The G&K Services acquisition offers upside potential to our fair value on this wide-moat uniform rental specialist.
In its fiscal third-quarter 2017 (ended February), wide moat-rated uniform rental specialist Cintas
grew its top line by 6.5% organically. Revenue growth was primarily in line with our expected run rate, though the uniform business is trending slightly above our forecast on persistently strong sales execution. Total profitability came in slightly ahead of our forecast due to healthy rental gross margins. Since our longer-term model assumptions remain largely intact, we don’t expect to materially alter our $80 fair value estimate. That said, we still believe the G&K Services acquisition (which closed on March 21) offers upside potential to our fair value, given plentiful cross-selling opportunities for Cintas. Of note, our fair value does reflect our initial take on the deal impact. On the other hand, we caution that Cintas shares continue to look overvalued.
Matthew Young, CFA, is an equity analyst for Morningstar.
On an organic basis, the core uniform rental business expanded 7%, which was ahead of the 6.2% posted in the first half of the firm’s fiscal year. Pressure from oil and gas end-market customers, which shed headcount over the past year-plus, is diminishing, and Cintas is firing on all cylinders in terms of adding new programmers and boosting account penetration with ancillary services, especially among services-sector customers. The “all other” segment (which includes the lumpy direct-uniform sales unit and fire-protection services) was up 2.4% organically, while the first aid business posted 5.5% underlying expansion. First aid growth accelerated from 3.3% last quarter as the division is beginning to realize benefits from its Zee Medical integration efforts over the past year.
Excluding G&K-related transaction costs, Cintas’ consolidated operating margin was roughly flat year over year, at 15.9%--a solid showing considering lost leverage from one less workday during the quarter and increased energy costs.
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