Cintas Beats Inflation With Operating Leverage

Cintas Beats Inflation With Operating Leverage
  • Cintas beat on the top and bottom lines and raised guidance.
  • Cintas is supported by a double tailwind that has it on track for capital returns in 2023.
  • Other labor market stocks should see similar strengths in 2023.
  • 5 stocks we like better than Cintas

Cintas Corporation (NYSE:CTAS) has something every business in the S&P 500 wishes it had right now; the operating leverage to improve margins despite the ongoing impact of inflation. The company just reported double-digit increases at all levels of operations, driven by a story that has been unfolding for years within the labor-market-related business services industry.

.first{clear:both;margin-left:0}.one-third{width:31.034482758621%;float:left;margin-left:3.448275862069%}.two-thirds{width:65.51724137931%;float:left}form.ebook-styles .af-element input{border:0;border-radius:0;padding:8px}form.ebook-styles .af-element{width:220px;float:left}form.ebook-styles .af-element.buttonContainer{width:115px;float:left;margin-left: 6px;}form.ebook-styles .af-element.buttonContainer input.submit{width:115px;padding:10px 6px 8px;text-transform:uppercase;border-radius:0;border:0;font-size:15px}form.ebook-styles .af-body.af-standards input.submit{width:115px}form.ebook-styles .af-element.privacyPolicy{width:100%;font-size:12px;margin:10px auto 0}form.ebook-styles .af-element.privacyPolicy p{font-size:11px;margin-bottom:0}form.ebook-styles .af-body input.text{height:40px;padding:2px 10px !important} form.ebook-styles .error, form.ebook-styles #error { color:#d00; } form.ebook-styles .formfields h1, form.ebook-styles .formfields #mg-logo, form.ebook-styles .formfields #mg-footer { display: none; } form.ebook-styles .formfields { font-size: 12px; } form.ebook-styles .formfields p { margin: 4px 0; }

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2022 hedge fund letters, conferences and more

How Buffett Has Borrowed Heavily To Juice Berkshire’s Returns

Warren Buffett has always advised investors against borrowing money to buy stocks or, indeed, any other asset. In 1991, during a question-and-answer session at Notre Dame, Buffett used Donald Trump’s financial troubles (Trump’s empire narrowly escaped collapse in the early 1990s after the property investor was able to extend the repayment schedule for his debt) Read More

That story is one of growing customer counts and deepening penetration due to expanding workforces and added services. This means a double tailwind for the industry that Cintas is on the cusp of hitting new all times highs once again.

“Our financial performance is the result of the exceptional execution of our employee-partners in providing businesses with the image, safety, cleanliness and compliance they need to get Ready for the Workday®.

Each of our operating segments again grew revenue at a double-digit rate. Strong volume growth from new customers and the penetration of existing customers with more products and services generated operating leverage,” said Todd M. Schneider, Cintas’ President and Chief Executive Officer.

Table of Contents
show

Dividend Aristocrat Cintas Proves Its Worth … Again

Anyone that’s kept track of Cintas over the past several decades knows that is a high-quality company with some of the best-run operations you can buy. The company has been working diligently to expand on an organic and acquisitional basis and has done so with aplomb. The Q2 results are a testament to those efforts as much as anything else and have the revenue up 13% versus last year and up 18% versus pre-pandemic levels.

The revenue beat the consensus by 190 basis points as well, and strength was able to carry through to the bottom line. Revenue growth was supported by double-digit gains in both operations segments as well.

Regarding the margin, the gross profit increased by 15% on a 100 basis point increase in margin. This drove a 16.7% increase in operating income, aided by a 70 basis point improvement in margin percentage. The net income came in at a lesser 10% due to rising costs and the company’s ongoing commitment to return capital to shareholders.

The key takeaway is that GAAP earnings of $3.12 are $0.09 or 300 basis points above the consensus estimate and 60 basis points more outperformance than shown on the top line. Earnings, by the way, are up more than 53% versus pre-pandemic levels.

Turning to the guidance, the news is good, but the specter of inflation can still be seen. The company upped its targets for revenue and earnings but upped the top end more than the bottom. The new guidance has revenue in a range above the previous and the current Marketbeat.com consensus. At the same time, the earnings are expected to be higher but bracketing the consensus (with ample room for outperformance).

Cintas On Track For Capital Returns

Cintas is among the highest-quality dividend growth stocks and many other groupings and has increased its payout for nearly 40 years. The current yield isn’t all that attractive by itself at 1.0%, but it is a safe and growing distribution coupled with share repurchases and a solid track record of company growth. Repurchases reduced the share count by about 2.0% over the last year and should continue on into the future.

The company’s balance sheet is a fortress, and its cash flow can sustain repurchases and dividend increases for many years. At the current payout level, the company is only distributing about 37% of its earnings, so investors might expect the double-digit growth pace to continue for at least another year or two.

The Technical Outlook: Cintas Hits Resistance, But Techs Are Bullish

The price action in Cintas stock popped in the wake of the earnings release but hit resistance the next day. The takeaway is that support at the short-term EMA appears to be strong so the battle at $460 could be fierce.

Assuming the market follows through on the early signals being given, the bulls should win the fight and drive the stock to a new high. The question is if they can hold it and then start another rally. If so, this stock could hit the $500 level in early 2023. If not, Cintas stock will be range bound at or near current levels until there is some change in the general outlook.

Cintas

Should you invest $1,000 in Cintas right now?

Before you consider Cintas, you’ll want to hear this.

MarketBeat keeps track of Wall Street’s top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… and Cintas wasn’t on the list.

While Cintas currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

Article by Thomas Hughes, MarketBeat

Comments are closed.