You can rest assured that any and all stocks related to the vaccine are going to pop. Whether or not the pop has legs remains to be seen. Not all vaccine plays will be true winners and not all will stand the test of time. Or will they? This may seem like a stretch but employment-services Cintas (NASDAQ:CTAS) is a great way to play the vaccine. The vaccine, no matter which one proves the most reliable and safe to use, will result in a widespread and massive reopening of the economy and that will be a profound influence on its business.
Cintas Business Is Steady
Believe it or not Cintas business is relatively steady on a YOY basis. The company experienced only a 10% decline in the fiscal 4th quarter, the worst-hit for shutdowns, and the business has since bounced back. The fiscal Q1 and Q2 results show revenue is still weak on a YOY basis but holding steady near the -4.0% range for this cash-flow machine.
The company’s net revenue for fiscal 2nd, which ended November 30th, 2020, came in at $1.76 billion which is a slight acceleration from the previous quarter and down -4.3% from last year. The revenue beat consensus by a slim margin as well due to strength in the First Aid and Safety segment. On an organic basis, sales fell -4.4%. This excludes impacts from acquisition and FX. On a segment basis, the core Uniform and Facility Services saw its organic revenue decline by 3.6% from last year while the First Aid and Safety segment grew 14.5%.
Moving down to the good stuff, earnings, the company’s gross margin improved 50 basis points over the past year to 46.7% of revenue. At the operating level, margin improved by 550 basis points to 20.1% of revenue delivering a net gain on cash from continuing operations of 15%. At the GAAP level, EPS of $2.62 beat the consensus by $0.43 further improving this company’s cash and FCF position.
Looking forward, the company declined to give any guidance for the fiscal 3rd quarter but did issue a cautionary statement. Because of the rising number of COVID cases and widening shutdowns, there is some uncertainty over the impact to revenue. That said, the company is already well on its way to beating the full-year consensus estimates and vaccines are being distributed.
Cintas 0.80% Yield Is Highly Valued
Cintas doesn’t yield much in terms of the dividend but it is very safe, growing at a double-digit rate, and backed up by a strong balance sheet. The company is carrying only a modest amount of debt, has more than $4.00 per share in cash (about $425 million), low leverage, and ample free cash flow. Even so, the 38X earnings the stock is trading at is a bit high but then there is the growth angle to consider. Not only is Cintas poised to rebound strongly with the economic reopening but it is on track to deliver the 38th year of distribution increases later in the fiscal year. Notably, the company switched from an annual payout to a quarterly payout last quarter.
The Technical Outlook: Cintas In A Holding Pattern
Shares of Cintas made a strong rebound from the March low but are now in a holding pattern. The trend broke in late October leaving the stock in a trading range that should persist over the next quarter. The FQ2 news has shares down about 1.5% in early trading and falling from the short-term EMA. This may lead to a slightly deeper pullback, the bottom of the range is near $320, before price action can find a firmer footing.
