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Cintas (CTAS) VS Automatic Data Processing (ADP): Both Are Buys, One’s A Value

Wednesday, July 8, 2020 | Thomas Hughes
Cintas (CTAS) VS Automatic Data Processing (ADP): Both Are Buys, One’s A ValueThe Labor Market Is Hot, Hot, Hot

One of the trends emerging within the economy is a very strong rebound within the labor market. Of the 30 million-odd jobs that were lost during the pandemic, the data shows we are well on the way to recovering most of them. Some have been lost forever, don’t get me wrong, it will take time to get the employment situation back to where it was before the pandemic, but the labor market is hot.

That’s why it’s smart to consider a play on the labor markets to ride out the rebound. I’ll be honest, when it comes to the labor-related stocks Cintas (NASDAQ: CTAS) is by far my favorite, but that doesn’t mean its the best buy now or for every portfolio. Automatic Data Processing (NASDAQ: ADP), a less-direct play on labor markets, could be the better choice but it depends on what you are looking for.

On the one hand, Cintas is in business servicing the needs of employers and employees through uniform, safety, and first aid services. On the other is ADP, a technology company also servicing the needs of employers and employees, if in different ways. If one were to have an upper hand in the pandemic it is probably Cintas. Both are well-positioned for the rebound but Cintas has a tailwind. Personal-Protection-Equipment, Social-Distancing measures, Sanitation, and First-Aid are going to be in much higher demand than in pre-COVID times.

The Dividend; Higher Yield/Lower Growth Or Lower Yield/Higher Growth

Both companies pay a dividend and a very safe one at that. The biggest difference in the payouts is the approach to yield and growth. ADP has been increasing its dividend for 44 years. At this stage in the game, ADP s more concerned with sustaining annual increases and keeping the payout rato low than it is aggressive growing the dividend. Based on current consensus estimates ADP is going to run a roughly 65% payout ratio this year and next with an expected distribution growth rate near 13%.

Now, a 13% distribution CAGR is nothing to sneeze at until you compare it to Cintas near 25% CAGR. Cintas is also a long-term dividend-grower, it is a Dividend Aristocrat with 28 years of consecutive increases, and it has a better grip on its payout. The payout ratio at Cintas is running in the low 30% range over the next two years suggesting substantive increases, if not aggressive increases, will continue.

Neither company has anything to fear from the balance sheet, both are well-capitalized with low debt and high-coverage. The real difference? Cintas yields less than 1.0% while ADP pays closer to 2.5%.

Growth In 2020? Really?

Oddly enough, both of these companies are expected to produce growth in 2020, despite the pandemic. Before I move on, the fiscal year’s for these companies are in near-perfect alignment so they are very comparable. While both are expected to see revenue growth near 2.0% and EPS growth near 5% in 2020 there is a differentiating factor. Unless the analyst’s consensus is off, Cintas will see its revenue and earnings shrink in 2020 while ADP will see its revenue and earnings grow modestly.

What I want to point out, and this goes for both Cintas and ADP, is that most companies reporting 2Q results so far are beating consensus and all the economic data is stronger than expected. If the analysts are far-wrong about either or both of these companies we could easily see blow-out results when these companies report in one week (Cintas) and three weeks (ADP)

The Technical Outlook: Lagging ADP Is Undervalued

Looking at it from the technical perspective ADP is lagging not only the broad market but Cintas as well. Considering ADP’s superior yield and outlook for growth I am a bit surprised but that is offering a value today. Regarding valuation, ADP is trading at only 25X times this years, nearly 26X next year’s earnings, while Cintas is trading in the 33X to 37X range.

Cintas is understandably a better quality in terms of the balance sheet but not 10X earnings better. This has ADP set up for a multiple-expansion, possibly sparked by Q4 earnings, that could lift the stock 20% by the end of the year. Bottom line, both company’s are a great buy for riding out the rebound but ADP is clearly a better value, has a higher yield, and a better outlook for growth.

Cintas (CTAS) VS Automatic Data Processing (ADP): Both Are Buys, One’s A Value

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Automatic Data Processing (ADP)2.0$140.25+0.5%2.60%24.61Hold$158.64
Cintas (CTAS)1.5$319.61-0.1%0.80%39.46Hold$266.33
Compare These Stocks  Add These Stocks to My Watchlist 

7 Stocks That Risk-Averse Investors Can Buy Now

If the title of this presentation piqued your interest, then you understand that there’s no such thing as risk-free investing. And that’s particularly true when you’re investing in stocks. The truth is sometimes the best thing that can happen is that your portfolio performs less badly than the market.

The goal of the risk-averse investor is not to avoid stocks, it’s to ensure that you retain the capital you gain, even if that means your portfolio does not grow as fast or as far as more aggressive stocks. You have to have a very low FOMO (fear of missing out) level.

With that in mind, there are still ways you can profit from this market without throwing caution to the wind. One is to look for stocks that have a low beta. Beta is a measure of a stock’s volatility in comparison to the rest of the market. A stock with a beta of 1, for example, means that investors can expect the price movement of the stock to be closely correlated to the market. A beta of more than 1 means the stock price will be more volatile (higher highs but lower lows).

What you’re looking for is a beta of less than 1. This means that the stock is less volatile than the broader market. While this may mean lower highs, it also generally means lower lows.

And many of these stocks are in defensive sectors. This means that their performance is consistent under both good and bad economic conditions.

View the "7 Stocks That Risk-Averse Investors Can Buy Now".

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