Cintas Falls Despite Predicting Record Sales, Double-Digit EPS Gains

By Dan Caplinger Markets Fool.com

Many successful businesses aren't in sexy industries, and Cintas (NASDAQ: CTAS) is a good example of how companies can make money from the most pedestrian of tasks. Cintas specializes in uniform rental services, along with a host of ancillary niches such as first aid and safety products.

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Coming into Thursday's fiscal second-quarter financial report, Cintas investors were optimistic that the company could produce ongoing growth in its top and bottom line. Cintas delivered on those hopes, but shareholders didn't seem satisfied with its complete picture, sending the stock downward after the results came out. Let's look more closely at what Cintas reported, and what it means for the future.


Image source: Cintas.

Cintas looks spiffier

Cintas' fiscal second-quarter results were more or less in line with what most investors wanted to see. Revenue climbed 6.4%, to $1.30 billion, which was slightly higher than the consensus forecast among those following the stock. Net income from continuing operations climbed 7%, to $123 million, and that produced adjusted earnings of $1.15 per share, matching what most investors were looking to see after taking into account one-time transaction expenses related to the G&K Services (NASDAQ: GK) transaction.

Looking more closely at Cintas, the company's various segments all posted solid top-line growth, but saw different performance in segment profits. The key uniform rental and facility services division saw revenue rise by more than 7%, making it the best performer of Cintas' three major segments. The first aid and safety services division saw more modest 4% gains in sales, and the all other businesses unit brought up the rear, with 3.5% sales growth.

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In terms of bottom-line performance, the only segment that grew profits was uniform rental, with gains of 5% on a pre-tax basis. Profits inched lower by less than 1% at first aid and safety, but fell by more than a third in the all other category.

Once again, Cintas saw its overhead costs rise as a percentage of total revenue, which weighed slightly on its margin figures and offset solid improvement in its gross margin. Cintas said that the increase, which amounted to nearly an extra percentage point-and-a-half in overhead, was due largely to strategic investments in its enterprise resource planning system, as well as its Ready for the Workday branding campaign. Medical expenses also rose, along with a boost in resources used to drive sales in the first aid and safety business.

Nevertheless, there were some positive signs for Cintas. Organic growth stayed solid at 5.7%, including a 6.5% growth rate for the uniform rental and facility services segment.

CEO Scott Farmer was particularly pleased with the way that Cintas boosted its internal efficiency in terms of cost of goods sold. "This is our 13th consecutive quarter of year-over-year gross margin improvement," Farmer said, and the CEO also pointed to "the significant opportunities that exist for us" as it looks to extend its streak of double-digit earnings growth for a seventh straight year.

Can Cintas keep climbing?

Cintas continues to see plenty of reason to be optimistic about its future prospects. The acquisition of G&K represents a good growth opportunity for Cintas, and the deal appears to be still on track to close early in 2017.

Cintas also raised its guidance slightly for fiscal 2017. The company now expects sales of $5.18 billion to $5.225 billion, which raises the bottom end of its previous range upward by another $20 million. Similarly, Cintas now expects earnings per share to come in between $4.57 to $4.65 per share, which is $0.02 higher than its previous guidance from last quarter. That works out to growth of roughly 12% to 14% in earnings per share from continuing operations.

Nevertheless, Cintas investors didn't seem happy with the news, sending the stock downward by 3% in after-hours trading following the announcement. Given how well the company has done lately, it's possible that shareholders are simply discounting the potential for further gains until there's greater certainty about the economic environment for 2017 and beyond. Nevertheless, Cintas seems confident for now that its fundamental business remains strong.

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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.