A Strong Economy Keeps Cintas Looking Sharp

The strong U.S. economy has helped many businesses across the nation, especially those that rely on healthy local business conditions to drive demand for their services. Cintas (NASDAQ: CTAS) has its success tied to the U.S. workforce, as its uniform rental and facilities services divisions both prosper when more workers have jobs and companies have to keep them safe. As the economy has improved, Cintas has sought opportunities to grow, and its strategic vision has worked out well recently.

Coming into Tuesday's fiscal first-quarter financial report, Cintas shareholders were hoping to see the company stay largely on course. The uniform rental specialist mostly met those expectations, and as it starts a new fiscal year, Cintas has high hopes for the immediate future.

The latest from Cintas

Cintas' fiscal first-quarter results kept up its positive momentum. Revenue rose by 5.4% to $1.70 billion, which was slightly better than most of those following the stock were looking to see. Net income fell 2% from year-ago levels to $212.5 million, due largely to a big one-time gain in the year-earlier period, but adjusted earnings of $1.93 per share came in well above the consensus forecast among investors for $1.81 per share.

Fundamentally, Cintas saw success throughout its various divisions. Organic growth overall came in at 5.2%, with the uniform rental and facility services division seeing slightly slower growth of 4.9%. Meanwhile, the first-aid and safety services division saw even sharper gains, posting an organic growth rate of 9%.

Income from continuing operations soared 32%, due largely to the positive impact of tax reform. Effective tax rates dropped by more than half during the quarter, from 26.5% a year ago to 12% during this year's period. That saved Cintas more than $29 million in the fiscal first quarter alone.

One key to Cintas' improvement on its bottom line has been its attention to the expense side of the income statement. Gross margin for uniform rental and facility services fell very slightly, but better margin levels for first aid and safety services helped offset that downward pressure. Most importantly, overhead expense growth came in at a pace slower than sales gains, and a nearly 20% drop in interest expense shows the efforts Cintas has made to get its balance sheet as healthy as possible.

CEO Scott Farmer was generally happy with the way Cintas is faring. "We remain focused on integrating the G&K acquisition," Farmer said, "continuing the implementation of our enterprise resource planning system and increasing the number of businesses we help get Ready for the Workday," referring to the company's slogan. The CEO has a lot of confidence that Cintas can keep moving forward effectively as well.

What's ahead for Cintas?

This is not to say that Cintas can afford to put any less effort toward making progress. For instance, the company will keep incurring some costs toward integrating G&K. However, it's likely those expenses will be far less than what it paid in fiscal 2018 toward the merger, amounting to just a $0.04 per-share hit to its bottom line.

Cintas responded to its strong performance by boosting its full-year fiscal 2019 guidance. The uniform rental specialist now sees revenue coming in between $6.8 billion and $6.855 billion, up $35 million to $50 million from its previous range. Earnings from continuing operations should be between $7.19 and $7.29 per share, which was between $0.14 and $0.19 per share higher than the guidance Cintas gave last quarter.

However, Cintas investors didn't seem entirely pleased with the report, and the stock fell 3% in pre-market trading Wednesday following the late-Tuesday announcement. Even with a slight pullback for the stock, though, Cintas looks like it's doing everything it needs to do in order to take full advantage of the strong U.S. economy for as long as the good times last.

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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.