Cintas Beats Inflation With Operating Leverage

Key Points

• Cintas beat on the top and bottom lines and raised guidance. 
• Cintas is supported by a double tailwind that has it on track for capital returns in 2023. 
• Other labor market stocks should see similar strengths in 2023. 

Cintas Corporation NYSE: CTAS has something every business in the S&P 500 wishes it had right now; the operating leverage to improve margins despite the ongoing impact of inflation. The company just reported double-digit increases at all levels of operations, driven by a story that has been unfolding for years within the labor-market-related business services industry.

That story is one of growing customer counts and deepening penetration due to expanding workforces and added services. This means a double tailwind for the industry that Cintas is on the cusp of hitting new all times highs once again. 

"Our financial performance is the result of the exceptional execution of our employee-partners in providing businesses with the image, safety, cleanliness and compliance they need to get Ready for the Workday^®. Each of our operating segments again grew revenue at a double-digit rate. Strong volume growth from new customers and the penetration of existing customers with more products and services generated operating leverage," said Todd M. Schneider, Cintas' President and Chief Executive Officer. 

Dividend Aristocrat Cintas Proves Its Worth … Again 

Anyone that’s kept track of Cintas over the past several decades knows that is a high-quality company with some of the best-run operations you can buy. The company has been working diligently to expand on an organic and acquisitional basis and has done so with aplomb. The Q2 results are a testament to those efforts as much as anything else and have the revenue up 13% versus last year and up 18% versus pre-pandemic levels.

The revenue beat the consensus by 190 basis points as well, and strength was able to carry through to the bottom line. Revenue growth was supported by double-digit gains in both operations segments as well. 

Regarding the margin, the gross profit increased by 15% on a 100 basis point increase in margin. This drove a 16.7% increase in operating income, aided by a 70 basis point improvement in margin percentage. The net income came in at a lesser 10% due to rising costs and the company’s ongoing commitment to return capital to shareholders.

The key takeaway is that GAAP earnings of $3.12 are $0.09 or 300 basis points above the consensus estimate and 60 basis points more outperformance than shown on the top line. Earnings, by the way, are up more than 53% versus pre-pandemic levels. 

Turning to the guidance, the news is good, but the specter of inflation can still be seen. The company upped its targets for revenue and earnings but upped the top end more than the bottom. The new guidance has revenue in a range above the previous and the current Marketbeat.com consensus. At the same time, the earnings are expected to be higher but bracketing the consensus (with ample room for outperformance). 

Cintas On Track For Capital Returns 

Cintas is among the highest-quality dividend growth stocks and many other groupings and has increased its payout for nearly 40 years. The current yield isn’t all that attractive by itself at 1.0%, but it is a safe and growing distribution coupled with share repurchases and a solid track record of company growth. Repurchases reduced the share count by about 2.0% over the last year and should continue on into the future.

The company’s balance sheet is a fortress, and its cash flow can sustain repurchases and dividend increases for many years. At the current payout level, the company is only distributing about 37% of its earnings, so investors might expect the double-digit growth pace to continue for at least another year or two. 

The Technical Outlook: Cintas Hits Resistance, But Techs Are Bullish 

The price action in Cintas stock popped in the wake of the earnings release but hit resistance the next day. The takeaway is that support at the short-term EMA appears to be strong so the battle at $460 could be fierce. Assuming the market follows through on the early signals being given, the bulls should win the fight and drive the stock to a  new high. The question is if they can hold it and then start another rally. If so, this stock could hit the $500 level in early 2023. If not, Cintas stock will be range bound at or near current levels until there is some change in the general outlook.