Cintas (CTAS) Poised To Benefit From Bullish Growth Trends

On Dec 27, we issued an updated research report on business services provider, Cintas Corporation (NASDAQ:CTAS) .

Cintas maintains a focused approach for steady top-line growth. Revenues have witnessed an increasing trend over the past few quarters. From fiscal 2010-2017, revenues have seen a compounded annual growth rate of 5.2%. In second-quarter fiscal 2018, revenues increased 26.4% year over year to $1,606.4 million, primarily driven by the accretive acquisition of G&K Services Inc. Moreover, addition of new customers, strong customer retention and higher penetration of existing customers through better and innovative products and services led to organic growth of 7.7%.

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. Cintas also identifies additional product and service opportunities for its current and future customers to expand its portfolio.

The acquisition of G&K Services has further expanded Cintas’ customer profile as the combined company is catering to more than 1 billion 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.

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 year-to-date return of 34.5% compared with a gain of 31.8% for the latter. Cintas has also raised its earlier guidance for fiscal 2018 on favorable growth trends. Revenues are currently expected in the range of $6,365 million to $6,430 million, up from $6,325 million to $6,400 million anticipated earlier. Earnings from continuing operations are expected to be between $5.39 and $5.46 per share, up from earlier projections of $5.30-$5.38.

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 sustained increase in raw material costs such as cotton also weighs on the margins. Cintas also faces stiff competition from national, regional and local companies on various factors such as design, price, quality, service and convenience to 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 has resulted in some loss of businesses.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Better-ranked stocks in the industry include UniFirst Corporation (NYSE:UNF) , NV5 Global, Inc. (NASDAQ:NVEE) and Accenture plc (NYSE:ACN) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

UniFirst has a long-term earnings growth expectation of 10%. It has beaten earnings estimates thrice in the trailing four quarters with a positive surprise of 3.7%

NV5 Global has a long-term earnings growth expectation of 20%. It has beaten earnings estimates thrice in the trailing four quarters with a positive surprise of 4.5%.

Accenture has a long-term earnings growth expectation of 10.3%. It has beaten earnings estimates in each of the trailing four quarters with a positive surprise of 2.6%.

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