Cintas Reiterated at Neutral - Analyst Blog

On Jul 9, we reiterated our Neutral recommendation for business services provider Cintas Corporation (CTAS). The company's diligent execution of operational plans and strategic decision to extend its global footprint, through continuous organic growth across the industry verticals, augur well for its growth prospects. However, an increase in raw material costs along with weak economic conditions prevailing in the global scenario could weigh on the margins moving forward.

Why Maintained?

Cintas aims to continually hike revenue streams by increasing businesses from existing customers and broadening customer base by including new business segments. The company also identifies additional product and service opportunities for its current and future customers to augment its product portfolio.

In order to increase market penetration, Cintas has a highly talented and diverse team of service professionals who regularly visit customers. These frequent contacts with existing customers strengthen personal relationships, which consequently provide a platform to launch additional products and services.

In order to pursue its strategy of broadening customer base, Cintas has a national sales organization that introduces its products and services in all business segments. The company also broadens its customer base through geographic expansion, and focuses particularly on emerging businesses of first aid and safety, fire protection and document management. Additionally, strategic acquisitions at opportune times also help the company to expand. This focused approach for a steady top-line growth is commendable.

Cintas reported an organic revenue growth of 6.9% in fiscal third quarter 2013, including 5.5% organic growth from Rental Uniforms and Ancillary Products due to improvements in productivity of sales representatives and an overall increase in the number of sales representatives. Sales productivity improvements are generally the culmination of increased tenure and a! dvanced training procedures of sales personnel, which in turn result in a higher number of products and services sold.

During recession, Cintas had taken initiatives to enhance its operations by evaluating sales force productivity, optimizing routes and streamlining labor overhead. The company returned to year-over-year rental organic revenue growth in mid 2010 and has continued the growth trajectory since then. Organic growth from the Other Services segment was also healthy at 10.5% in the last reported quarter, largely due to growth in each of the operating segments and accretive acquisitions. All these indicate solid growth momentum for the company.

However, a continuous increase in raw material costs such as cotton, due to global headwinds, may weigh on the margins going forward. Cintas procures raw materials from a wide variety of domestic and international suppliers, making it susceptible to market risks which are beyond its control.

Other Stocks to Consider

Cintas presently has a Zacks Rank #3 (Hold). Other companies in the industry worth reckoning include Macquarie Infrastructure Company LLC (MIC), Harte-Hanks Inc. (HHS) and Heartland Payment Systems, Inc. (HPY), each carrying a Zacks Rank #2 (Buy).