 4.3 4.3 4.3

Def. Tax Liability, Curr. 2.6 77.2 88.8 98.4 103.5 105.1 111.3 117.5

Total Current Liabilities 675.7 556.3 630.1 714.4 782.2 853.7 934.5 1,022.9

Long-Term Debt 1,059.2 1,301.0 1,300.5 1,300.5 1,300.5 1,300.5 1,300.5 1,300.5

Def. Tax Liability, Non-Curr. 204.6 210.5 246.0 220.4 220.4 220.4 220.4 220.4

Other Non-Current Liabilities 87.1 76.4 92.9 85.5 85.0 87.8 86.1 86.3

Total Liabilities 2,026.5 2,144.1 2,269.6 2,320.8 2,388.0 2,462.3 2,541.4 2,630.0

Common Stock 148.3 186.3 251.8 227.8 293.5 334.9 348.8 348.8

Additional Paid In Capital 107.0 109.8 134.9 148.4 163.3 179.6 197.6 217.3

Retained Earnings 3,482.1 3,717.8 3,998.9 4,277.5 4,569.0 4,859.7 5,166.6 5,489.5

Treasury Stock (1,634.9) (1,850.6) (2,221.2) (2,371.2) (2,521.2) (2,671.2) (2,821.2) (2,971.2)

Comprehensive Inc. and Other 36.7 38.1 28.4 34.4 34.4 34.4 34.4 34.4

Total Common Equity 2,139.1 2,201.4 2,192.8 2,316.9 2,539.0 2,737.4 2,926.1 3,118.8

Total Equity 2,139.1 2,201.4 2,192.8 2,316.9 2,539.0 2,737.4 2,926.1 3,118.8

Total Liabilities And Equity 4,165.7 4,345.6 4,462.4 4,637.7 4,927.0 5,199.7 5,467.6 5,748.9


23

Appendix 18: Pro-Forma Income Statement

In $ Millions 2012 2013 2014 Q1-Q2 2015 Q3-Q4 2015 2015F 2016F 2017F 2018F 2019F

Revenue

Rental Uniforms & Ancillary Products 2,912.3 3,044.6 3,223.9 1,722.3 1,695.1 3,417.4 3,613.9 3,812.6 4,012.8 4,213.4

Uniform Direct Sales 434.0 461.3 455.5 222.7 246.5 469.1 483.2 497.7 512.6 528.0

First Aid, Safety & Fire Protection 415.7 460.6 514.4 280.5 290.5 571.0 631.0 694.1 760.0 828.4

Document Management 340.0 350.0 358.0 - - - - - - -

Total Revenue 4,102.0 4,316.5 4,551.8 2,225.5 2,232.1 4,457.5 4,728.0 5,004.4 5,285.4 5,569.8

COGS

Rental Uniforms & Ancillary Products 1,648.55 1,756.30 1,829.43 948.57 960.39 1,908.96 2,033.18 2,167.88 2,281.70 2,395.78



Document Management 173.22 185.49 193.34 - - - - - - -

Total COGS 2,363.4 2,529.4 2,637.4 1,266.1 1,293.7 2,559.8 2,732.4 2,920.6 3,083.1 3,247.7

Gross Profit

Rental Uniforms & Ancillary Products 1,263.7 1,288.3 1,394.5 773.7 734.7 1,508.4 1,580.7 1,644.7 1,731.1 1,817.6



Document Management 166.8 164.5 164.6 0 0 0 0 0 0 0

Total Gross Profit 1,738.6 1,787.1 1,914.4 959.4 938.3 1,897.7 1,995.6 2,083.8 2,202.3 2,322.2

SG&A (Including Depreciation)

Rental Uniforms & Ancillary Products 834.2 835.2 887.4 474.6 448.1 922.7 975.7 1,029.4 1,083.5 1,137.6



Document Management 140.9 148.6 183.5 0 0 0.0 0.0 0.0 0.0 0.0

Total SG&A 1,199.0 1,221.9 1,330.5 614.3 587.0 1,201.3 1,277.2 1,355.0 1,434.1 1,514.3

