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The Future Looks Bright for Cintas

Dan Caplinger, The Motley Fool

When the job market is strong, Cintas (NASDAQ: CTAS) tends to be strong. That's because the company specializes in providing uniforms to the employees of the companies on its extensive client list, and a healthy economy also helps drive business formation and adds new customers to Cintas' rolls.

Coming into Tuesday's fiscal fourth-quarter financial report, shareholders had expected that the company would continue to profit from the strong employment picture in the U.S., and they wanted to see signs that Cintas would keep driving forward into a new fiscal year. Its results were solid, and the guidance it gave for fiscal 2020 created even more optimism about the uniform company's prospects.

Person wearing Cintas uniform pouring cleaning solution into dispensers.

A Cintas employee refills a cleaning solution dispenser. Image source: Cintas.

How Cintas wowed investors

Fiscal fourth-quarter results reflected the strength of the U.S. economy. The company posted revenue of $1.79 billion, up 7.4% from year-ago levels and outpacing what most of those following the stock had expected. Net income rebounded 22% to $226.1 million, and the resulting earnings of $2.06 per share came in well ahead of the consensus forecast among investors for $1.93.

Fundamentally, Cintas did well with its two main business segments. Organic growth for the key uniform rental and facility services segment came in at 6.8%, which accelerated from its pace three months ago. First aid and safety services saw even stronger organic growth, as its 10.7% growth rate pulled up Cintas' businesswide organic growth to 7.6%.

Cost-control efforts were also successful in bolstering the bottom line. Gross margin was higher by eight-tenths of a percentage point to 45.9% versus the year-earlier quarter, with a 1 percentage point gain in the uniform rental segment's gross margin driving the gains. Operating margin similarly rose to 17.6% after adjusting for integration-related expenses.

CEO Scott Farmer was happy with the way his company closed its 2019 fiscal year. "For the ninth consecutive year, our organic revenue growth was in the mid to high single digits," Farmer said, "and EPS grew double digits when adjusted for one-time and special items." He was also pleased with the way that Cintas' balance sheet and cash flow helped the company boost shareholder value, taking special note of its 26% increase in its dividends.

Can Cintas keep up the pace?

Cintas has high hopes, with Farmer noting that "all businesses care about image, safety, cleanliness, or compliance, and businesses continue to outsource to concentrate on their core competency." As long as its customers remain financially healthy enough to enlist help with things like uniforms and cleaning supplies, Cintas will remain in a prime position to deliver goods and services to them.

It also gave encouraging guidance for the new 2020 fiscal year. The company expects revenue between $7.24 billion and $7.31 billion, which would represent top-line growth of around 5% to 6% versus its final figures for fiscal 2019. Cintas expects earnings between $8.30 and $8.45 per share, suggesting an even faster growth rate of 9% to 11%. The bottom-line estimates in particular were on the high side of the $8.29 consensus forecast among those following the stock.

Cintas investors were happy with the news, and the stock jumped 5% in pre-market trading Wednesday following the Tuesday afternoon announcement. Despite some concerns among economists that the strength of the U.S. economy might finally be starting to wane, Cintas hasn't yet seen any signs that the all-important job market is weakening. As long as employment growth remains robust, it should stay in position to profit from its successful clients.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.