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Growth & Income

Cintas Corporation (CTAS - Analyst Report) carried its momentum into the second quarter of its fiscal 2012 and delivered an outstanding 19% EPS beat on solid organic revenue growth.

Management also raised its 2012 guidance, prompting analysts to revise their estimates higher for both this year and next. It is a Zacks #2 Rank (Buy).

On top of strong earnings growth potential, the company also pays a dividend that yields a solid 1.5%.

Company Description

Cintas Corporation provides uniforms, restroom supplies, first aid, safety and fire protection, and other ancillary products to approximately 900,000 businesses. The company should benefit from an improving labor market in the United States, as more workers means more uniforms.

Cintas was founded in 1968 and has a market cap of $4.5 billion.

Huge Second Quarter

Cintas delivered excellent second quarter 2012 results on December 20. Earnings per share came in at 57 cents, crushing the Zacks Consensus Estimate by 9 cents. It was a whopping 50% increase over the same quarter in 2011.

Revenue rose 9% to a record $1.019 billion, ahead of the Zacks Consensus Estimate of $1.003 billion. Organic revenue increased a solid 7% as the company maintained its momentum in its Rental Uniforms & Ancillary Products segment, as well as in it First Aid, Safety & Fire Protection Services segment.

Operating income improved 30% year-over-year as the company leveraged its selling and administrative expenses. The operating margin improved from 10.9% to 13.0%.

Outlook

Management raised its guidance for the remainder of its fiscal 2012 following strong Q2 earnings. The company now expects EPS in the range of $2.16-$2.20, with revenue between $4.075 billion and $4.125 billion. This is up from previous EPS guidance of $1.97-$2.05 on revenue of $4.000-$4.100 billion.

The company stated that "while we remain cautious about the U.S. economic picture, we have more confidence about our ability to execute in this less than robust environment."

These factors caused analysts to raise their estimates significantly for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy). The Zacks Consensus Estimate for 2012 is now $2.19, within guidance, and representing 29% growth over 2011 EPS. The 2013 consensus estimate is currently 8% higher at $2.35.

Dividend

Cintas has a history of rewarding its shareholders and has raised its dividend every year since it began paying one in 1991. It currently yields a solid 1.5%.

It would be safe to bet that the company will continue raising its dividend in the near future. Its payout ratio is still relatively low at 27%, and earnings are projected to grow at a healthy clip over the next couple of years.

Valuation

Shares of CTAS are up more than 20% since I wrote about it on September 29. But valuation still looks very reasonable. Shares trade at just 15.8x 12-month forward earnings, a discount to its 10-year median of 17.8x.

The Bottom Line

With strong earnings momentum, solid growth prospects, a rising dividend and reasonable valuation, Cintas still offers plenty of upside potential.

This Week's Growth & Income Zacks Rank Buy Stocks:

Kennametal Inc. (KMT) recently delivered its 10th consecutive positive earnings surprise on record EPS for the first quarter. Management raised its EPS guidance for 2012, prompting analysts to revise their estimates higher. It is a Zacks #2 Rank (Buy) stock. Kennametal also recently raised its quarterly payout by 17%, marking the first dividend increase in 4 years. It yields a solid 1.6%. Read the full article.

The Kroger Co. (KR) recently delivered excellent results for the third quarter of 2011, driven by a stellar 5.0% increase in same-store sales. Management raised its guidance for the remainder of the year off the strong quarter, prompting analysts to revise their estimates higher, and sending the stock to a Zacks #2 Rank (Buy). It also pays a dividend that yields 1.9%. Read the full article.

Union Pacific Corporation (UNP) recently posted record financial results for the third quarter of 2011, beating the Zacks Consensus Estimates on both the top and bottom lines. Analysts revised their 2011 and 2012 estimates higher off the strong quarter, sending the stock to a Zacks #2 Rank (Buy). The company is also shareholder-friendly as it buys back stock and boosts its dividend. It currently yields a solid 2.4%. Read the full article.

Total System Services, Inc. (TSS) delivered the coveted triple play for the third quarter of 2011: a positive revenue beat, positive earnings beat, and increased guidance from management. This caused analysts to revise their estimates higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy). The company also increased its quarterly dividend for the first time in over 5 years. It now yields a solid 2.1%. Read the full article.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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