Morningstar | Cintas' Fiscal 1Q Organic Growth Moderates, but Should Recover as Year Progresses
In its fiscal first quarter of 2019 (ended August), uniform rental specialist Cintas’ total revenue increased roughly 5% organically, roughly in line with our expectations and similar to that posted in the fiscal fourth quarter. Year-over-year organic growth pulled back slightly over the past few quarters, but that’s not unexpected given G&K’s (acquired March 21, 2017) slower growth profile. Excluding G&K integration costs and noise from a nonrecurring uptick in stock-comp expense, adjusted operating profitability is generally tracking our expectations. Since our midcycle revenue and margin forecasts remain intact, we don’t expect to materially alter our $120 fair value estimate. Overall, Cintas’ operating performance continues to impress, but the shares look rich, in our view.On an organic basis, the flagship uniform rental business expanded 4.9% year over year, down slightly from 5.3% last quarter and roughly 7% on average during the first nine months of fiscal 2018, mostly because of the G&K impact. That said, we expect organic growth to recover as fiscal 2019 progresses, with help from ramping cross-selling efforts at G&K. Cintas’ operational execution remains strong in terms of adding new programmers, boosting account penetration with ancillary services, and integrating G&K’s sizable uniform rental operations. Management’s original target for G&K-related annual cost and revenue synergies of $130 million to $140 million (within four years of deal close) looks to be comfortably in play.
Cintas’ first aid division posted underlying growth near 9.0% (9.4% last quarter). Solid first aid unit expansion stems from previous Zee Medical integration efforts, including investment in sales headcount. Excluding nonrecurring costs, Cintas’ consolidated EBIT margin improved roughly 100 basis points, to 16.7%. In terms of guidance, management expects fiscal 2019 revenue of $6.80 billion-$6.86 billion, with EPS of $7.19-$7.29, excluding $15 million-$20 million of expected G&K integration costs.
Cintas is a provider of corporate identity uniforms through rental and sales programs, as well as a provider of related business services, including entrance mats, restroom cleaning services and supplies, carpet and tile cleaning services, first aid and safety services and fire protection products and services. The company's segments are Uniform Rental and Facility Services, which consists of the rental and servicing of uniforms and other garments, including flame resistant clothing, mats, mops and shop towels and other ancillary items; and The First Aid and Safety Services, which consists of first aid and safety products and services.
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