CTAS Cintas Corporation

We have recently upgraded Cintas Corporation (CTAS) from Neutral to Outperform encouraged by solid organic growth and margin expansion despite cost headwinds. Furthermore, we believe Cintas’ balance sheet and cash flow characteristics support a renewed repurchase authorization and a dividend hike.

Cintas reported earnings of 57 cents per share for fiscal second quarter 2012, comfortably surpassing the Zacks Consensus Estimate of 48 cents and 50% higher than the 38 cents earned in the year-ago quarter. Total revenue increased 9% to a record $1.02 billion, striding ahead of the Zacks Consensus Estimate of $1 billion.

Cintas was directly affected by a huge number of job losses and facility closures during the recession. However, during those times, Cintas enhanced its operations by evaluating sales force productivity, optimizing routes and streamlining labor overhead. This helped the company return to year-over-year organic revenue growth in the fourth quarter of fiscal 2010 after a stretch of negative performance for six quarters. Since then, organic growth has only accelerated.

In the reported quarter, the company posted solid organic growth of 7%, close to the 8% in the fourth quarter of 2011 – an all time high in the past five years and a massive improvement over the 4.2% growth reported in the year-ago quarter. Even as the macro environment remains uncertain, we believe Cintas will continue to drive growth by adding salespeople and increasing sales productivity.

Cintas also continues to deliver margin expansion through better sales productivity and cost efficiencies, offsetting the rising headwinds from higher energy and garment material prices. There is scope for further gross margin expansion as the company has unutilized capacity in facilities that it can leverage.

Cintas recently raised its quarterly dividend by 5 cents to 54 cents, the 29th consecutive year of the company’s dividend hike. The company has religiously hiked its dividend each year starting from 1983, the year it went public. In addition, Cintas’ board of directors also approved a new share repurchase program under which the company may repurchase up to $500 million of Cintas common stock at market prices. Since the beginning of fiscal 2011, the company has purchased 23.4 million shares under its share buyback programs at a total cost of $702 million. We believe Cintas’ solid balance sheet and cash flow support a renewed repurchase authorization and a dividend hike and could create further upside for shareholders.

On the flipside, Cintas continues to be plagued with rising costs of cotton used in uniforms and diesel fuel for trucks. Energy and cotton prices remain headwinds for 2012, particularly in the Rental segment.

Furthermore, its Document Management segment was affected by a material decline in recycled paper prices. After experiencing a fairly long stretch of prices in excess of $200 per ton, the prices dropped to $150 per ton during the quarter, 16% below the first-quarter average. In the next few quarters, recycled paper prices will remain sluggish at $150 per ton. The segment was also affected by the difficult economic environment in Europe. Although the company has taken steps to right-size the business, incurring costs this quarter, we await the segment to deliver a turnaround.

All said, we upgrade our recommendation from Neutral to Outperform on Cintas Corporation. The quantitative Zacks #1 Rank (short term Strong Buy rating) for the company indicates upward pressure on the stock over the near term.

Cincinnati, Ohio-based Cintas Corporation designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products, and first aid and safety products for approximately 900,000 businesses. Cintas competes with G&K Services Inc. (GKSR) and privately held Alsco Inc. and ARAMARK Corporation.

 
CINTAS CORP (CTAS): Free Stock Analysis Report
 
G&K SVCS A (GKSR): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research