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Shares of Cintas well positioned for a rebound

I remain upbeat about the shares of Cintas (CTAS), a US largest producer of corporate uniform and a provider of diversified services for businesses. The company financials for its fiscal 2017 first quarter (ended Aug 31) were solid. Revenues increased 7.9% y-o-y to $1.294 bn and came in slightly ahead of consensus estimate. Organic sales grew 5.7% on the back of addition of new customers, strong customer retention and higher penetration of existing customers through better and innovative products and services. Operating income rose 11.6% to $207 mn, and operating margin improved 50 basis points to 16%. Adjusted earnings per share of $1.12 beat analysts’ average projection by 3 cents.

Cintas has solid financial position with adequate liquidity. The company exited FQ1 with cash and cash equivalents of $99.2 mn and long-term debt of $1.045 bn. Net cash from operating activities was $157.6 mn, up 10.1% y-o-y. In October, the company raised its annual dividend by 26.7% to $1.33 per share, which offers dividend yield of around 1.3%.

During the reported quarter, the company inked a definitive agreement to acquire rival G&K Services for $2.2 bn (including acquired net debt) to fuel its growth momentum. The transaction is expected to be completed within the next four to six months, subject to the fulfillment of mandatory closing conditions and regulatory approvals. The deal is expected to open up additional processing capacity and route density, which should produce cost savings and greater operational efficiency. The synergies from the combined operations are likely to yield $130-140 mn in cost savings, and the transaction is anticipated to be accretive to Cintas’ earnings from the second year of its operation.

Buoyed by the healthy FQ1 results, Cintas improved its guidance for full fiscal year 2017. The company expects fiscal 2017 revenues in the range of $5.160-5.225 bn, up 5.2-6.5% y-o-y. Earnings from continuing operations are now projected to be within $4.55-4.63 per share compared with $4.35-4.45 per share anticipated earlier. The new EPS guidance represents a year-over-year growth of 11.2-13.2%.

After a significant decline, shares of Cintas have found support near $105 level. The stock, I believe, is well positioned for a rebound, with medium-term target at $120.