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Cintas Corporation Second Quarter Above Expectations Despite Sluggish Environment

Cintas reported a somewhat noisy fiscal second quarter, but after cutting through the clutter, we consider EPS to be about in line with expectations at $0.63, a penny ahead of our estimate and Street consensus. The quarter reflected additional sales volume, offset by continued declines in paper prices (impact of $5.5 million). While the company stressed that its customers remain cautious ahead of the fiscal cliff, it is still seeing decent new business wins and opportunities for greater penetration. Overall, we are encouraged the company maintained its EPS guidance for the year, and industry trends could turn more positive should hiring improve, which could lead to additional benefits from greater route density.

We forecast fiscal 2013 EPS growth of 10%, to $2.51, with growth of 13% in 2014, to $2.82. The stock trades at 16 times and 14 times our calendar 2013 and 2014 estimates, respectively. We continue to believe Cintas is in the early innings of experiencing renewed earnings growth following a period of decelerating trends and recommend investors purchase shares at current levels.

Noisy quarter, but results were positive despite the challenging environment. The quarter reflected an unusual amount of noise from the write-off of an investment (about $0.01 per share), a gain on the sale of stock (about $0.04 per share), a modest impact from Hurricane Sandy, and lower paper prices relative to the company’s original guidance. The quarter also benefited from a lower-than-forecast tax rate of $0.01 per share. When netting all of these puts and takes, we consider the quarter about in line with expectations, which is positive when considering the degree of uncertainty from
businesses regarding investment.

We have heard from multiple companies and industries that businesses have been reluctant to invest ahead of the uncertainties regarding the fiscal cliff and additional health and tax expenses. As a result, we would not have been surprised to see a slight miss during the quarter. However, the company continues to drive upside to revenue (up 4% to $1,060 million, about $8 million ahead of our estimate) through new wins, enhanced sales productivity, and cross-selling efforts. We are encouraged by the
company’s expectation regarding accelerating revenue growth over the next two quarters based on the rollout of some direct uniform programs and easier comparisons, especially in regard to lapping lower paper prices.

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