Net Operating Profit

Rental Uniforms & Ancillary Products 429.5 453.0 507.1 299.2 286.6 585.7 604.9 615.3 647.6 680.0



Document Management 26.0 15.8 (18.9) 0 0 0 0 0 0 0

Total Net Operating Profit 539.6 565.2 583.9 345.1 351.3 696.4 718.4 728.8 768.2 807.8

Net Gains from Extraordinary Items (1.6) 0.0 89.6 52.3 0 0.0 0.0 0.0 0.0 0.0

EBIT 538.0 565.2 673.5 397.4 351.3 696.4 718.4 728.8 768.2 807.8

Interest Expenses 70.6 65.7 65.8 32.5 33.0 65.5 65.5 65.5 65.5 65.5

Interest and Investment Income 1.9 0.4 0.2 0.0 0.0 10.3 10.5 10.7 10.9 11.1

Net Interest Expense 68.7 65.3 65.6 32.5 33.0 55.2 55.1 54.9 54.7 54.4

EBT 469.3 499.9 607.9 364.9 318.3 630.9 663.3 674.0 713.5 753.4

Income Tax 173.3 184.5 233.4 127.3 118.7 246.0 258.7 262.9 278.3 293.8

Net Profit 296.0 315.4 374.5 364.9 318.3 384.8 404.6 411.1 435.2 459.6


24

Appendix 19: Pro-Forma Cash Flow Statement and DCF Model

In $ Millions 2012 2013 2014 Q1-Q2 2015 Q3-Q4 2015 2015F 2016F 2017F 2018F 2019F

EBIT 538.0 565.2 673.5 397.4 351.3 696.4 718.4 728.8 768.2 807.8

Income Tax 173.3 184.5 233.4 127.3 118.7 246.0 258.7 262.9 278.3 293.8

EBIT (1-T) 366.6 381.1 440.3 270.1 232.6 450.4 470.2 476.7 500.8 525.1

Depreciation 194.2 189.4 190.9 78.2 82.3 160.5 165.5 170.1 174.4 178.2

Total Capital Expenditure 160.9 196.4 145.6 150.0 110.0 260.0 190.5 193.5 195.8 178.2

Ending NWC 862.4 1,068.6 1,175.6 1,295.0 1,204.7 1,114.4 1,182.0 1,251.1 1,321.4 1,392.5

