We issued an updated research report on Cintas Corporation CTAS on Jun 14.
The company currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $24.7 billion.
Below we discussed why it will be prudent for investors to hold on to this stock for now.
Factors Favoring Cintas
Share Price Performance, Earnings Projections: Market sentiments seem to be working in favor of Cintas over time. In the past six months, the company’s share price has gained 41.8%, higher than the industry’s growth of 38.4%.
We believe that impressive financial results helped in driving sentiments for the stock. In third-quarter fiscal 2019 (ended February 2019), Cintas recorded positive earnings surprise of 7.60%. Its share has increased 13.6% since the results released on Mar 21, 2019. Also, it pulled off average positive earnings surprise of 6.09% for the last four quarters.
For fiscal 2019 (ended May 2019; results not yet released), the company anticipates gaining from solid customer base, focus on product portfolio enhancement, effective implementation of enterprise resource planning system and synergistic gains from buyouts will be advantageous. Earnings per share in the year is predicted to be $7.42-$7.48, up from the previously announced $7.30-$7.38.
Also, the Zacks Consensus Estimate for the company’s earnings is pegged at $7.46 for fiscal 2019 and $8.30 for fiscal 2020 (ending May 2020). On a year-over-year basis, these estimates reflect growth of 25.6% for fiscal 2019 and 11.2% for fiscal 2020.
Cintas Corporation Price and Consensus
Cintas Corporation price-consensus-chart | Cintas Corporation Quote
Shareholder-Friendly Policies: The company effectively uses capital for rewarding shareholders handsomely through dividend payments and share buybacks. It is worth mentioning here that it increased the annual dividend rate by 26.5% in October 2018.
In the first nine months of fiscal 2019 (ended February 2019), the company repurchased shares worth $608.2 million and paid dividends totaling $220.8 million.
Buyouts: Cintas seems to favor acquisitions to fortify its product portfolio. In fiscal 2018 (ended May 2018), the company strengthened its Uniform Rental and Facility Services segments with five acquisitions while First Aid and Safety Services with three acquisitions. Also, it made six acquisitions under the All Other segment.
Further, the company added G&K Services Inc. to its portfolio in March 2017. Since then, the buyout has been strengthening its Uniform Rental and Facility Services segment. This buyout has been a revenue driver and it is predicted to yield significant cost synergies going forward.
It is worth mentioning here that Cintas invested approximately $7.4 million in making acquisitions in the first three quarters of fiscal 2019.
Factors Working Against Cintas
Valuation: The company’s shares currently seem overvalued compared with the industry it belongs to. In the past six months, its price/earnings multiple of 32.38 has been higher than the industry’s multiple of 30.67. Notably, this metric is trading higher than the industry’s three-month highest level of 30.67. This makes us cautious about the stock.
High Costs Trouble: The company has been suffering from higher costs and expenses. In the third quarter of fiscal 2019, its cost of sales increased 4.3% on a year-over-year basis. Costs related to hangers, rising wages and those related to effective implementation of enterprise resource planning system might be the main reasons behind higher costs.
The company believes that expenses related to enterprise resource planning system and integrations expenses of the G&K Services buyout will be troublesome in the quarters ahead. G&K Services integration costs are predicted to be $16 million in fiscal 2019.
Highly Leveraged Balance Sheet: In the last five fiscal years (2014-2018), Cintas’ long-term debt grew 14.3% (CAGR). The metric at the end of the third quarter of fiscal 2019 was approximately $2.5 million.
We believe that a highly leveraged balance sheet might be detrimental to the company, as it raises financial obligations and pressures margins.
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Chart Industries, Inc. GTLS, DXP Enterprises, Inc. DXPE and Dover Corporation DOV. While Chart Industries currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Dover carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 16.56% for Chart Industries, 48.47% for DXP Enterprises and 8.61% for Dover.
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