EUR 850.00 For Business Accounts Only

Morningstar | Cintas Continues to Make Solid G&K Integration Progress in Its Fiscal Fourth Quarter

In its fiscal fourth-quarter 2018 (ended May), uniform-rental specialist Cintas’ consolidated top line increased a healthy 5% organically but was below the approximate 8% run rate it had posted throughout most of the year largely because of incorporating G&K’s (acquired March 2017) slower organic growth profile. A tough project-work comparison for the uniform direct sales division also played a role. That said, revenue growth was largely in line with our expected run rate. Excluding G&K integration costs, adjusted operating profitability was also in line and is trending nicely. We expect to raise our $113 fair value estimate by about 6% due to modestly increasing our longer-term margin assumptions to give slightly more credit for bringing G&K profitability up to legacy Cintas levels. The time value of money also contributes to our planned increase. Overall, Cintas’ operating performance continues to impress, but the shares still look overvalued, in our view.

On an organic basis, the flagship uniform rental business expanded 5.3% year over year, down from the 6.5% posted last quarter due to the impact of G&K. That said, that’s still a healthy growth rate, the firm’s sales execution remains strong, and we expect growth to ramp back up a bit in the second half of fiscal 2019 as cross-selling efforts begin to take hold at G&K. Cintas’ solid operational execution persists in terms of adding new programmers, boosting account penetration with ancillary services, and integrating G&K’s sizable uniform rental operations. Management noted that all G&K’s locations have been converted to Cintas’ operating system.

Cintas’ first-aid division once again posted robust underlying growth near 9.5% (10.0% last quarter). Solid first-aid unit expansion stems from previous Zee Medical integration efforts, including investment in sales headcount. Excluding non-recurring costs, Cintas’ consolidated EBIT margin improved roughly 100 basis points, to 16.8%, due in part to strong progress recognizing G&K cost synergies. In terms of guidance, management expects fiscal 2019 revenue of $6.75 billion-$6.82 billion, with EPS in a range of $7.00-$7.15, excluding $15 million-$20 million of expected incremental G&K integration costs.