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Synergies Make Cintas' Acquisitions Pay Off

By Dan Caplinger - Dec 22, 2017 at 10:48AM

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The latest report from the uniform rental services company showed nice gains in revenue and earnings.

Unemployment is at its lowest levels in decades. Having more Americans at work means more business for Cintas (CTAS -2.22%), with its uniform rental and facility services seeing increased demand when more employees need to take advantage of the company's products. The outlook for the job market has been so good for so long that Cintas seized the opportunity to expand its business with its acquisition of G&K last year.

Coming into Thursday's fiscal second-quarter financial report, Cintas shareholders were hoping that the company would keep reaping the benefits of that acquisition, producing cost savings that could translate into higher profits. Cintas' results were encouraging, and the synergies that it has found from integrating G&K into its operations bode well for its future. Let's take a closer look at Cintas' latest numbers and what they say about its prospects.

Cintas-branded portable safety washing system.

Image source: Cintas.

Cintas makes strong gains

Cintas' fiscal second-quarter results continued the upward momentum that we've seen in the company's results lately. Revenue rose 26% to $1.61 billion, which was slightly better than what most of those following the stock had expected. Net income from continuing operations was higher by 13% to $137.7 million, and that translated into adjusted earnings of $1.31 per share, topping the consensus forecast among investors for $1.27 per share.

Cintas saw favorable trends play out both for its core business and its recent acquisition. Although G&K produced most of the rise in Cintas' top line, organic revenue growth came in at almost 8%, sustaining a solid pace for the company. The first aid and safety services segment saw sharper gains organically, with segment revenue rising 11%. The uniform rental and facility services business wasn't too far behind, with organic top-line gains of more than 7%.

G&K's influence also made itself felt in the mix of business that Cintas got during the quarter. Uniform rental and facility services sales climbed at more than a 30% clip during the quarter, compared to just over 10% for Cintas' other businesses.

Yet costs still remain a consideration for the company. In uniform rental and facility services, costs rose at a faster pace than revenue, leading to slight gross margin compression. The picture was more favorable with first aid and safety services, where costs were up less than 8%, but a 30% jump in overhead expenses also weighed on operating income and pointed to the need for further efficiency efforts.

CEO Scott Farmer was nevertheless encouraged by Cintas' accomplishments. "Our pace [in integrating G&K] increased in the second quarter," Farmer said, "and we realized about $14 million in synergies, which is almost twice the amount achieved in the first quarter." The CEO also noted that enterprise resource planning system advances showed significant progress, pointing toward an on-time implementation in the future.

What's next for Cintas?

Cintas' enthusiasm showed up earlier in the month when it gave investors a huge dividend increase. The company said it would raise its payout by 22% to $1.62 on an annual basis. Most people don't think of Cintas as a major dividend stock because it doesn't make quarterly dividend payments, but the boost marked the 34th consecutive year that the uniform rental specialist has rewarded shareholders with a larger payout.

Cintas also increased its full-year fiscal 2018 guidance once again. New projections for sales of between $6.365 billion and $6.43 billion were about $30 million to $40 million higher than its guidance three months ago. Cintas expects earnings to come in between $5.39 and $5.46 per share, higher by $0.08 to $0.09 per share. Although the numbers omit any further costs from the G&K integration, they also leave out possible favorable impacts from tax reform measures.

Cintas investors were initially pleased with the results, and the stock opened higher by 2% before giving up those gains early in Friday's trading session.The U.S. economy is performing well, and as long as that continues, Cintas will be in a good position to benefit in 2018 and beyond.

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CTAS
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