Cintas (CTAS, Financial) recently reported the second quarter of its fiscal year 2017. Shares of the $12.2 billion business services company fell 3.1% the day after having delivered a 7.2% sales growth to $2.5 billion and a disappointing negative 37.5% change in its profits to $278.7 million in Cintas’ first-half fiscal 2017 operations.
As observed, Cintas recorded lower profits brought by a one-time gain last year when the company sold its Shred-it investment to Stericycle (SRCL, Financial). Completely eliminating any contribution to profits brought by any discontinued operations, Cintas would have delivered a profit growth of 18% year on year.
“This is our 13th consecutive quarter of year-over-year gross margin improvement. This, along with our industry-leading organic sales growth, is a reflection of the significant opportunities that exist for us and of the great execution of our employees, whom we call partners.” – Scott D. Farmer, Cintas’ chairman and CEO
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In addition, Cintas sees its sales growing between 5.6% and 6.5% for fiscal year 2017. The company also sees its earnings-per-share (EPS) growth between 11.7% and 13.7%. Cintas had five-year sales and profit growth averages of 5.18% and 22.94% (1).
Further, the company also just raised its dividend for the 33rd consecutive year, which is every year since the company went public in 1983. Cintas had a trailing dividend yield of 0.9% with a 24% payout ratio and 5.2% share buyback ratio (2).
Valuations
Cintas had a trailing price-earnings (P/E) ratio of 24 times (industry median 20), price-book (P/B) ratio of 6 times (industry median 2) and price-sales (P/S) ratio of 2.5 times (industry median 1.3; [2]).
Market performance
Cintas had a good run in 2016 with 29% total return to date compared to the Standard & Poor's 500 index’s 13%. On a five-year basis, the company still outperformed the index with 28% versus 14.8%.
(Cintas)
Cintas
Cintas was founded in 1968 by its current chairman emeritus, Richard T. Farmer. Cintas’ products and services include uniforms, floor care, restroom supplies, first aid and safety products, fire extinguishers and testing and safety and compliance training for employees primarily in North America, Latin America, Europe and Asia.
Cintas’ reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. In addition, Cintas also had an All Other segment.
(Cintas Statements of Income)
Uniform Rental and Facility Services
The segment consists of the rental and servicing of uniforms and other garments including flame-resistant clothing, mats, mops and shop towels and other ancillary items. According to Cintas, the segment also provides restroom cleaning services and supplies; carpet and tile cleaning services and the sale of items from Cintas’ catalogs to its customers.
In fiscal 2016, Uniform Rental and Facility Services grew 6.7% to $3.8 billion and contributed 77% in total Cintas sales and delivered a 17.8% before income tax margin – highest among the segments. In first-half fiscal 2017, the segment grew 6.9% year on year with an 18.1% margin.
First Aid and Safety Services
The segment consists of first aid and safety products and services. In fiscal 2016, the First Aid and Safety Services segment grew 41.4% to $461.8 million and contributed 9.4% to overall Cintas sales with a 10.8% margin. In Cintas’ recent two quarters, First Aid and Safety grew 13.5% and delivered a 10.5% margin.
As observed, Cintas’ $130 million cash acquisition of Zee Medical, a pioneer in van-delivered first aid and safety services, helped boost the segment’s sales operations in fiscal 2016 and first-half fiscal 2017.
Cintas stated that 30.6% of the segment growth out of the total 41.4% in fiscal 2016 came primarily from its Zee acquisition.
All Other
The segment consists primarily of Cintas’ Fire Protection Services and its Direct Sale business. In fiscal 2016, All Other segments grew 9.1% to $665.9 million and contributed 13.6% to overall sales and delivered an 8.9% margin before income tax.
Two quarters into fiscal 2017, the segment grew 4.4% and delivered a 6.2% margin.
(Cintas)
Cash, debt and book value
As of Nov. 30, Cintas had $143.6 million in cash and $1.11 billion in debt with a debt-equity ratio of 0.55, compared to 0.68 year on year. The company also had 30.9% of its $4.2 billion assets in goodwill while having a book value of $2 billion compared to $1.9 billion year on year.
Cash flow
(Cintas Cash Flow Resources)
Despite weak profit growth, Cintas grew its cash flow from operations in its first-half fiscal 2017 by 13.8% year over year. As observed, Cintas took in a bigger amount of cash flow last year, $349.7 million, compared to its recent period, $16.9 million, which has helped raise the company’s cash flow. In addition, Cintas also had lesser cash outflow in its inventories, uniforms in service among others.
Capital expenditures were $155.2 million, leaving Cintas with $146.5 million free cash flow compared to $143.2 million last year. The company allocated 13% of its free cash flow in share repurchases and placed 260% of its free cash flow over the past three fiscal years.
On an annual basis, Cintas also has steadily increased cash flow allocations in marketable securities and investments. In the recent first half, Cintas placed $118.3 million in these investment tools and received proceeds amounting to $173 million.
Admirably, Cintas had a net reduction in debt of $197.5 million for the period.
Conclusion
Cintas has been delivering good growth figures in recent years except for the anomaly that happened in a sequel to its divestment in the Shred-It business. As pointed out, Cintas could have still delivered good profit growth figures absent any discontinued operations.
The company also has been loyal in handing out dividends to its shareholders since the company began trading publicly. Accompanied by the admirable 33-year continuous dividend payouts, Cintas also has outperformed the broader market index consistently not only in recent years but also for the past decade.
Cintas also has an acceptable debt level and ratio although a bit more of goodwill found in its assets as a conservative investor would prefer less.
(Google Finance)
Last week, Stifel reiterated its outlook on Cintas as a hold with a target price of $123 per share. Using a 20% margin, Cintas’ EPS growth guidance and its five-year historical earnings multiple indicated a value of $114 per share.
With its shares hitting and/or surpassing its all-time high recently and eager chartists would probably state that Cintas shares are now hitting a bearish pattern of double-top –Â there is a good possibility that watching the company’s shares from the sidelines maybe a better move.
In summary, Cintas is a pass – unfortunately.
Notes
(1) Morningstar data.
(2) GuruFocus data.
Disclosure: I do not have shares in any of the companies mentioned.
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