Cintas Cleans Up With Strong Earnings Growth

By Markets

Image source: Cintas.

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Providing uniforms for clients' employees is a major business need that Cintas (NASDAQ: CTAS) serves, and many people still think of Cintas as being a uniform specialist. Yet the company has diversified its product offerings recently, and that has helped open up new opportunities for growth.

Coming into Tuesday's fiscal first-quarter financial report, Cintas investors had hoped that the business services company would be able to sustain and accelerate its growth. Cintas' results were encouraging, and investors responded with another big push upward for its shares. Let's take a closer look at the latest from Cintas, and what its most recent quarter says about its prospects going forward.

Cintas keeps on growing

Cintas' fiscal first-quarter results fed on the positive trends that the company has experienced lately. Revenue was up 8%, to $1.29 billion, and that was slightly higher than most of those following the stock had expected to see. Net income from operations soared 30%, to $138.1 million, and that led to adjusted earnings of $1.26 per share. That was fully $0.18 higher than the consensus forecast among investors.

Taking a closer look at Cintas and its results, there were, again, several factors contributing to the company's success. The uniform rental and facility services business boosted its top line by 6.5%, and the segment's direct costs rose just 4.3%, helping to expand its overall gross margin. Once again, Cintas' other business division grew at a faster pace of 13%, but a higher 8% growth rate in costs for that division limited its competitive advantage over its uniform counterpart. Selling and administrative costs climbed at a slightly disturbing rate of more than 10%, but efficiency gains helped Cintas improve its operating margin and net margin figures.

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Cintas also sustained its past practice of using both internal business growth and strategic acquisitions as ways to accomplish its long-term goals. Organic growth for the company was 5.7%, or roughly three-quarters of Cintas' total growth rate.

In keeping with past practice, CEO Scott Farmer limited his comments about Cintas to a fairly pedestrian recounting of financial numbers. "We achieved record revenue and [earnings per share]," Farmer said, "and increased EPS by double-digits for the sixth consecutive year."

What's ahead for Cintas?

Moreover, Cintas sees its momentum building into the new fiscal year. Farmer pointed to early activity in the fiscal first quarter as confirming its strong performance going forward, and the CEO argued that the "solid start positions us for another year of record-breaking results."

In response to its encouraging results, Cintas boosted its guidance for the 2017 fiscal year. In particular, revenue projections inched higher as Cintas pushed the lower end of its previous guidance range up by $10 million, now expecting sales of between $5.16 billion and $5.225 billion for the fiscal year. Earnings-per-share projections increased by roughly $0.20 to a new range of $4.55 to $4.63 per share, which would mean that the company could see growth of as much as 13%.

Looking forward, one wildcard will be what impact Cintas' proposed acquisition of G&K Services (NASDAQ: GK) will have. Cintas announced the $2.2 billion deal in mid-August, saying that it expected the deal to open up additional processing capacity and route density, which should produce cost savings and greater operational efficiency. Expected to close by next February, the G&K Services merger should boost Cintas' earnings by the second year after the deal is completed. Going forward, the extent to which G&K integrates into Cintas' operations will play a pivotal role in determining the future course of the combined post-merger entity -- assuming that the two companies get all the necessary approvals to merge.

Cintas investors were happy about the company's results, sending the stock upward by more than 4%, and approaching another all-time record high. With strong tailwinds from favorable employment trends and economic strength, Cintas will have investors watching to see just how much it can take advantage of good conditions to produce faster profit growth.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cintas. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.