EUR 850.00 For Business Accounts Only

Morningstar | Cintas Continues to Fire on All Cylinders in Its Fiscal 4Q 2019, Though Shares Look Quite Rich

In its fiscal fourth-quarter 2019 (ended May), uniform-rental specialist Cintas’ total revenue grew roughly 7.5% organically, ahead of our expectations due to a better-than-expected showing in the fire protection services operations (part of the “all other” division). Core uniform segment organic growth was mostly in line, as the firm continues to exhibit impressive sales execution (with particular strength among services-sector companies outsourcing uniform programs, along with greater penetration among existing accounts), while benefiting from positive underlying U.S. macroeconomic conditions, including solid nonfarm payroll gains. Excluding G&K integration costs, adjusted operating profitability came in slightly better than our forecast on robust leverage from revenue growth across all segments.

Given Cintas’ strong performance this past year, we are increasing our top-line growth and margin forecasts for fiscal 2020 while giving the firm slightly more credit for its midcycle EBIT margin potential (up 30 basis points to about 17.1%). Coupled with the time value of money, this change will likely result in an 8%-10% increase in our $127 fair value estimate. That said, although Cintas’ operating performance remains impressive, we think the shares are overvalued, as the firm’s persistent earnings beats over the past several years have driven sentiment to very high levels. We think the market price implies midcycle organic revenue growth and operating margins that overlook the cyclical nature of Cintas’ uniform rental operations.

In terms of highlights, on an organic basis, the flagship uniform rental business expanded 6.8% year over year (6.1% for the full fiscal-year 2019). The first-aid division posted strong underlying growth near 10.7% (9.5% for the year), up from 8.6% last quarter. In short, customer outsourcing, cross-selling, and increased customer penetration remain healthy. Excluding non-recurring costs, Cintas’ adjusted EBIT margin improved 80 basis points to 17.6%. Of note, G&K integration efforts continue to progress smoothly, and the firm is solidly on track to achieve its originally targeted $135 million of synergies by fiscal 2021; in fact, management thinks Cintas may reach that goal a year ahead of schedule. Management expects fiscal 2020 revenue of $ $7.24 billion-$7.31 billion, with EPS in a range of $8.30-$8.45, excluding future expected G&K integration costs. EPS guidance compares with previous consensus near $8.35.