This Uniform Supplier Is Primed for Strong Growth

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Dec 15, 2014

Cintas (CTAS, Financial), a provider of specialized services and uniforms to support businesses, posted decent quarterly numbers recently, beating earnings expectations. But its shares plunged after the announcement in the wake of a weak guidance. Let’s analyze further.

A look at the numbers

Revenue jumped 4.1% to $1.05 billion, but the bottom line experienced a multiplier effect, reaching jumping to $78.6 million, an increase of 11% over the same quarter last year. Even better were the numbers for earnings per share which grew 22% to 60 cents per share. But this increase was due to a lower number of shares outstanding for the quarter. Cintas differs from its rival G&K Services in its strategy to provide value to its shareholders. It believes in buying back shares whereas G&K Services, the market leader in Canada, believes in delivering dividends. In fact, G&K had recently announced dividend of $0.13 per share, each time paying out higher.

Getting back to Cintas, it managed to perform well because of a better job market in the U.S. and improving performances of businesses. This pushed up its revenue from uniform rental sales which accounts for 52% of its total revenue. Despite higher material costs in the segment uniform sales increased 5.2% over last year.

The star segment for the quarter was the First Aid, Safety and Fire protection services segment which registered a revenue growth of 9.3% on account of higher volumes. Even the gross margin increased to 42.4% from 41.7% a year ago. However, the Document Management Services business was dull with an 8.2% decrease in its revenue. The key reason was the lower price of recycled paper which adversely affected the margins. Moreover, the tough European conditions pulled down the revenue to a great extent.

Realistic growth

Cintas was on a buying spree last year, with acquisitions to enhance all four business segments. The benefits of the buyouts were evident in performance for the year in terms of a 21% increase in the net income. However, even if we ignore these effects, the uniform supplier lived up to its markexpectations with a 4% increase in revenue for the quarter. This highlights the true ability of the company. Even the uniform direct sales segment grew 2% in spite of having no acquisitions in the segment.

The future

Uncertain economic conditions, unhealthy job market and an expected weak GDP growth haves made led the Cincinnati-based company give an outlook which reflects all of these sound out a muted outlook. Moreover, the unfavorable impact of change in tax laws has made Cintas expect revenue in the range of $4.25 billion and $4.35 billion with earnings between $2.47 cents per share and $2.55 cents a share for the year. The company expects to do well and overcome the obstacles but with a less attractive year.

Conclusion

A good performer is the one which comes out in green in spite of all the setbacks faced during the period. This is exactly what this gem has done. In spite of drag downs of higher input costs, weak economy, and a soft job market this service provider held its head high – the most important quality for a company to deserve a place in an investor’s portfolio. Another point to note is that the uniform provider has been doing well from the last few quarters, fulfilling expectations each time. This looks like a good one, especially with a slight change in economic conditions.