Cintas Falls On Great Results, Growth Is Back On The Table

 Cintas Is The Best-In-Breed Play On Labor Market Strength 

There are lots of ways to play the labor market but Cintas (NASDAQ: CTAS) is by far the best in the breed. The only problem with the stock is that is the best in the breed which means you pay a lot for what you get. The 35X earnings the company trades at is well above the broad market average and comes with a sub-average yield but there is more to this story than yield. 

Cintas is a growth stock with a long-term focus and on the verge of resuming its upward trend. The Q3 results were not only better than expected but point to acceleration within the labor market and a return to growth for this company. And not just compared to last year’s COVID-affected results. Based on what we’re seeing in the estimates and the data Cintas could easily top its record-high pre-COVID results in the current quarter and that should be a catalyst for a new all-time high. 

Cintas Beats On The Top And Bottom Line 

Cintas Q3 results are proof of two things. The first is that this company has weathered the pandemic and is ready for the economic reopening. The second is that labor market strength continues to build and points to robust economic activity this year. 

The top line of $1.78 billion is down -1.7% from last year’s Q3 which is a pre-COVID comparison but that is where the bad news ends. The good news is that top-line revenue is also up sequentially and 110 basis points better than expected. The even better news is that, on an organic basis, revenue was flat on a YOY with the Uniforms and Facilities Services revenue flat and Safety products up 17%. 

Moving down the report the details get even better due to widening margins, increased leverage, and better than expected earnings. The company’s gross margin improved by 10 basis points to aid a 100 basis point increase in operating margins and a 380 basis point increase in operating income. On the bottom line, the GAAP EPS grew 9.7% from last year and beat the consensus by $0.15.

The guidance is where the report gets really good because it shows the ongoing effects of wider margins as well as a return to pre-COVID levels of business. The company is expecting the Q4 revenue to be in the range of $1.80 to $1.83 billion versus the $1.62 billion earned last year in the 4th quarter and the $1.85 billion company record. And we feel this estimate is low because we expect to see employment ramp over the next month and the FOMC is calling for greater than 6.0% GDP growth this year. 

You Can Count Cintas Dividend Payment 

Cintas doesn’t have a high-yielding distribution but it is one that you can count on. The company has a long history of dividend payments and increases that point to future increases and the balance sheet and cash flow are strong enough to handle it. At only 30% of the company’s earnings, there is plenty of room to sustain dividend increases without an outlook for growth and this company has an outlook for growth. The balance sheet has some debt on it but it is well-managed and was used to help produce growth so ultimately pays for itself. As for the debt level, the company is only lightly levered and has ample coverage and free cash flow so nothing to worry about there. 

The Technical Outlook: Consolidating Within A Range 

Shares of CTAS are down about 2.0% following the Q3 release but don’t read too much into that. The move is already finding support at the short-term moving average and near the mid-point of the trading range. So long as this level holds up we see this stock moving sideways in the near-term and then edging higher as the employment data strengthens this spring. Longer-term, Cintas should move up to the top of the range by the early summer and then break out to new all-time highs in the second half of the year providing the economic recovery continues to unfold unabated.