Cintas Corporation CTAS kept its earnings streak alive by delivering better-than-expected results for the first quarter of fiscal 2019 (ended Aug 31, 2018). It recorded earnings beat of 8.4% and sales beat of 0.7% in the quarter under review.
The company’s adjusted earnings in the reported quarter were $1.93 per share, surpassing the Zacks Consensus Estimate of $1.78. On a year-over-year basis, the bottom line increased 30.4% from the year-ago tally of $1.48 on the back of healthy segmental business and lower tax expenses.
It’s worth noting here that adjusted earnings per share of $1.93 exclude adverse impacts of 4 cents of expenses related to the G&K buyout, completed in March 2017.
Organic Sales Growth Drives Top Line
In the quarter under review, Cintas’ net sales were $1,698 million, reflecting growth of 5.4% from the year-ago quarter. The improvement was driven primarily by organic sales growth of 5.2%.
Further, the top line marginally exceeded the Zacks Consensus Estimate of $1,687 million.
The company has two reportable segments — Uniform Rental and Facility Services, and First Aid and Safety Services. Other businesses, including Uniform Direct Sale and Fire Protection Services, are included in All Other. Quarterly sales data is briefly discussed below:
Revenues from Uniform Rental and Facility Services segment (representing 81% of the reported quarter’s net sales) were $1,374.9 million, increasing 4.8% year over year. Organic sales were recorded at 4.9%.
Revenues from First Aid and Safety Services segment (representing 9% of the reported quarter’s net sales) totaled $153.4 million, increasing 9.1% year over year. Organic sales in the quarter increased 9%.
Revenues from All Other business (representing 10% of the reported quarter’s net sales) were $169.6 million, increasing 6.6% year over year.
Gross Margin Weak on Higher Costs
In the quarter under review, Cintas’ cost of sales (comprising costs related to uniform rental and facility services as well as others) increased 5.9% year over year to $923.3 million. It represented 54.4% of net sales compared with 54.1% in the year-ago quarter. Gross profit in the quarter increased 4.8% year over year while gross margin was down 30 basis points (bps) to 45.6%.
Selling and administrative expenses totaled $504.6 million, reflecting 3.8% increase over the year-ago tally. It represented 29.7% of net sales. Effective tax rate in the reported quarter was 12%, way below 26.5% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the first quarter of fiscal 2019, Cintas’ cash and cash equivalents were $118.4 million, roughly 14.7% below $138.7 million at the end of the last-reported quarter. Long-term debt roughly remained stable, sequentially, at $2,535.9 million.
In the reported quarter, the company generated net cash of $163 million from its operating activities, decreasing 35.9% from the year-ago tally. Capital expenditure totaled $64.5 million, reflecting year-over-year growth of 3.2%. Fall in operating cash flow and rise in capital expenditure led to roughly 48.7% decline in free cash to $98.5 million.
During the quarter under review, the company used repurchased shares worth $139.5 million.
Outlook
Cintas remains focused on increasing the number of businesses it serves, effectively integrating G&K assets and execution of its enterprise resource planning system.
Driven by first-quarter performance, the company has increased projections for fiscal 2019. Revenues are now anticipated to be $6.80-$6.855 billion, above previously stated $6.75-$6.82 billion. The revised guidance reflects year-over-year growth of 5-5.8%. Organic sales for the Uniform Rental and Facility Services segment are estimated to grow in the quarters left in fiscal 2019.
Earnings are predicted to be $7.19-$7.29 per share versus $7.00-$7.15 stated earlier. On a year-over-year basis, earnings per share represent growth of 21-22.7% from the previous fiscal. Moreover, the revised projection excludes impact of G&K integration expenses of $15-$20 million.
Cintas Corporation Price, Consensus and EPS Surprise
Cintas Corporation Price, Consensus and EPS Surprise | Cintas Corporation Quote
Zacks Rank & Stocks to Consider
With a market capitalization of approximately $23.1 billion, Cintas currently carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the Zacks Industrial Products sector are Colfax Corporation CFX, DXP Enterprises, Inc. DXPE and Barnes Group Inc. B. While both Colfax and DXP Enterprises sport a Zacks Rank #1 (Strong Buy), Barnes Group carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for each of these stocks improved for the current year and next. The average positive earnings surprise for the last four quarters was 7.91% for Colfax, 101.32% for DXP enterprises and 6.88% for Barnes Group.
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