January 1, 2009
Cintas Corporation |(CTAS - NYSE) |$47.88 | |
Note: More details to come; changes are highlighted. Except where highlighted, no other section of this report has been updated.
Reason for Report: Flash Update: 3Q13 Earnings Release
Prev. Ed.: June 24, 2013, Minor Changes in Estimate
Flash News Update [Earnings Update to Follow]
On July 15, 2013, Cintas reported its 4Q13 and FY13 financial results.
Cintas reported strong 4Q13 (ended May 31, 2013) results with record revenue and healthy year-over-year increase in earnings. Net income for the reported quarter was $86.0 million or $0.69 per share compared with $78.6 million or $0.60 per share in the year-earlier quarter. While absolute earnings increased 9.4% year over year, it increased 15.0% on a per share basis due to a positive impact from the share buyback program. However, the reported earnings marginally missed the Zacks Consensus Estimate by $0.01.
For FY13, net income rose 6.0% to $315.4 million from $297.6 million in FY12. On a per share basis, earnings surged 11.0% year over year to $2.52 from $2.27 in FY12. This is the third consecutive fiscal year in which Cintas recorded a double-digit increase in earnings despite a challenging macroeconomic environment.
Operational Update
Total quarterly revenue increased 7.2% year over year to $1.13 billion, slightly ahead of the Zacks Consensus Estimate of $1.12 billion. Organic growth (adjusted for the impact of acquisitions) was 6.2% with a strong execution of operational plans, which include a diligent focus on stringent cost-control measures and improvement in efficiency levels.
For FY13, Cintas generated record revenues of $4.32 billion, which represented a 5.2% increase from the prior fiscal. Taking in to account the effect of one less workday in the reported fiscal compared with FY12, total revenue improved 5.6% year over year. Organic growth for FY13 was 4.9%.
Segment Performance
Rental Uniforms and Ancillary Products revenues for the quarter improved 4.8% year over year to $785.0 million, accounting for 70% of the total company revenue. Gross margin decreased to 42.1% from 43.3% in the year-ago quarter due to the adverse effect of higher material and service costs associated with added route capacity.
Revenues for Uniform Direct Sales aggregated $124.7 million (up 12.1% year over year) and accounted for 11% of the company’s revenues. Gross margin remained relatively flat at 30.8%.
First Aid, Safety and Fire Protection Services revenues climbed 15.1% to a record quarterly tally of $125.4 million, representing 11% of the company’s total revenue. Gross margin improved 110 bps year over year to 43.5% by leveraging infrastructure facilities for an improved mix of higher-margin sale items.
Revenues for Document Management Services segment increased 11.3% year over year to a record quarterly total of $94.0 million, accounting for 8% of the total company revenue. Gross margin for the segment was 46.4%.
Financial Position
Cintas has a solid financial position with adequate liquidity. Cash and cash equivalents were $352.3 million at fiscal-end 2013 compared with $339.8 million at fiscal-end 2012. Long-term debt was $1.31 billion as of May 31, 2013 compared with $1.28 billion in the year-ago period. Cash flow from operations was $552.7 million for FY13, representing a 17.6% increase from the comparable period in the previous fiscal. Cash from operating activities in the reported quarter was $184 million, compared with $162 million in the year-ago quarter.
Fiscal 2014 Outlook
For FY14, Cintas expects revenue to be in the range of $4.5 billion-$4.6 billion with continued softness in the market due to several factors including the Affordable Care Act. Earnings are expected to be in the range of $2.66-$2.75 per share.
Moving Forward
Cintas continues to deliver organic growth through superior execution of its operational plans. The company witnessed top-line growth across all the segments in the reported quarter and expects to continue this bull run in the coming quarters as well, albeit at a moderate pace. We also remain encouraged with the relatively strong quarterly and fiscal performances of the company.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON CTAS.
