Cintas to Outperform - Analyst Blog
January 16 2012 - 10:00AM
Zacks
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
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