Activist short seller Ben Axler sent us an email this morning with the details of his short case against Cintas Corporation (NASDAQ:CTAS). We haven’t verified the accuracy of his statement and Cintas Corporation hasn’t responded Axler’s claims. Here is what Axler said in the email:
“Spruce Point is pleased to issue a unique investment research opinion on Cintas Corp. (“CTAS” or “the Company”), a uniform rental, safety, and fire inspection service company. The report outlines why we believe shares face 60% – 75% downside risk to approximately $69 to $107 per share.
…Based on a new public FOIA and our research, we have evidence that Cintas’ Fire Protection Services was charged with fraud and is causing a public safety hazard by having workers conduct fire and safety inspections without proper licenses or permits, and falsifying inspections. We call on Cintas to conduct a review to assure stakeholders it’s not a systemic issue placing Cintas in non-compliance with its credit agreement. Fire Protection is its fastest growing segment. Our research indicates that Cintas’ has a poor reputation, and that new private equity and public money is entering the space, which will compress its growth and margins.
In addition, we believe that Cintas is facing financial strain in its core uniform rental business from its 2017 levered acquisition of G&K for $2.1bn. Cintas has tried to sell investors on a “Beat and Raise” story post acquisition, but our forensic analysis reveals little to be excited about. It appears management may have suppressed G&K revenue, and misguided expenses. Furthermore, it changed capital priorities to favor repurchases, and slashed tax rates to engineer the appearance of out-performance. In total, we find zero out-performance in Cintas’ FY 2019 results.
Cintas trades at a 1% premium to average analyst price targets, and at a multiple well in excess of its sum-of-the-parts based on precedent transactions or peer multiples. With sell-side analysts failing to acknowledge any of these problems, or conduct a nuanced valuation of its various business segments to reflect divergent growth and risk profiles, our variant view suggests 60%-75% downside.”
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I don’t know much about Spruce Point Capital. Some sources claim that it returned 24% in 2018 and regulatory filings show that Axler raised $123 million from investors, Spruce Point Capital filed a single 13F and disclosed owning no long equity positions in publicly traded stocks. What I know about Spruce Point is that Ben Axler emailed us some of his short thesis in the past. Here is how those stocks performed since then:
– Hill-Rom Holdings, Inc. (NYSE:HRC): emailed on October 29th. The stock’s price increased from $100.52 on October 28th to $104.62 through November 12th.
– Monolithic Power Systems, Inc. (NASDAQ:MPWR): emailed on October 9th. The stock’s price increased from $141.81 on October 8th to $162.55 through November 12th.
– Premier, Inc. (NASDAQ:PINC): emailed on September 25th. The stock’s price increased from $33.94 on September 24th to $36.36 through November 12th.
– Church & Dwight (NYSE:CHD): emailed on September 5th. The stock’s price declined from $80.19 on September 4th to $67.05 through November 12th.
– Penumbra, Inc. (NYSE:PEN): emailed on July 30th. The stock’s price declined from $179.49 on July 30th to $167.03 through November 12th.
These are the last 5 email pitches we received from Ben Axler and these stocks had a mixed performance. Based on the performance of these stocks it doesn’t look like Spruce Point is going to beat the market by 30 percentage points in 2019. Ben Axler is pitching way too many short ideas and only 2-3 of them can really be his “best short ideas” in a calendar year. This means investors’ usual initial reaction of selling Axler’s short picks may not mean that Axler is right and these stocks will continue their declines.
Having said this I personally initiated a small speculative short position in Cintas Corporation shares for two reasons. CTAS stock doesn’t attract a lot of hedge fund interest for a $25 billion stock and CTAS shares trade at a forward earnings ratio of 26. So, if Axler’s thesis is wrong, I am probably risking 10-20% downside.
Disclosure: I have a short position in CTAS shares which I can close out any time based on Cintas’ response and my further research on the credibility of Axler’s claims. This article is originally published at Insider Monkey.