Portfolio Manager Executive Summary [Note: only highlighted material has been changed]
Cintas Corporation (CTAS or the company) provides specialized services to varied businesses across the United States and Canada. The company classifies its businesses into two operating segments: 1.Rental Uniforms and Ancillary Products and 2.Other Services. The Other Services consists of Uniform Direct Sales, First Aid, Safety and Fire Protection, and Document Management.
About 67% of the firms in the Digest Group covering the stock provided neutral rating, 25% assigned positive rating and 8.0% of the firms were negative on the stock.
Neutral or equivalent outlook – Eight firms - These firms believe that the current lackluster employment scenario and incremental pricing erosion will be headwinds in the upcoming quarters. The company thus plans to add delivery and plant capacity to meet the requirements of new customers. According to the firms, however, this addition could diminish the near-term incremental margins. Moreover, the firms believe lower recycled paper prices will negatively impact margins. The U.S. tax policies and the impact of changing healthcare regulations have created obstacles in many of the business activities. Further, the firms favor the company’s peers as they have better near-term as well as long-term growth prospects. Continued competitive pricing environment for national and large regional deals is also a concern for the company. Therefore, the firms remain on the sidelines until the macroeconomic conditions improve and the valuation becomes more attractive.
Positive or equivalent outlook – Three firms - These firms believe new business wins will remain a primary growth driver, moving ahead. The company continues to deliver organic growth by new business wins. Also, these firms believe that the improvement in add-stop metric, which signifies that some companies are beginning to add employees, could lead to an increase in route density with further improvements in the job market. The firms are of the opinion that Cintas has a healthy balance sheet and its share buyback initiative will boost earnings in the next quarters. The firms believe that the company is well positioned to be an industry consolidator based on its leadership position. Thus, these firms continue to prefer this stock and believe it can deliver potential earnings upside as the company wins new businesses and the add-stop metric continues to improve.
Negative or equivalent outlook – One firm - The firm believes that employment growth has been choppy and disappointing over the past few months and this could be a potential headwind for the company, going forward.
Jun 24, 2013
Overview [Note: only highlighted material has been changed]
Brokerage firms identified the following key factors for evaluating the investment merits of CTAS:
|Key Positive Arguments |Key Negative Arguments |
|The market growth of Cintas is compounded by an industry structure that |Numerous local, regional, and national competitors are targeting the |
|favors development and funding of automated laundry facilities. |company’s markets. Competitors at times target market share at the |
| |expense of margins, as a result of which Cintas’ profitability can be |
| |negatively impacted. |
|With over several hundred small operators in North America unable to match |Cintas’ long-term strategy involves acquiring other local and regional |
|the quality and financial power of the majors, Cintas has ample acquisition |competitors. Acquisitions bring additional risks associated with |
|opportunities available. |integration, rationalization, and employee culture. |
|Increased market penetration, acquisitions, and cross-selling of new products|The company cited a weakening manufacturing employment level to have |
|enable Cintas to reaccelerate its growth. |affected the size of the served markets, customer retention rate, and |
| |pricing, which in turn is likely to negatively impact both revenue and |
| |profitability margins. |
|The massive amount of free cash flow generated by Cintas will be used to |The growth rate of the uniform rental industry slows down as the |
|pursue acquisitions and internal growth opportunities. |penetration rate rises steadily. This maturation is likely to put |
| |pressure on the growth of Cintas. |
Based in Cincinnati, Ohio, Cintas Corporation (CTAS or the Company) provides specialized services to businesses of all types throughout North America. The company designs, manufactures, and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products, and first aid and safety products.
The Rental Uniforms and Ancillary Products operating segment designs and manufactures corporate identity uniforms that it rents along with other items. The Other Services segment consists of Uniform Direct Sales, First Aid, Safety and Fire Protection, and Document Management. The Uniform Direct Sales business designs, manufactures, sells, and delivers uniforms and promotional products to customers including airlines, hotels, and restaurants. This business markets through a direct sales force, catalog, and the Internet. First Aid, Safety, and Fire Protection delivers first aid, safety, and compliance products to businesses in 60 of the top 100 U.S. markets, while Document Management provides on-site shredding of confidential documents. Cintas has also been experimenting with a Document Storage business and now has five such facilities.
