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Fundamental Favorite Cintas (CTAS) Draws Call Small, High-Dollar Call Flow Ahead of Potential Breakout Move

by | Aug 31, 2021

Cintas (CTAS) setting up well with shares in a narrowing bull flag under $396 and a fundamental favorite that has seen some smaller, high-dollar call buys lately that stand out. On 8/30, a trader bought 400 October $400 calls for $11.20 and follows a buyer of 150 Feb. $390 calls on 8/27 for $30.60. The December $340 calls remain in OI from February 145X for $48.20, more than $700K. Shares have a measured move on a breakout to $416. The longer-term picture shows a nice consolidation forming above the recent weekly breakout that has a continuation target above of $435. The $40.35B company trades 33.7X earnings, 5.67X sales, and 35X FCF with a small yield. CTAS is a leader in corporate and service uniforms as well as ancillary services like mats, mops, and shop towels. They also offer restroom cleaning, carpet and tile cleaning, first aid services, and fire protection products. CTAS is a steady grower and leader in their market and benefitting from reopening tailwinds, especially as more buildings build out cleaning and sanitizer services. CTAS has been expanding into the healthcare vertical and seeing their value proposition resonate with hospitals over the last year with scrubs, isolation gowns and cleaning products in-demand. They feel they remain in the early innings of penetrating that market and COVID likely accelerates the decision to outsource more uniforms for institutions. Currently, less than 10% of their revenue comes from hospitals, so a lot of opportunity in the $5B+ market.  Analysts have an average target for shares of $395 with a Street High $425. Baird upgrading shares to Outperform on 7/16 as guidance is conservative and its balance sheet is flush with optionality. Goldman has a $411 PT and on the Conviction Buy list. The firm thinks the domestic uniform rental industry is undergoing an attractive recovery, with revenues on track to reach pre-Covid levels by the end of 2021. Sustained strength in hygiene demand, new hygiene customers into the non-programmer market for uniform rentals and penetration of the healthcare industry represent structural tailwinds to top-line growth. Short interest is 1.2%. Hedge fund ownership fell 5% last quarter.