On May 23, we issued an updated research report on Cintas Corporation (CTAS - Free Report) .
The business services provider aims to continually achieve revenue build-up by increasing penetration levels at existing customers and broadening the customer base to include fresh business segments. The company also identifies additional product and service opportunities for its current and future customers to expand its portfolio. Revenues have witnessed an uptrend over the past few quarters. From 2010 to 2017, revenues of the company have recorded a compounded annual growth rate of 5.2%. Third-quarter fiscal 2018 revenues increased 26.6% year over year to $1,589.1 million while organic growth improved 7.8%.
The successful integration of G&K Services Inc. has expanded Cintas’ customer profile and augmented its revenues. The combined company caters to more than 1 million customers with an extended product portfolio and additional processing capacity. Customer service has also improved with increased route density. The synergies from the combined operations are expected to yield $130 million to $140 million in cost savings from the fourth year of its operation. The transaction is anticipated to be accretive to Cintas’ future earnings.
In addition, Cintas has a strong balance sheet with adequate liquidity to meet its working capital requirements. Over the years, the company has consistently returned significant cash to its shareholders through dividends and share repurchases. Its investment strategy takes a holistic view of the rapidly evolving market and deploys a dynamic capital allocation approach to focus on the relative value of the various sectors within the broader industry. With a diligent execution of operational plans, Cintas has outperformed the industry with an average return of 22.7% in the last six months compared with a rise of 20% for the latter.
At the same time, Cintas continues to benefit from the U.S. tax reform and provided bullish 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%.
However, Cintas procures raw materials from a wide variety of domestic and international suppliers, making it susceptible to market risks which are beyond its control. Its first aid and fire protection services are decidedly commoditized markets and hence are subject to fierce competition. As such, the company has to continually invest in value drivers to fend off competition, which further weakens its profitability. Moreover, some customers have started to perform certain in-house services themselves instead of outsourcing them to Cintas. This resulted in some loss of businesses.
Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #2 (Buy) stock. Some other top-ranked stocks in the industry are Altra Industrial Motion Corp. (AIMC - Free Report) , IDEX Corporation (IEX - Free Report) and Kadant Inc. (KAI - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Altra Industrial Motion topped estimates thrice in the trailing four quarters with an average positive earnings surprise of 5.1%.
IDEX has a long-term earnings growth expectation of 11%. It topped estimates in each of the trailing four quarters with an average positive earnings surprise of 3.1%.
Kadant has topped estimates in each of the trailing four quarters with an average positive earnings surprise of 15.5%.
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