Dress Up Your Portfolio with This Uniform Maker
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cintas Corporation (NASDAQ: CTAS), a provider of specialized services and uniforms to support businesses, posted decent fourth quarter results on Monday beating earnings expectations. But its shares plunged after the announcement in the wake of weak guidance. Let’s analyze further.
A Look into the Numbers
Revenue jumped 4.1% to $1.05 billion, but the bottom line experienced a multiplier effect, jumping to $78.6 million, an increase of 11% over the same quarter last year. Even better were the numbers for earnings per share which grew 22% to 60 cents per share. But this increase was due to a lower number of shares outstanding for the quarter. The uniform supplier is popular for its share buyback programs which are reflected in its earnings per share each time. Cintas differs from its rival G&K Services (NASDAQ: GK) in its strategy to provide value to its shareholders. It believes in buying back shares whereas G&K Services, the market leader in Canada, believes in delivering dividends. In fact, G&K had recently announced its dividend of $0.13 per share, each time paying out higher.
Getting back to Cintas, it managed to perform well because of a better job market in U.S. This pushed up its revenue from uniform rental sales which accounts for 52% of its total revenue. Despite higher material costs in the segment, uniform sales increased 5.2% over last year.
The star segment for the quarter was the First Aid, Safety and Fire protection services segment which registered revenue growth of 9.3% on account of higher volumes. Even the gross margin increased to 42.4% from 41.7% a year ago. However, the Document Management Services business was dull with an 8.2% decrease in its revenue. The key reason was the lower price of recycled paper which adversely affected the margins. Moreover, the tough European conditions pulled down the revenue to a great extent.
Cintas was on a buying spree last year, with acquisitions to enhance all 4 business segments. The benefits of the buyouts were evident in performance for the year in terms of a 21% increase in the net income. However, even if we ignore these effects, the uniform supplier lived up to expectations with a 4% increase in revenue for the quarter. This highlights the true ability of the company. Even the uniform direct sales segment grew 2% in spite of having no acquisitions in the segment.
The Road Ahead…
Uncertain economic conditions, a tepid job market and expected weak GDP growth have led the Cincinnati-based company to sound out a muted outlook. Moreover, the unfavorable impact of change in tax laws has made Cintas expect revenue in the range of $4.25 billion to $4.35 billion with earnings between $2.47 per share and $2.55 a share for the year. The company expects to do well and overcome the obstacles but with a less attractive year.
A good performer is the one which comes out in the green in spite of all the setbacks faced during the period. This is exactly what this gem has done. In spite of the drags of higher input costs, a weak economy, and a soft job market this service provider held its head high. Another point to note is that the uniform provider has been doing well from the last few quarters, fulfilling expectations each time. This looks like a good addition to your portfolio.
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