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Cintas Sees More Growth Ahead for 2019

By Dan Caplinger – Mar 22, 2019 at 8:41AM

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The business products and services company is taking full advantage of the growing economy.

The U.S. economy has been strong for a very long time, and in particular, numbers related to the labor force haven't looked this good in decades. That's been good news for Cintas (CTAS 2.87%), because key businesses like providing facilities-related services to corporate clients and offering rented uniforms to their employees tend to be linked closely to the employment picture across the nation. Despite pressures from deteriorating global macroeconomic conditions, the state of things closer to home has been more favorable and has supported Cintas' business.

Coming into Thursday's fiscal third-quarter financial report, Cintas shareholders were hoping that the company would be able to keep delivering a positive picture on both its past performance and its prospects ahead. Cintas didn't give investors an unequivocal signal of strength, but its numbers were extremely encouraging for those seeking growth in the coming year and beyond.

Person in Cintas uniform pouring red liquid into a dispenser.

Image source: Cintas.

A slightly mixed picture for Cintas

Cintas' fiscal third-quarter results were solid, although they didn't live up to everything that those watching the company had wanted. Revenue of $1.68 billion was up nearly 6% from year-ago levels, but it lagged slightly behind the $1.69 billion consensus forecast among investors. On the bottom line, though, Cintas looked much stronger. Net income of $203.3 million was down a third due to the positive tax reform-related impact in the third quarter of the previous fiscal year, but after accounting for that and other extraordinary items, adjusted earnings of $1.84 per share were up almost 35% from last year's period and topped the $1.71 per share that investors had expected to see.

Cintas continued to see good performance throughout its operations. Organic growth across the business came in at 6%, with a 6.2% growth rate for the key uniform rental and facility services business. Cintas got even better results from its first aid and safety services division, where organic sales were higher by 8.6%.

Trying to maximize efficiency paid off once again for Cintas. The company reported gross margin that climbed almost a full percentage point to 44.9% during the period, with gains from both of its segments contributing to the overall rise. Despite expenses related to integrating recent mergers, Cintas managed to boost operating margin by nearly 4 percentage points during the quarter, and even though much of that was related to a one-time payment of bonuses to Cintas employees last year, a full percentage point came from internal efforts.

CEO Scott Farmer explained the cause of the slight sales shortfall. "Customer closures caused by the severe weather and the holiday calendar during the quarter created challenges within our route schedules," Farmer said, yet "despite these challenges, we still delivered solid organic growth for the quarter." The CEO also noted that ongoing efforts to get its operations unified under enterprise resource planning have kept moving forward and are delivering results.

What's ahead for Cintas?

Cintas also believes that its stock is a good bargain right now. Farmer noted that in addition to boosting its annual dividend by almost 27% from the previous year's payout, Cintas also spent $100 million to buy back its stock during the fiscal third quarter. That brought the total spent so far this fiscal year to almost $547 million, leaving $863 million available for future repurchases.

Cintas updated its guidance, with moves in both directions for key metrics. The company guided toward the lower end of its previous revenue projections, setting a range of $6.87 billion to $6.885 billion that reduced the top number by $25 million. However, earnings guidance was higher, with adjusted earnings from continuing operations coming in between $7.42 and $7.48 per share. That's $0.10 to $0.12 per share higher than what Cintas predicted three months ago for the full year.

Cintas investors seemed to focus on the sales numbers, and the stock dropped between 1% and 2% in premarket trading Friday following the Thursday afternoon announcement. Yet with plenty of enthusiasm for the future and strong economic tailwinds helping its businesses, Cintas has the potential to bounce back from minor setbacks and stoke stronger growth for the remainder of the year.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.

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