Uniform-rental behemoth Cintas (CTAS 4.59%) releases the first earnings report of its new fiscal 2020 year on Sept. 24 after the markets close for trading. The company is coming off a record fiscal year, but to longtime shareholders, this isn't exceptional: Cintas has set revenue and net income records in 48 out of the last 50 years. Below, let's briefly review key areas investors should focus on when the outperforming services company issues its first scorecard of 2020.
Fiscal 2020 guidance: The numbers
Cintas expects slightly slower revenue growth versus the 7.4% year-over-year top-line expansion it chalked up last year. The company's aiming for revenue improvement of 5% to 6.1%, which translates to an annual revenue range of $7.24 billion to $7.31 billion. Last quarter, when issuing this goal, management observed that fiscal 2020 will have one fewer workday than fiscal 2019. On a "constant workday basis," Cintas is actually expecting to advance its revenue in a range of 5.4% to 6.5%.
Turning to the bottom line, the organization booked diluted earnings per share (EPS) of $7.60 in 2019. For the current year, management anticipates that Cintas' earnings will land between $8.30 and $8.45, good for expansion of 9.2%-11.2%.
Cintas doesn't issue quarterly guidance; thus, its first-quarter numbers will be taken within the larger context of the annual revenue and earnings guidance.
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Margins, merger synergies, and a modern "ERP" system
For a facilities products-and-services provider, Cintas boasts an enviable gross profit margin. Last year, the company generated gross margin of 45.4%, an improvement of nearly half of a percentage point over the prior year. Sustaining this relatively high level of profitability is central to the company's earnings projections, and gross margin is one of the first numbers investors are likely to check after reviewing revenue and earnings on the 24th. It's likely to fall in the 45%-46% range; anything less will be closely scrutinized.
Investors will also look for progress in the company's years-long effort to derive merger synergies from its $2.2 billion acquisition of uniform rental competitor G&K Services in March 2017. Cintas is still incurring integration expenses as it finishes combining its service platforms with G&K's, but it's also realizing cost savings. Last year, management quantified $100 million in realized cost synergies, and in fiscal 2020, Cintas is aiming for $135 million. Expect management to discuss integration-related productivity on the company's post-earnings conference call.
While we're on the topic of margins and productivity, Cintas is two-thirds of the way through implementation of a modern enterprise resource planning (ERP) system. The company is investing in software provided by German ERP giant SAP, and management expects that the rollout of the new system, which has been a massive undertaking, will be completed in the new fiscal year.
The transition to a unified ERP framework should benefit Cintas greatly, as it's expanded its top line through the years not simply via organic growth, but through the serial acquisition of smaller competitors. A wealth of opportunity exists to clean up a patchwork of disparate operations and accounting systems that continue as a legacy of these acquisitions, and for the company to derive useful analytics from a single shared resource.
This is a topic that management has treated at length in recent earnings conference calls, as executives are hopeful that a robust ERP product will help the organization find additional avenues to profitability. Cintas is the rare large-cap company that has performed more like a bona-fide growth stock investment in recent years: Shares have soared 275% cumulatively over the last five years.
Due to the potential of the ERP initiative to help the company continue its impressive earnings growth, investors can expect that management will again provide updates on the final leg of implementation in the conference call following the release of next week's results.
