Cintas Posts Solid Earnings as It Moves Out of Document Shredding

Image: Cintas.

Most investors associate Cintas with uniforms, as the company gets about three-quarters of its revenue from rental uniforms and other related products, and another 10% or so from direct sales of uniforms to workers. Yet coming into Thursday afternoon's fiscal fourth-quarter financial report, Cintas investors had already learned that the company had made the decision to divest itself of its document-shredding business, selling off the portion of the Shred-It partnership that it had gotten last year as part of a deal with private equity company Birch Hill Equity Partners and other Shred-it owners.

Although Cintas' results were fairly muted on a reported basis, the company's growth looks much more impressive when you take out the impact of the document-shredding business from its past-year results. Let's look more closely at what Cintas said, and what's ahead for the company going forward.

Cintas earnings show a new directionAs we've seen in previous quarters, Cintas' results look fairly tepid at first glance; but after making adjustments, the company's growth path gets clearer. Revenue of $1.14 billion was just 0.7% higher than last year's fiscal fourth quarter, and adjusted net income of $101.2 million fell 21%, working out to $0.86 per share. Yet when you take out the discontinued document-shredding business, net income actually rose more than 6%. Investors had expected just $0.85 per share in adjusted earnings, leading to a modest earnings beat.

A closer look at Cintas' lines of business showed pockets of strength. First Aid, Safety, and Fire Protection had the best results, with revenue growth of almost 10% for the quarter. Rental Uniforms and Ancillary Products, which is the most important division at Cintas, saw gains of 5.8%, but organic growth came in at a slightly faster 6.5% rate. Only the Uniform Direct Sales division held the company's sales gains back, with growth of just 0.3% year over year.

CEO Scott Farmer expressed pleasure at the results, noting that Cintas has "provided excellent customer service and increased the focus on managing our cost structure." Combined with solid contributions from its employees, Cintas believes that it has plenty of potential to grow from current levels.

How Cintas hopes to shred its competitors Looking forward, Cintas clearly thinks that getting rid of the Document Shredding business is a positive move. As it said in a press release yesterday, Cintas will sell its 42% stake in the Shred-it partnership to Stericycle, expecting to clear between $550 million and $600 million in pre-tax proceeds. The deal concludes a successful exit from the shredding business, with Cintas having collected $180 million from creating the Shred-it partnership last year, and also having received $113.4 million in dividends from the partnership a couple of months ago.

Meanwhile, Cintas continues to have ambitious growth plans. In its guidance for the 2016 fiscal year, Cintas said it expects $4.7 billion to $4.78 billion in revenue, representing growth of between 5% and 7% from 2015 levels. Earnings per share of $3.74 to $3.83 would equate to even faster growth of around 12% to 14% once you take out the impact of the Shred-it moves. For investors, though, that guidance is somewhat mixed, with the earnings range at the high-end of expectations, but the revenue guidance closer to the low-end.

Cintas clearly believes in positive prospects for its stock, as the company spent another $370 million on stock buybacks. Fiscal fourth-quarter repurchases of 2.9 million shares cost the company $237 million, and since the new fiscal year began, Cintas spent $133 million for another 1.5 million shares. Cintas is running out of authorized funds for future buybacks, with just $130 million remaining under the current authorization.

Cintas stock didn't respond too much to the news, initially falling in after-hours trading following the announcement, but then bouncing back to the unchanged level about an hour and 15 minutes into the session. Still, for long-term investors, Cintas appears to have a firm sense of its future strategy, and that could help the company keep executing well, and producing greater profits long down the road.

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