Cintas Reversal Gains Momentum
Shares of Cintas (NASDAQ: CTAS) corrected over the last three months and have put in a bottom. The bottom began to form in late January with an uptick in institutional buying and the market has since traced out a nice looking Head & Shoulders Reversal Pattern and the movement is gaining momentum. Not only are the institutions buying this stock, but the company, already one of the healthiest on the market, is outperforming expectations and raising guidance while still buying back shares and paying a very safe dividend. In our view, this is as good an entry point for the stock as we’ve seen and we’ve been covering Cintas for a very long time.
The institutions have been on board with this company for a very long time and have total ownership up around 63%. Their buying picked up in late Q4 when they netted $0.94 billion or about 2.3% of the market cap (with shares trading near $400) and accelerated again in Q1 of 2022. So far in Q1 of 2022, the institutions have bought a net $1.35 billion which is worth about 3.3% of the market cap and they are still buying. In fact, based on the Q3 results, we think their activity may pick up speed again. Cintas is a highly valued company but it is one of the best-run companies on the market today and its business is stronger than ever.
Cintas Beats And Raises, Taxes Will Cut Into Earnings
Cintas had a very good Q3 supported by economic expansion and reopening efforts. The company brought in $1.96 billion in net revenue for a gain of 10.3% over last year. This is up sequential as well as a company record and beat the consensus estimates by 260 basis points. The revenue is also up in the 2 and 3-year comparisons by double-digits so the strength is very real. On a segment basis, the core Uniform segment which is about 80% of revenue grew by 9.6% while the smaller Other category grew by 13.4%. The Other category includes First Aid and Fire Safety as well as other specialty supplies for niche markets.
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Moving down the report, the company logged improvement in both the gross and operating margins with gross margin up 20 basis points and operating margin up 240 basis points. The operating margin was impacted by a one-off investment-related event but, even when adjusted, the margin is up by 90 basis points including a 45 basis point increase in fuel costs. The margin strength was unexpected and led to outperformance on the bottom line. The $2.69 in adjusted earnings is up $0.32 from last year and beat the consensus by a full quarter dollar.
The guidance is good but there is a negative to be aware of. The company sees business strength carrying through into the 4th quarter and raised the revenue guidance because of it. The bad news is that better business means a higher tax rate and that will cut into earnings by $0.14 which is not something we want to see. The salient point, however, is that cash flow and FCF are very strong and support the idea of dividend increases and share buybacks. The company did not make any specific statement about buybacks in Q4 but it is a regular share-repurchaser and did allude to future share purchases. As for the dividend, the stock yields about 1.0%, is only 37% of consensus earnings and has been increased regularly for over two decades.
The Technical Outlook: Cintas Is Moving Higher
Shares of Cintas have exited their reversal and are now moving higher. The post-earnings release action is forming a continuation signal above the short-term moving average that we see leading to another $35 or so of upside. That puts the stock within striking distance of the all-time high and with an expectation of economic acceleration in the back half of the year. Assuming that story unfolds like expected, we see Cintas setting new all-time highs by mid-year and moving higher from there.
Companies in This Article:
| Company | Current Price | Price Change | Dividend Yield | P/E Ratio | Consensus Rating | Consensus Price Target |
|---|
| Cintas (CTAS) | $221.76 | +0.1% | 0.70% | 56.00 | Hold | $199.63 |
Experience
Thomas Hughes has been a contributing writer for InsiderTrades.com since 2019.
Areas of Expertise
Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies
Education
Associate of Arts in Culinary Technology
Past Experience
Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights.
