Cintas (CTAS) Down 2.3% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Cintas Corporation (NASDAQ:CTAS) . Shares have lost about 2.3% in that time frame, underperforming the market.

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

Cintas Beats Q3 Earnings & Revenues on Organic Growth

Cintas recorded strong third-quarter fiscal 2017 (ended Feb 28, 2017) results on the back of healthy top-line growth. Net income from continuing operations for the reported quarter improved to $118.6 million or $1.08 per share from $117.3 million or $1.05 per share in the year-earlier quarter. Adjusted earnings for the reported quarter were $1.11 per share, which beat the Zacks Consensus Estimate by $0.05.

Quarterly revenues increased 5.3% year over year to $1,281.1 million, exceeding the Zacks Consensus Estimate of $1,279 million. Organic growth for the reported quarter improved 6.5% year over year. The superior top-line performance was primarily attributable to the addition of new customers, strong customer retention and higher penetration of existing customers through better and innovative products and services.

Gross margin increased for the 14th consecutive quarter on a year-over-year basis to 44.2% from 43.1% in the prior-year quarter. Operating income was $194.7 million, up 0.9% year over year. Operating margin was 15.2%, slightly lower than 15.9% in the year-earlier quarter, owing to transaction expenses related to the acquisition of G&K Services, Inc.

Segmental Performance

Uniform Rental and Facility Services revenues for the quarter improved 6.1% year over year to $993.4 million. The segment accounted for 77.5% of the total revenue, with year-over-year organic growth of 7.3%. Gross margin increased 100 basis points (bps) to 45.0% in the reported quarter.

Revenues from Other segment were up 2.9% year over year to $287.7 million, while its gross margin improved 130 bps to 41.6%. 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 solid gross margin improvement of 260 bps to 44.8% due to synergies from the acquisition of ZEE Medical in fiscal 2016.

G&K Services Acquisition Update

Subsequent to the quarter end, Cintas completed the acquisition of G&K Services for approximately $2.2 billion, including acquired net debt, after receiving all the requisite regulatory approvals.

Headquartered in Minneapolis, MN, G&K Services operates as a branded uniform and facility services program provider in the U.S. and Canada. With over 8,000 employees serving over 170,000 customers from 160 facilities in North America, it reported annual revenues of $978 million in fiscal 2016.

G&K Services would operate as a wholly-owned subsidiary of Cintas and is likely to retain its existing brand name. The successful integration of G&K Services is likely to expand Cintas’ customer profile and augment its revenues. The combined company is likely to cater to over one billion business customers with an extended product portfolio and additional processing capacity.

Customer service is also likely to improve 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 full year following the acquisition. The transaction is anticipated to be accretive to Cintas’ future earnings.

Financial Position

Cintas has a solid financial position with adequate liquidity. At the quarter end, cash and cash equivalents were $147.2 million while long-term debt was $745.2 million.

Net cash from operating activities was $483.8 million for the first nine months of fiscal 2017 compared with $297.2 million in the prior-year period. Free cash flow for the first nine months of the fiscal year increased to $265.1 million from $89.7 million in the year-ago period.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been seven revisions lower for the current quarter.

VGM Scores

At this time, Cintas' stock has a subpar Growth Score of 'D', however it is lagging a bit on the momentum front with a 'F'. Charting a somewhat similar path, 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 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.