Cintas Isn't Scared of a Recession

Many investors see Cintas (NASDAQ: CTAS) as a barometer of the success of the U.S. economy overall. The company provides uniform rentals to workers as well as facilities services to companies across the country, and a healthy employment environment has helped promote substantial growth for all of its businesses. Yet with investors fearing a possible recession in the U.S., it would be reasonable to think that Cintas might be concerned about its near-term future.

Coming into Thursday's fiscal second-quarter financial report, Cintas shareholders expected that it would keep growing at a solid pace, but they really hoped that the company would signal a bright future even with prevailing fears about the economy's strength. Cintas's numbers showed no signs of a slowdown, and executives remain optimistic about what lies ahead for the uniform rental specialist.

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How Cintas defied the downturn

Cintas's fiscal second-quarter results showed how successful the company has been. Revenue came in at $1.72 billion, up 7% from year-ago levels and accelerating from its pace in the first quarter of the fiscal year. Net income soared 77% to $243 million, and even after making allowances for some one-time items, adjusted earnings of $1.76 per share topped the consensus forecast among investors for $1.70 per share.

Signs of fundamental strength continue to shine in Cintas's quarterly report. Organic growth matched the overall 7% rise in sales, with the key uniform rental and facility services segment seeing slightly slower revenue gains of 6.6%. The first aid and safety services unit continued to outperform, with growth of 10.2% strengthening from its figures earlier in the fiscal year.

Two things played a key role in goosing earnings higher for Cintas. First, a one-time gain on the sale of an investment contributed more than $69 million to pre-tax profit for the quarter. Also, tax reform kept paying dividends for Cintas, with its effective tax rate falling 9 percentage points to just over 24%.

Cost containment also contributed to the company's bottom line. Gross margin for the uniform rental and facility services business climbed about 0.6 percentage points to almost 45.3%, and overhead expenses climbed at just a 5% rate, slower than Cintas's sales growth rate. Declines in interest expense were also helpful, even though they were less extensive than investors have seen in previous periods.

CEO Scott Farmer kept his comments simple. "The company is on pace to achieve another year of strong growth in revenue, earnings, and cash flow generation," Farmer said, and the CEO also noted that the company's annual dividend earlier this month was 26% higher than its 2017 dividend, marking the 35th straight year that Cintas has boosted its annual payout.

Can Cintas keep building momentum?

Cintas is also optimistic about the future. With the integration of the G&K acquisition having made substantial headway, the company remains on track with most of its major strategic objectives. Executives were also largely silent about any worries about perceived deterioration in the strength of the U.S. economy.

That optimism showed up in improved guidance for the full 2019 fiscal year. Revenue for the uniform rental specialist is now projected to be $55 million to $70 million higher than Cintas's previous forecast, with a new range of $6.87 billion to $6.91 billion. Earnings of $7.30 to $7.38 per share would be about $0.10 higher than what Cintas had believed three months ago that it would bring in for the fiscal year.

Cintas investors were happy with the results, and the stock jumped 4% in premarket trading Friday following the Thursday-afternoon announcement. With the uniform rental company seemingly on track to sustain its recent success, Cintas has its shareholders as excited as they can be that it can escape the negative impact of a bear market and produce strong fundamental performance for 2019 and beyond.

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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.