Cintas (CTAS) Maintains Core Business Focus, Risks Remain

On May 30, we issued an updated research report on business services provider, Cintas Corporation (NASDAQ:CTAS) .

Based in Cincinnati, OH, Cintas provides specialized services to various types of businesses throughout North America. The company designs, manufactures, implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products and first aid and safety products for diversified businesses.

Cintas has outperformed the Zacks categorized Linen Supply & Related industry with an average year-to-date return of 8.3% compared with a gain of 5.9% for the latter. Revenues have steadily increased over the past few quarters. Cintas 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. This focused approach for a steady top-line growth is commendable.

The acquisition of G&K Services Inc. is further likely to expand Cintas’ customer profile and augment its revenues. The combined company is likely to cater to over one billion 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 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 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.

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. A continuous increase in raw material costs such as cotton also weighs on the margins. Cintas faces stiff competition from national, regional and local companies on various factors such as design, price, quality, service and convenience to the customers. Specifically, 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, a persistent challenging macroeconomic environment has mostly driven customers to perform certain in-house services themselves instead of outsourcing them to Cintas, which resulted in some loss of businesses.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry include Regal Beloit Corporation (NYSE:RBC) , EnerSys (NYSE:ENS) and UniFirst Corporation (NYSE:UNF) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Regal Beloit has a long-term earnings growth expectation of 9%. It topped estimates twice in the trailing four quarters with an average positive earnings surprise of 1.5%.

EnerSys has a long-term earnings growth expectation of 9.5%. It surpassed estimates in each of the trailing four quarters with an average positive earnings surprise of 5.1%.

UniFirst has a long-term earnings growth expectation of 10.0%. It surpassed estimates thrice in the trailing four quarters with an average positive earnings surprise of 2.1%.

More Stock News: 8 Companies Verge on Apple-Like Run

Did you miss Apple (NASDAQ:AAPL)'s 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.

A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>