We have recently downgraded
) from Outperform to Neutral as the positives like solid organic
growth and margin expansion are undercut by headwinds from cotton
and energy prices and an uncertain economic environment.
In the first quarter of 2012, Cintas reported earnings of 52
cents per share, comfortably surpassing the Zacks Consensus
Estimate of 47 cents and 30% higher than the 40 cents earned in the
year-ago quarter. Strong performance across all its business
segments helped the company to deliver better-than-expected
Total revenue in the quarter under review increased 10.1% to
$1.02 billion, striding ahead of the Zacks Consensus Estimate of
$0.998 billion. The quarter marked the second consecutive period of
double-digit revenue growth.
Cintas, in fiscal 2012, expects to generate revenue in the band
of $4.0 billion to $4.1 billion and EPS in the range of $1.97 to
$2.05. The Zacks Consensus Estimates for revenue and EPS are at
$4.075 billion and $2.04, respectively.
During the recession, Cintas sharpened its operations by
evaluating sales force productivity, optimizing routes and
streamlining labor overhead. The company returned to year-over-year
organic revenue growth in mid-2010 not looking back since then. In
the recently reported quarter, the company posted solid organic
growth of 7.6%, reflecting the sixth consecutive quarter of a
year-over-year rise. The organic growth of 7.6% was almost on par
with a rise of 8% recorded in the fourth quarter of 2011, marking a
five-year high and a distinct improvement over the 2.8% growth
recorded in the year-ago quarter. Though the macro environment can
limit Cintas' growth prospects, the company has the wherewithal to
drive growth by adding additional salespersons and increasing sales
On the margin front, Cintas continues to expand through better
sales productivity and cost efficiencies, offsetting the rising
headwinds from higher energy and other input costs. During the
first quarter of fiscal 2012, gross margin increased 60 basis
points to 43.2% and operating margin expanded an impressive 170
basis points to 12.6%, the third consecutive quarter of strong
operating margin expansion after several years of declines. This
performance was commendable considering the ongoing headwinds from
higher energy and garment material prices.
Cintas recently raised its quarterly dividend by 5 cents to 54
cents, the 29th straight year of the company's dividend hike,
translating into a 10.2% increase from the prior dividend of 49
cents. The company has religiously hiked its dividend each year
starting from 1983, the year it went public. We believe Cintas'
solid balance sheet and cash flow characteristics support a renewed
repurchase authorization and a dividend hike.
On the flipside, Cintas draws 70% of revenue from its core
uniform rental segment, which is in the saturation stage. The
company is constantly making efforts to innovate and focus on its
other businesses, including direct uniform sales, first aid safety,
fire protection and document management. However, in doing so, the
additional resources and time involved in developing these growing
segments may affect Cintas' profitability.
The quarter was plagued by rising costs such as cotton for
uniforms and diesel fuel for trucks. These costs could pressure
profitability in 2012, particularly in the Rental segment.
Management reiterated expectations for a $15 million impact from
higher cotton prices.
Cintas' revenue largely depends upon the service industry,
including hotels, airlines, restaurants, etc. Any drop in the
employment rate can adversely impact the company's
We have thus downgraded our recommendation on Cintas Corporation
from Outperform to Neutral. The quantitative Zacks #2 Rank
(short-term 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.
) and privately held Alsco Inc. and ARAMARK Corporation.
CINTAS CORP (
): Free Stock Analysis Report
G&K SVCS A (
): Free Stock Analysis Report