Cintas Corp. (NASDAQ: CTAS) and others in the employer services industry are riding a wave of business that has yet to end. The pandemic caused a consolidation within the industry that led to increased client counts early on and increased penetration per client, resulting in a trend of revenue and earnings growth above the consensus.
Cintas, the blue-chip leader and clear market dominator, has a dividend growth stock of epic proportions. The company has increased its payout for the last 39 years and is on track to make it a 40th later in the year. While the dividend yield is a bit low at 1%, it also has share repurchases and a track record for growth that has the Cintas stock trending steadily higher in the long term.
Cintas Rises on Solid Results
Cintas had a solid recent quarter with revenue of $2.19 billion, up 11.7% and at new highs. The revenue beat the consensus by 180 basis points on strength in both segments. The core uniform segment gained 10% year-over-year (YOY) but remained outpaced by a 16.4% increase in the "other" category. The margin news is also favorable, with gross and operating margins increasing compared to the last year.
The gross margin improved by 140 basis points, and the adjusted operating margin by 110 bps drove robust results on the bottom line. The company's margin is adjusted for the one-off gain on an equity transaction which left the GAAP results down on a YOY basis. The takeaway is that $3.24 in adjusted EPS is up 16.9% compared to the top-line growth of 11.7%, and it should boast strength through the end of the year.
Cintas raised its guidance for revenue and earnings to a range above the midpoint of the previous. The company expects revenue of at least $8.74 billion compared to the previous high target of $8.75 billion, with earnings of $12.70 at the low end of the range. The $12.70 in expected financial year EPS puts the fourth-quarter target at $3.05, up 8.5% compared to last year and five cents above the Marketbeat.com consensus figure.
Will the Analysts Provide a Tailwind for Cintas?
Analysts usually adjust their ratings for Cintas a day or two after reporting results, and investors should expect upward revisions.
As it is, the analysts rate the stock a "moderate buy" with a price target trending upward, albeit consistent with recent price action. Many of the most recent targets are well above the current price action and in the fresh all-time high territory, so a new high is likely if this trend continues. The institutions are also supportive and have been buying heavily in the first quarter of 2023.
The technical setup is promising. The market is trending higher and showing a trend-following signal now. If the market follows through on this signal, a move to new highs is likely, but there is a risk. Resistance at the all-time high could be strong and keep this stock range bound. Strength in the labor market is good for Cintas but bad for wage inflation, inflation and the Federal Open Market Committee (FOMC). If the FOMC continues on its current path, Cintas could lower its guidance later in the year.
