Cintas Outperforms Our Expectations

Wide-moat-rated Cintas CTAS reported strong fiscal 2023 third-quarter results. Guidance also implies solid fourth-quarter performance. Management increased its annual revenue and diluted EPS guides to $8.77 billion and $12.80 at each midpoint, respectively, up roughly 1% from prior guidance. After taking a fresh look at our long-term assumptions, we intend to sizably increase our $299 fair value estimate. Despite this planned change, we still think the stock remains overvalued at its $463 price.

During the quarter, Cintas’ total revenue grew around 12% to $2.19 billion compared with last year’s third quarter. Total operating margins grew 110 basis points to 20.4%, and diluted EPS grew around 17% to $3.14. Cintas saw broad-based, strong organic growth in all three business lines. The firm’s core uniform rentals segment grew sales 10.8% year on year, consistent with previous quarters in the low double digits. The first aid and safety services grew 7.8% organically. This result appears low compared with past quarters that grew at double this rate. However, the segment grew 16% when excluding last year’s surge in COVID-19 test kit sales. Lastly, the “All Other” segment enjoyed even better results, increasing 32% organically.

Strong operating results point to Cintas’ successful growth strategy. Higher volumes continue to drive revenue. Cintas adeptly targets nonprogrammers or potential customers that do not yet outsource these services. Adding nonprogrammers helps Cintas expand its addressable market. Strategic cross-selling complements sales to nonprogrammers. Cintas boasts an existing client base of over 1 million companies. Enlarging pools of both nonprogrammers and existing customers present Cintas with ample opportunities to further drive volume.