On Dec 24, we reiterated our Neutral recommendation for
business services provider
) on the back of solid second quarter fiscal 2014 results and
rising earnings estimates. 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 forward.
ALLIANCE DATA (ADS): Free Stock Analysis
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CINTAS CORP (CTAS): Free Stock Analysis
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Why the Reiteration?
Cintas reported an organic revenue growth of 7.1% in second
quarter fiscal 2014 with a diligent execution of its operational
plans. This included 6.4% 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
growth perspectives, as 7 out of 12 earnings estimates for fiscal
2014 have been revised up and none revised down.
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 like 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.
Cintas also faces stiff competition from national, regional and
local companies on various factors such as design, price,
quality, service and convenience to the customers. 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 #2 (Buy). Other companies in
the industry that warrant a look include
Alliance Data Systems Corporation
The ADT Corporation
Higher One Holdings, Inc.
), each carrying a Zacks Rank #2 (Buy).