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Stock Analyst Update

No Surprises From Cintas

The wide-moat company's impressive operational execution persists in terms of adding new programmers and boosting account penetration with ancillary services.


In its fiscal second-quarter 2018 (ended November), wide-moat uniform-rental specialist  Cintas(CTAS) consolidated top line increased 7.7% organically, not far off last quarter's 8.3%. Total operating margin also came in modestly ahead of our expectations--core uniform segment and first aid unit profitability were in line, but the lumpy direct sales and fire protection division came in ahead. We expect to increase our fair value estimate by 6%-8% due to modestly raising our revenue forecasts for fiscal 2018 and 2019 and incrementally adjusting our effective tax rate estimates to reflect the new 21% statutory corporate tax rate. We were already baking in a 25% rate. The company's shares continue to look overvalued.

On an organic basis, the core uniform rental business expanded 7.3% year over year, versus 8.1% last quarter, but still ahead of the 7% rise posted in fiscal 2017. Cintas' impressive operational execution persists in terms of adding new programmers and boosting account penetration with ancillary services. The firm is also getting off to a strong start integrating G&K’s sizable uniform rental operations. The “all other” segment (direct-uniform sales and fire-protection services) was up 7.8% organically (6.3% last quarter), while the first-aid business posted healthy 10.8% underlying growth (11.9% last quarter; 6% for fiscal 2017). Solid first-aid division growth stems from successful Zee Medical integration efforts, including investment in sales headcount.

Excluding transaction costs, Cintas’ total operating margin fell 40 basis points to 15.5%. The decline was due to G&K’s network, which has less route density, as well as G&K related intangibles amortization and higher depreciation linked to the recent SAP system implementation. In terms of guidance, management expects fiscal 2018 total revenue of $6.37 billion-$6.43 billion, with EPS in a range of $5.39-$5.46 (previously $5.30-$5.38). Guidance excludes future G&K integration costs and U.S. tax reform.

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Matthew Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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