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Cintas (CTAS) Up 7.1% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Cintas (CTAS). Shares have added about 7.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cintas due for a pullback? 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 catalysts.

Cintas Beats Q2 Earnings & Sales Estimates, Ups View

Cintas delivered better-than-expected results for the second quarter of fiscal 2020 (ended Nov 30, 2019). It recorded an earnings beat of 11.27% and sales beat of 1.19% in the quarter under review.

The company’s adjusted earnings in the reported quarter were $2.27 per share, surpassing the Zacks Consensus Estimate of $2.04. On a year-over-year basis, the bottom line increased 29% from the year-ago figure of $1.76 on healthy segmental business and margin improvement.

Segmental Sales

In the quarter under review, Cintas’ net sales were $1,843.7 million, reflecting growth of 7.3% from the year-ago quarter. The improvement was driven primarily by organic sales growth of 7.3%.

Further, the top line marginally surpassed the Zacks Consensus Estimate of $1,822 million.

The company has two reportable segments — Uniform Rental and Facility Services, and First Aid and Safety Services. Other businesses like Uniform Direct Sale and Fire Protection Services are included in All Other. Quarterly sales data is briefly discussed below.

Revenues from the Uniform Rental and Facility Services segment (representing 79.7% of the reported quarter’s net sales) were $1,470 million, increasing 5.7% year over year. Organic sales were recorded at 5.8%.

Revenues from the First Aid and Safety Services segment (representing 9.2% of the reported quarter’s net sales) totaled $169.7 million, increasing 10.6% year over year. Organic sales in the quarter increased 10.6%.

Revenues from the All Other business (representing 11.1% of the reported quarter’s net sales) were $204.1 million, increasing 17.2% year over year.

Gross Margin

In the quarter under review, Cintas’ cost of sales (comprising costs related to uniform rental and facility services as well as others) increased 5.1% year over year to $991.4 million. It represented 53.8% of net sales compared with 54.9% in the year-ago quarter. Gross profit in the quarter increased 10% year over year and gross margin was up 110 basis points (bps) to 46.2%.

Selling and administrative expenses totaled $517.9 million, reflecting a 5.3% increase over the year-ago figure. It represented 28.1% of net sales. Operating margin in the quarter expanded 210 bps year over year to 18.1%.

Balance Sheet and Cash Flow

Exiting the quarter, Cintas’ cash and cash equivalents were $226.5 million, up 121.8% from $102.1 million at the end of the previous quarter. Long-term debt remained more or less unchanged, sequentially, at $2,538.6 million.

In the first half of fiscal 2020, the company generated net cash of $571.4 million from operating activities, increasing 65.8% from the year-ago figure. Capital expenditure totaled $126.2 million, reflecting a year-over-year decline of 8.3%. Free cash flow surged 115.1% year over year to $445.2 million.

During the first half of fiscal 2020, the company repurchased shares worth $258.7 million.

Outlook

For fiscal 2020 (ending May 2020), Cintas raised the revenue projection to $7.29-$7.33 billion from the previously stated $$7.28-$7.32 billion. The revised guidance suggests growth of 5.8-6.4% from the year-ago reported figure.

Earnings are predicted to be $8.65-$8.75 per share versus $8.47-$8.57 stated earlier. This indicates year-over-year growth of 13.8-15.1%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Cintas has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cintas has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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