Further information is available at the Company’s website: .
NOTE: The Company's fiscal year ends on May 31; all fiscal references differ from the calendar year.
Jun 24, 2013
Long Term Growth [Note: only highlighted material has been changed]
The firms believe that the company’s shift toward the rapid growth and higher-margin non-uniform businesses (First Aid & Safety, Document Management) will act as a positive catalyst over the long term. Despite the stabilization in its core rental organic growth rate, Cintas continues to face significant headwinds from slower U.S. economic growth and declining employment levels at existing accounts, leading to a loss of businesses, and a decline in uniform wearers. Cintas and its peers also continue to battle numerous cost pressures. However, the company is attempting to combat some of these negative trends through its sales force reorganization (Project One), which help improve sales productivity (in terms of new business) and turnover. Cintas’ efforts to focus on the acquisition of new customers and penetration of existing accounts are sure to reap some new benefits in the long term. These firms believe that an acquisition or a series of acquisitions in the uniform space would be wise as the company could continue to add scale in the existing facilities and routes and further enhance the already strong cash flow profile of the company.
Overall, the firms believe Cintas is making the right strategic move to expand and diversify its service offerings and customer base as its core uniform rental market matures.
Jun 24, 2013
Target Price/Valuation [Note: only highlighted material has been changed]
Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:
|Rating Distribution |
|Positive |25.00% |
|Neutral |67.00% |
|Negative |8.00% |
|Avg. Target Price |$45.83↑ |
|Digest High |$53.00 |
|Digest Low |$41.00 |
|No. of Firms with Target Price/Total |6/12 |
Risks to the target price include; a highly competitive industry, maturing uniform industry, increasing prices of raw materials (particularly cotton), risk of integration brought about by acquisitions, risks from political environment, etc.
Recent Events [Note: only highlighted material has been changed]
On June 10, 2013, The Building Owners and Managers Association (BOMA) International announced adding Cintas Fire Protection (CTAS), a leader in the fire life safety industry, to its Partnership Program. As a BOMA Leadership Circle Partner, Cintas Fire Protection pledges to support BOMA’s vital programs in advocacy, education and research.
On June 5, 2013, Cintas announced that it diverted more than 17 million 16.9-ounce plastic bottles from landfills in 2012 through the production of its EcoGeneratio line. This represents a 13% increase over 2011.
On Apr 22, 2013, Cintas announced recycled over one million pounds of paper during its free Shred USA Earth Day events throughout the U.S. This resulted in more than 12,000 trees being saved. Further, the recycling helped to remove 2.8 million pounds of greenhouse gases, or the equivalent of taking 254 cars off the road annually.
On Mar 9, 2013, Cintas reported 3Q13 (ended Feb 28, 2013) earnings of $0.60 per share compared with $0.58 per share in 3Q12.Total revenue in 3Q13 increased 6.3% year over year to $1.076 million.
On Jan 8, 2013, Cintas extended its operations in Europe by forging a new commercial partnership with The CALVELEX GROUP, a Portugal-based clothes manufacturing company. With this strategic tie-up, Cintas will likely expand its uniform design, production and support services in Europe to meet the increased demand for corporate apparel services.
Revenue [Note: only highlighted material has been changed]
Total revenue increased 6.3% year over year to $1.076 billion in 3Q13. The record top-line performance was primarily attributable to strong Uniform Direct Sales.
Organic growth (adjusted for acquisitions and the impact of one less workday) was 6.9% with strong execution by the global accounts and supply chain teams.
The average price for recycled paper prices in 3Q13 was $140 per ton compared with $135 per ton in 3Q12.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
|Total Revenue ($ in million) |3Q12A |
|Lead Analyst |Supriyo Bose |
|QCA |Supriyo Bose |
|No. of brokers reported/Total | |
|brokers | |
|Reason for Update |Flash |
| | |
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