Cintas Climbs on Tax Cut, Strong Fundamentals

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Serving employees is a big part of Cintas' (NASDAQ: CTAS) business. Its uniform-rental volume picks up when more people are working, and its facility-services business helps keep workplaces clean and safe. As the U.S. economy has steadily strengthened, Cintas has worked to take greater advantage of its opportunities, boosting its scope through acquisitions and generally seeking to make a bigger impression with its clients.

Coming into Thursday's fiscal third-quarter financial report, Cintas shareholders wanted to see continued success in a strong business environment. The company didn't disappoint, with better numbers than most expected and a solid outlook for the future. Let's look more closely at what Cintas told investors and whether it can keep up its positive momentum.

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Cintas keeps making progress

Cintas' fiscal third-quarter results generally looked good. Revenue jumped 27%, to $1.59 billion, accelerating from growth rates in recent quarters and outpacing what most investors had expected to see from the company's top line. GAAP net income soared more than 150% from year-ago levels, to $296 million, but even after accounting for the one-time benefit, adjusted earnings of $1.37 per share topped the consensus forecast among those following the stock for $1.27 per share.

Tax reform was the main reason why the bottom line grew so much before adjustments. Revaluation of deferred tax assets and liabilities helped to boost GAAP earnings by $1.59 per share, or about $175 million.

Yet Cintas also saw solid gains from its business operations. Organic growth of 8% was consistent with what the company has produced in past quarters, with acquisitions accounting for the remainder of Cintas' overall sales gains.

On a segment basis, the first aid and safety services segment was the better performer on an apples-to-apples basis, seeing organic sales grow 10% from year-ago levels. Yet the uniform rental and facility services business still did well, posting 6.5% organic growth on the segment's top line. Moreover, when you add in acquisitions, revenue from uniform rental and facility services soared by roughly 30%, even though pre-tax segment income for the unit was higher by less than 1%.

Margin figures were mixed for Cintas. The uniform rental and facility services unit saw gross margin fall a full percentage point, to 44.1%, but margin from other sides of the business saw a similar-sized boost. Part of the cost increase came from Cintas' decision to pass through some of the benefits of tax reform in a one-time payment to employees, which cost the company about $40 million in total.

CEO Scott Farmer praised the balanced contributions that all business parts made to Cintas' success. "We are pleased to report strong third-quarter financial results," Farmer said, "[as] each business unit contributed substantial revenue gains." The CEO also noted that the acquisition of G&K and the long-awaited implementation of an enterprise resource planning system contributed to Cintas' progress over the past few months.

Can Cintas keep climbing?

Looking ahead, Cintas sees good times continuing. Farmer pointed out that as the company integrates its acquisitions and takes better advantage of technological capabilities, it'll be able to get stronger more quickly.

Rather than making changes to its full-year guidance, though, Cintas chose to give specific guidance for the fiscal fourth quarter because of the uncertainties in anticipating the final impact of tax reform measures. For the quarter, Cintas expects sales of $1.625 to $1.645 billion, and that should translate to adjusted earnings of $1.64 to $1.69 per share. The earnings figure is quite a bit higher than most investors had expected, perhaps without fully encompassing the earnings boost from favorable tax rates going forward.

Cintas investors were happy with the news, and the stock climbed 4% in after-hours trading immediately following the announcement. With the employment situation in the U.S. remaining favorable, Cintas should be able to keep doing well for the foreseeable future.

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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.