On Dec 5, we reaffirmed our Neutral recommendation for
business services provider
). The company's expansion through higher penetration levels and
broadening of customer base to include business segments that are
not historically served augur well for its growth prospects.
However, an increase in raw material costs and challenging
macroeconomic conditions could weigh on the margins moving
Why the Reiteration?
Cintas reported an organic revenue growth of 7.1% in first
quarter fiscal 2014 with a diligent execution of its operational
plans. This included 6.7% organic growth from Rental Uniforms and
Ancillary Products, primarily due to improvements in productivity
of sales representatives and an overall increase in the number of
sales workforce. Sales productivity improvements are generally
the culmination of increased tenure and advanced training
procedures of sales personnel, which in turn result in a higher
number of products and services sold.
During recession, Cintas had taken initiatives to enhance its
operations by evaluating sales force productivity, optimizing
routes and streamlining labor overhead. The company returned to
year-over-year rental organic revenue growth in mid 2010 and has
continued the growth trajectory since then. Organic growth from
the Other Services segment was also commendable, which was driven
by growth in each of the operating segments and accretive
acquisitions. All these measures augur well for the long-term
In order to have increased market penetration, Cintas has a
highly talented and diverse team of service professionals who
regularly visit customers. These frequent contacts with existing
customers strengthen personal relationships, which consequently
provide a platform to launch additional products and services. In
order to pursue the strategy of broadening the customer base,
Cintas has a national sales organization that introduces its
products and services to prospects in all business
segments. The company also broadens its customer base
through geographic expansion, particularly in emerging businesses
of first aid and safety, fire protection and document management,
in addition to strategic acquisitions at an opportune time.
This focused approach for steady top-line growth is commendable.
However, a continuous increase in raw material costs such as
cotton, due to global headwinds, may weigh on the margins going
forward. Cintas procures raw materials from a wide variety of
domestic and international suppliers, making it susceptible to
market risks which are beyond its control. Cost of rental
uniforms and ancillary products comprises production expenses,
delivery expenses and amortization of in-service inventory,
including uniforms, mats, shop towels and other ancillary items.
In fiscal first quarter 2014, gross margin from Rental Uniforms
and Ancillary Products decreased to 42.6% from 43.3% in the
year-earlier quarter due to higher sales volume, increase in
material cost and higher service costs associated with expanded
route capacity. In addition, the U.S. and foreign trade policies,
tariffs and other impositions on imported goods, trade sanctions,
and limitations on the imports of certain types of goods also
escalate product costs and adversely affect its operations. This
undermines the growth potential of Cintas to some extent.
Other Stocks to Consider
Cintas presently has a Zacks Rank #3 (Hold). Other companies in
the industry that warrant a look include
McGraw Hill Financial, Inc.
Global Payments Inc.
Higher One Holdings, Inc.
), each carrying a Zacks Rank #2 (Buy).
CINTAS CORP (CTAS): Free Stock Analysis
GLOBAL PAYMENTS (GPN): Free Stock Analysis
MCGRAW HILL FIN (MHFI): Free Stock Analysis
HIGHER ONE HLDG (ONE): Free Stock Analysis
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