Change in NWC (404.2) 206.2 107.0 119.5 (90.3) (90.3) 67.6 69.1 70.3 71.1

FCFF 804.1 167.9 378.6 78.8 295.2 441.2 377.5 384.2 409.2 454.0

Terminal Value 10,877.4

Total FCFF 804.1 167.9 378.6 78.8 295.2 441.2 377.5 384.2 409.2 11,331.4

NPV of FCFF 9,329.1

Cash 826.7

Long Term Debt 1,392.9

NPV of FCFE 8,762.9

Number of Shares 117.3

Value Per Share $74.69

Adj. Value per Share on Jan 15 $75.46


25

Appendix 20: Monte Carlo Simulation Assumptions


Variables Distribution Minimum Mean Maximum SD

Revenue Growth RUAP Triangular 4.8% 5.5% 6.5%

Revenue Growth UDS Nominal 3.0% 1.0%

Revenue Growth FAFP Triangular 9.0% 10.0% 11.0%

COGS Margin RUAP Triangular 56.2% 56.9% 57.4%

COGS Margin UDS Triangular 70.0% 70.4% 70.6%

COGS Margin FAFP Triangular 57.4% 58.0% 58.4%

SG&A Margin RUAP Triangular 26.8% 27.0% 27.4%

SG&A Margin UDS Triangular 17.7% 18.0% 18.3%

SG&A Margin FAFP Triangular 33.8% 34.0% 34.2%

COGS Margin Improvements 2015F Nominal 1.0% 0.05%

COGS Margin Improvements 2016F Nominal 0.6% 0.03%

Net PP&E / Revenue Triangular 16.0% 17.0% 18.0%

Depreciation / Net PP&E Triangular 18.0% 20.0% 22.0%

NWC / Total Revenue Triangular 24.0% 25.0% 26.0%

Terminal Growth Rate Nominal 3.50% 0.25%

WACC Nominal 7.82% 0.25%

26

Appendix 21: Tornado Chart for Share Price Sensitivity


8.14%

3.82%

57.16%

27.25%

6.09%

25.55%

58.20%

34.11%

70.49%

18.17%

10.55%

21.11%

4.28%

1.064%

0.638%

17.55%

7.50%

3.18%

56.49%

26.91%

5.14%

24.45%

57.64%

33.89%

70.15%

17.83%

9.45%

18.89%

1.72%

0.936%

0.562%

16.45%

65 70 75 80 85

WACC

Terminal Growth Rate

COGS Margin RUAP

SG&A Margin RUAP

Revenue Grwoth RUAP

NWC / Total Revenue

COGS Margin FAFP

SG&A Margin FAFP

COGS Margin UDS

SG&A Margin UDS

Revenue Grwoth FAFP

Depreciation / Net PP&E

Revenue Grwoth UDS

COGS Margin Improvements 2015F

COGS Margin Improvements 2016F

Net PP&E / Revenue

Upside Downside

27

Appendix 22: Statistics for Sensitivity of Share Price to Input Variables


Share Price Input

Input Variable Downside Upside Range Explained Variation

Downside Upside Base Case

WACC $ 80.11 $ 68.33 $ 11.77 53.9616% 7.50% 8.14% 7.82%

Terminal Growth Rate $ 69.05 $ 79.27 $ 10.22 40.6503% 3.18% 3.82% 3.50%

COGS Margin RUAP $ 75.44 $ 72.36 $ 3.07 3.6750% 56.49% 57.16% 56.85%

SG&A Margin RUAP $ 74.45 $ 72.90 $ 1.55 0.9350% 26.91% 27.25% 27.05%

Revenue Grwoth RUAP $ 73.34 $ 74.30 $ 0.97 0.3654% 5.14% 6.09% 5.58%

NWC / Total Revenue $ 74.18 $ 73.38 $ 0.80 0.2498% 24.45% 25.55% 25.00%

COGS Margin FAFP $ 74.05 $ 73.56 $ 0.50 0.0954% 57.64% 58.20% 57.95%

SG&A Margin FAFP $ 73.88 $ 73.68 $ 0.20 0.0151% 33.89% 34.11% 34.00%

COGS Margin UDS $ 73.89 $ 73.70 $ 0.20 0.0148% 70.15% 70.49% 70.35%

SG&A Margin UDS $ 73.88 $ 73.69 $ 0.19 0.0145% 17.83% 18.17% 18.00%

Revenue Grwoth FAFP $ 73.87 $ 73.69 $ 0.17 0.0118% 9.45% 10.55% 10.00%

Depreciation / Net PP&E $ 73.71 $ 73.85 $ 0.14 0.0075% 18.89% 21.11% 20.00%

Revenue Grwoth UDS $ 73.73 $ 73.82 $ 0.09 0.0032% 1.72% 4.28% 3.00%

COGS Margin Improvements 2015F $ 73.77 $ 73.80 $ 0.03 0.0003% 0.936% 1.064% 1.000%

COGS Margin Improvements 2016F $ 73.77 $ 73.79 $ 0.02 0.0001% 0.562% 0.638% 0.600%

Net PP&E / Revenue $ 73.77 $ 73.79 $ 0.02 0.0001% 16.45% 17.55% 17.00%

28

Disclosures:

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company.

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Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by

the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its

accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any

person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or

sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society

of Columbus, CFA Society of Cincinnati, CFA Institute or the CFA Institute Research Challenge with regard to this

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