Workwear and facilities products giant Cintas (NASDAQ:CTAS) is set to issue its fiscal fourth-quarter 2019 earnings report to investors on July 16, after the close of the trading day. Cintas shares have soared 44% year to date; thus, the upcoming release is likely to either support further gains or give shorter-term investors an excuse to book profits.
Let's take a brief look at the performance factors supporting Cintas' share price ascent and review what investors can expect from its wrap on the current fiscal year.
Fiscal 2019 background: investors reward above-average performance
Cintas has won plaudits from investors over the last several quarters by expanding revenue even while successfully integrating the operations of G&K Services, a uniform rental specialist the company acquired for $2.2 billion in March 2017.
Cintas has improved year-over-year organic growth by roughly 6% this year. In the organization's third-quarter earnings conference call, management acknowledged that G&K Services is growing at a slightly slower pace than Cintas' legacy uniforms rental business, but it expects crisper growth ahead as integration activities continue. Meanwhile, the smaller operating segment, which includes first aid and safety services, has recently achieved high-single-digit organic revenue growth, because of the aggressive signing of new national accounts and the uptake of additional products and services by existing customers.
As I've recently discussed, Cintas is also exhibiting admirable profitability, with gross profit margin hovering around 45% in recent quarters. This is a solid mark within the uniform rental and services industry, which isn't noted for breathtaking profitability. Contrast Cintas' gross profit power to smaller competitor UniFirst, which typically books quarterly gross margin of around 16%.
Cintas' relatively high margins have recently enabled it to generate nearly as much in operating cash flow as it's recording in net income per generally accepted accounting principles (GAAP). In the first nine months of the fiscal year, the company booked $671 million in operating cash from $659 million in net income. In the comparable period in fiscal 2018, Cintas produced $661 million in operating cash from $656 million in recorded net income.
The numbers: Benchmarks appear to be within reach
Cintas' full-year financial targets, shared with investors last quarter, are as follows:
- Revenue of $6.870 billion to $6.885 billion, which will mark a year-over-year growth rate of 6% to 7%.
- Operating margin of 17% to 17.5%.
- Earnings per share (EPS) from continuing operations -- excluding certain items -- of between $7.42 and $7.48.
The excluded items in the EPS projection include $0.09 in integration expenses related to the G&K Services acquisition and $0.47 from a non-recurring gain on sale of an investment.
To meet its full-year revenue projection at the midpoint of the range, Cintas will need to exceed the $1.67 billion top line chalked up in the fourth quarter of 2018 by 6.5%, which is roughly in line with its 6.1% year-over-year revenue growth rate through the first three quarters of 2019 -- an achievable benchmark.
Similarly, if operating margin and per-share earnings follow the cadence of the first three quarters, the company will be in striking distance of its full-year targets. With one quarter to go, management is probably confident that it can meet its fiscal 2019 targets: Surprises, if any, may fall to the upside.
Watch share repurchases
Cintas' year-end EPS projections, in addition to excluding the items discussed, also don't incorporate any share repurchase activity. The company has been an active buyer of its own shares on the open market this year, having repurchased $608 million of its stock in the first nine months of fiscal 2019. Cintas has roughly $863 million remaining on its current share repurchase authorization, and management indicated a willingness to continue to buy back shares during the company's third-quarter earnings call.
As I mentioned, rising organic revenue and healthy profit margins are producing ample cash flow for the company each quarter, and it's possible that management will put some of this cash to work to buy back shares in the final three months of the year. Further repurchase activity will reduce share count in the fourth quarter and could contribute to the company's meeting -- or exceeding -- its stated goal of netting between $7.42 and $7.48 in diluted EPS.