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Cintas (CTAS) Up 6.1% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Cintas Corporation (CTAS - Free Report) . Shares have added about 6.1% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is CTAS due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Cintas Q3 Earnings, Revenues Beat, Outlook Positive

Cintas posted impressive third-quarter fiscal 2018 (ended Feb 28, 2018) results backed by healthy top-line growth. Net income from continuing operations for the quarter surged 152.9% to $295.8 million or $2.66 per share from $116.9 million or $1.06 per share recorded in the year-earlier quarter. Adjusted earnings came in at $1.37 per share, which comfortably surpassed the Zacks Consensus Estimate of $1.24.

Quarterly revenues increased 26.6% year over year to $1,589.1 million, exceeding the Zacks Consensus Estimate of $1,568 million. Organic growth for the reported quarter improved 7.8% year over year, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations.

Operating income was $200 million, up 4.2% year over year. Operating income, excluding G&K transaction and integration expenses and the one-time cash payment to employees, increased 24% year over year, resulting in an operating margin of 15.7%.

Segmental Performance

Uniform Rental and Facility Services revenues for the fiscal third quarter improved 30% year over year to $1,284.5 million and accounted for 80.8% of the total revenues. The segment recorded year-over-year organic growth of 6.5%. However, gross margin for the segment decreased to 44.1% from 45.1% in the year-ago quarter.

At the Other segment, revenues were up 14% year over year to $304.6 million and accounted for 19.2% of the total revenues. This segment includes the First Aid and Safety Services, and All Other businesses that comprise the Fire Protection Services and Direct Sale business. The First Aid and Safety Services recorded organic growth of 10%. The segment’s gross margin increased to 44% from 42.9% in the year-ago quarter.

Financial Position

Cintas has a solid financial position with adequate liquidity. At the end of the fiscal third quarter, cash and cash equivalents were $152.6 million, while long-term debt was $2,534.8 million.

In the first nine months of fiscal 2018, net cash from operating activities was $660.9 million compared with $483.8 million in the prior-year period. Free cash flow in the same period increased to $464.8 million from $265.1 million reported in the year-ago period.

Outlook

The benefits from the U.S. tax reform in the third fiscal quarter were significant. Cintas provided specific guidance for fourth-quarter fiscal 2018. Revenues are projected to be $1,625-$1,645 million. Earnings from continuing operations are expected to be between $1.64 and $1.69 per share. This assumes a fiscal fourth-quarter tax rate of 24%. This earnings per share guidance excludes future G&K transaction and integration expenses related to the acquisition.

In the recently-reported quarter, Cintas made solid progress on two significant long-term investments. The first is the acquisition of G&K. It has now closed 60 or 95% of redundant operations, and has converted 65% of G&K locations to Cintas operating systems.

The second is the implementation of an enterprise resource planning system. Cintas continues to convert more operations to the system 79 so far, and the roll-out remains on schedule. It aims to be a stronger company with this new technology.

Moving Ahead

Cintas continues to deliver organic growth through superior execution of its operational plans. We remain encouraged by the company’s stellar quarterly performance. The fiscal fourth quarter will mark the anniversary of the G&K acquisition.

In the fiscal fourth quarter, the G&K transaction and integration expenses will be incurred, as Cintas continues to integrate this significant acquisition, with a total estimate of $10-$15 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter.

Cintas Corporation Price and Consensus

VGM Scores

At this time, CTAS has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for growth and momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of this revision looks promising. Notably, CTAS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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