We have recently upgraded
) 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
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
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
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
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.
) and privately held Alsco Inc. and ARAMARK Corporation.
CINTAS CORP (
): Free Stock Analysis Report
G&K SVCS A (
): Free Stock Analysis Report
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