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A month has gone by since the last earnings report for Cintas (CTAS). Shares have lost about 2.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Cintas due for a breakout? 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 drivers.
Cintas Q2 Earnings Surpass Estimates, Sales Miss
Cintas reported better-than-expected earnings results for the second quarter of fiscal 2021 (ended Nov 30, 2020). Its earnings beat estimates by 20.18%, while sales lagged the same by 0.23%.
The company’s earnings in the reported quarter were $2.62 per share, surpassing the Zacks Consensus Estimate of $2.18. On a year-over-year basis, the bottom line increased 15.4% from the year-ago figure of $2.27 as lower costs and expenses helped more than offset the impacts of a decrease in revenues.
In the quarter under review, Cintas’ net sales were $1,757 million, reflecting a decline of 4.7% from the year-ago quarter. Organic sales in the quarter decreased 4.4% year over year, while acquisitions, divestitures and foreign currency translation had a net negative impact of 0.3%. The pandemic played a spoilsport in the quarter.
Further, the top line lagged the Zacks Consensus Estimate of $1,761 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 80.3% of the reported quarter’s net sales) were $1,410.5 million, decreasing 4% year over year. Organic sales in the quarter decreased 3.6%.
Revenues from the First Aid and Safety Services segment (representing 11.1% of the reported quarter’s net sales) totaled $194.4 million, increasing 14.6% year over year. Organic sales in the quarter increased 14.5%.
Revenues from the All Other business (representing 8.6% of the reported quarter’s net sales) were $152.1 million, decreasing 25.5% year over year.
In the quarter under review, Cintas’ cost of sales (comprising costs related to uniform rental and facility services as well as others) decreased 5.5% year over year to $937.2 million. It represented 53.3% of net sales compared with 53.8% in the year-ago quarter. Gross profit in the quarter decreased 3.8% year over year to $819.9 million. Gross margin increased 50 basis points (bps) year over year to 46.7%.
Selling and administrative expenses totaled $467 million, reflecting a 9.8% decline from the year-ago figure. It represented 26.6% of net sales. Operating margin in the quarter increased 190 bps year over year to 20.1%. Notably, the operating margin in the quarter gained 100 bps from the sale of some assets belonging to the Uniform Rental and Facility Services segment. Interest expenses decreased 6.2% to $24.6 million.
Balance Sheet and Cash Flow
Exiting the quarter, Cintas’ cash and cash equivalents were $703.2 million, up 66.8% from $421.5 million at the end of the previous quarter. Long-term debt remained more or less unchanged sequentially at $2,290.9 million.
In the first half of fiscal 2021, the company generated net cash of $573 million from operating activities, increasing 0.3% from the previous-year period. Capital expenditure totaled $57.7 million, reflecting a year-over-year decline of 54.3%. Free cash flow increased 15.8% year over year to $515.3 million.
During the first half, the company repurchased shares worth $71.4 million. It is worth noting here that Cintas announced a 10.2% hike in its annual dividend rate, which now stands at $2.81.
The company is still exposed to the challenges and uncertainties related to the coronavirus outbreak. It refrained from providing any projections for fiscal 2021 (ending May 2021).
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
At this time, Cintas has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Cintas has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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