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Cintas Dressed for Success in the Second Quarter of 2020

By Anders Bylund - Dec 18, 2019 at 8:49AM

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The leader in business uniform rentals and related business services stomped Wall Street's earnings expectations in this report.

Business services specialist Cintas (CTAS 3.52%) reported earnings this Tuesday evening, covering the results of the second quarter in fiscal year 2020. The provider of uniform rentals, fire safety services, and restroom supplies for corporations of every size crushed Wall Street's expectations and raised its full-year guidance targets.

Cintas' second quarter by the numbers

Metric

Q2 2020

Q2 2019

Change

Analyst Consensus

Revenue

$1.84 billion

$1.72 billion

7.3%

$1.82 billion

GAAP net income

$246 million

$243 million

1.3%

N/A

Adjusted earnings per share (diluted)

$2.27

$1.76

29%

$2.03

Data source: Cintas. GAAP = generally accepted accounting principles.

Uniform rental and facility services recorded 5.7% year-over-year revenue growth, stopping at $1.47 billion. Other products and services saw 14% higher sales, adding up to $374 million. The typically sleepy direct sales of uniforms posted a 25% revenue increase in the second quarter, driven by a large order of branded garments from an unnamed Fortune 100 client. This order alone explains the bulk of Cintas' surprising growth across the board.

The company also widened its profit margin to a significant degree. Cintas' operating margin stood at 16% in the second quarter of fiscal 2019 and 18% in this week's report for Q2 2020. The company benefits from lower oil prices, which limits the costs of running its massive distribution and product delivery network. Cintas is also still integrating the $2.2 billion acquisition of fellow uniforms provider G&K Services, a multiyear project that continues delivering synergies and cost-cutting opportunities along the way.

Based on these solid second-quarter results, Cintas boosted its full-year revenue guidance by a hair, lifting the midpoint of the guidance range from $7.30 billion to $7.31 billion. The earnings projection increased by a larger margin, from roughly $8.52 per share to $8.70 per share.

A chef and three waiters, all smiling, standing in a restaurant kitchen

Image source: Getty Images.

If you sell quality products, they will come

Cintas expects the G&K Services buyout to deliver annual cost savings of more than $130 by calendar year 2021. The company already holds a dominant market share with 1 million customers under contract, but the addressable market remains much larger, with 16 million different businesses in North America. Selling uniform rentals and other services to the unserved majority represents a massive growth opportunity for the long term, and Cintas is going after that target with a combination of large buyouts and a quality-first attitude.

On the earnings call, when asked why new clients are choosing Cintas over other alternatives, CEO Mike Hansen underscored that commitment to quality:

We need to be doing a pretty good job of showing why they are moving into a Cintas garment and what are the features and functions of that new garment. It may be that it's softer, it may be that fits a little bit better and may be that it's the fabric breezes a little bit better. And generally when we explain those kinds of features to the customer, they get it and they understand, and it doesn't take very long for them to be in those garments to recognize that there is a quality difference.

The market reaction

Cintas shares rose slightly on the news, poised to open Wednesday's trading near $267 per share. That's a 61% increase in 52 weeks and a 260% gain over the last five years. On top of all of that, Cintas saw the strong report coming and boosted its dividend payouts by 24% a couple of weeks ago. The company is now up to 36 years of uninterrupted annual dividend increases, making it a true Dividend Aristocrat.

That's another rock-solid earnings report in the books, proving that Cintas can take a macroeconomic licking and keep on kicking. The stock may not be terribly cheap, trading at 27 times forward earnings, but you get what you pay for.

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CTAS
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