We are downgrading our recommendation on
) to Neutral as we expect that margins will remain under pressure
in the fourth quarter due to an increase in energy and medical
related expenses along with higher raw material costs.
The company reported third-quarter fiscal 2012 earnings of 58
cents per share, surpassing the Zacks Consensus Estimate of 52
cents. Total revenue in the reported quarter increased 7.9% year
over year to $1.012 billion, beating the Zacks Consensus Estimate
of $1.008 billion.
Cintas raised the earnings estimates for fiscal 2012 to a range
of $2.24-$2.27 per share from the previous target of $2.16-$2.20.
The Zacks Consensus Estimate is currently pegged at $2.27, at the
higher end of the company's guidance range. The company expects
revenues in the band of $4.09-$4.12 billion, up from the previous
range of $4.075-$4.125 billion.
Cintas continues with margin expansion through cost efficiencies
despite the pressure from higher energy and material costs. During
the third quarter, gross margin increased 30 basis points (bps) to
42.1% and the operating margin inflated 200 bps to 13.6%.
This marked the fifth consecutive quarter of increase in the
operating margin. Cintas has scope for further margin expansion
given the unutilized capacity in facilities that the company can
Recently, Cintas has partnered with Rubbermaid Commercial
Products, the leader in solutions based cleaning products, to offer
its customers with hygiene solutions and custom cleaning. The
synergy has proved beneficial, enabling Cintas to augment its
current product portfolio.
However, energy related costs along with medical expenses are
expected to create headwinds. Moreover, lower paper price remains a
concern for the company. It affected revenue growth in the Document
Management segment during the third quarter.
Organic growth dropped 1.3% and gross margin declined 240 bps to
47% year over year in the Document Management segment during the
quarter. If paper price remains low, it may weigh on the segment as
well as revenues going forward.
In addition to paper, another important raw material is cotton
which is used in uniforms. Higher cotton price remains a headwind
for the balance of the year, particularly in the Rental segment,
which may put pressure on margins moving forward.
Cintas faces competition from
G&K Services Inc.
) and privately-held companies ARAMARK Corporation and Alsco, Inc.
Our long-term recommendation is in line with the short-term Zacks
#3 Rank (Hold).
CINTAS CORP (CTAS): Free Stock Analysis Report
G&K SVCS A (GKSR): Free Stock Analysis
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