Why Shares of Cintas Corporation Stock Popped Last Week

Cintas Corporation’s earnings and outlook are fitting for success, but caution is warranted.

Mar 24, 2014 at 6:33PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of uniform maker Cintas Corporation (NASDAQ:CTAS) were looking spiffy up 4% higher following the company's fiscal third quarter earnings last week.

So what: Cintas Corporation reported that revenue jumped 5% to $1.13 billion due in part to acquisitions and an extra workday. Excluding these, revenue still popped 3.1%. Operating income climbed 12.9% to $150.2 million. Earnings per share leaped 15% to $0.69.

Now what: CEO Scott D. Farmer pointed out that the double-digit earnings gains came despite the severe winter weather. This created a headwind which is obviously temporary.

Cintas Corporation is guiding for full fiscal year revenue of between $4.55 billion and $4.575 billion along with earnings per share of between $2.75 and $2.79. This is excluding any potential new buybacks that may be announced, but it also assumes no sudden drop in the economy.

Cintas Corporation's business is very sensitive to changes in the economy, especially employment, and is therefore a highly cyclical business.

The guidance is in line with analyst estimates. This puts the expected P/E ratio in the 20s with 10% earnings growth. For 2015, analysts expect earnings growth of an additional 10% to 11%.

Given the cyclical nature of the business, Fools should consider sitting this one out as the P/E looks a bit pricy at around twice the growth rate. Generally stocks with a P/E in the 20s should have expected growth of 20% or more. This further suggests that no risks of a potentially weak economy are priced in.

The flip side is if the economy takes an unexpected jump forward, Cintas Corporation may find itself with earnings accelerating faster than even it expected. For that reason, though it may look too pricy to own the stock, betting against it is also dangerous.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Cintas. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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