What happened
Shares of uniform specialist Cintas Corporation (CTAS 0.24%) rallied 28% in April according to data from S&P Global Market Intelligence. That was more than twice the 13% or so gain seen in the S&P 500 Index during the month. However, when you pull back a little, Cintas was lower by roughly 18% through the first four months of the year versus a drop of just under 10% for the S&P 500. There's clearly more to understand.
So what
Demand for Cintas' products and services is economically sensitive. When businesses aren't doing well, they pull back on staffing and spending. That, in turn, reduces demand for Cintas. However, that trend has yet to fully show up in the company's numbers.
Image source: Getty Images.
Cintas reported fiscal third-quarter earnings in late March. The fiscal period ended in February and sales and earnings were actually pretty good. The top line increased 7.6% year over year, with earnings advancing 17.4%. The problem with these numbers is that they don't include the worldwide effort to slow the spread of COVID-19, which effectively caused large sections of the global economy to shut down. Fears surrounding the impact of these efforts, which is likely to spur recessionary conditions, led to a deep market swoon in March. In April, investors switched gears and started to push everything higher again, with some of the most beaten-down names (like Cintas) rallying the most. Here's the problem: The recession that's likely on the way hasn't really started to hit company numbers just yet.
In fact, Cintas CEO Scott Farmer made an interesting statement when the company reported earnings in late March:
A week ago, we were expecting today to raise revenue and EPS guidance based upon our fourth quarter outlook. However, much has changed in the past week as our country and others continue to respond to the COVID-19 coronavirus pandemic. Due to the uncertainty, including the severity and duration of the pandemic, we are not providing guidance for the fourth quarter of fiscal 2020 at this time and withdrawing our full fiscal year guidance.
That is not the type of thing you say when you expect the future to be bright.
Now what
Based on the words of Cintas' CEO, long-term investors should prepare themselves for what is likely to be a difficult period just ahead. Sure the market may have reversed course in April, but the business environment hasn't changed and, in fact, might have actually gotten worse. At this point, a weak fourth quarter seems likely, with more to come as Cintas' new fiscal year gets under way.
