Story Stocks^®

Another uniform quarter for Cintas (CTAS +5%) keeps its shares trending higher, moving to all-time highs, an over +25% gain thus far in 2024. CTAS, the largest supplier of work uniforms in the U.S., delivered Q4 (May) numbers similar to Q3 (Feb), topping earnings estimates by a double-digit margin on in-line revenue growth. The company also projected FY25 adjusted EPS and revs consistent with analyst forecasts. With business trending as usual despite modestly shaky economic conditions, investors remain confident in CTAS's short and long-term prospects.

• CTAS may not be an exciting organization, supplying work uniforms, facility services (cleaning supplies), and safety services (first aid kits). However, its results tend to offer a window into how businesses of varying sizes view near-term prospects. When CTAS performs well, it can often be an encouraging sign of the underlying economy. Therefore, it is important to keep an eye on its quarterly numbers.
• During Q4, CTAS's core Uniform Rental and Facility Services segment delivered a 7.8% improvement in revenue yr/yr to $1.91 bln. Meanwhile, all other divisions tacked on a 9.5% bump in sales. The broad-based strength supported CTAS's 8.2% revenue growth yr/yr to $2.47 bln, its 13th straight quarter of yr/yr growth.
• Verticals were strong across the board, as healthcare, hospitality, education, and state and local governments all exhibited solid demand characteristics. New business was also robust, a recurring theme for CTAS. Likewise, retention rates remained favorable.
• CTAS's consistent revenue growth continued to be accompanied by expanding margins, a good sign of demand as the company has not needed to lower prices to spur volume growth. It also reflects management's productivity enhancements, such as route optimization. Gross margins increased by 150 bps yr/yr to 49.2% in Q4, while operating margins edged 160 bps higher to 22.2%. As a result, CTAS kept its string of earnings beats active, growing its bottom line by 17.2% yr/yr to $3.99, nicely above analyst projections.
• Looking ahead, while CTAS's FY25 outlook merely met analyst expectations, targeting adjusted EPS of $16.25-16.75 and revs of $10.16-10.31 bln, the company has a recent history of initially guiding conservatively only to raise it as the year progresses. In fact, CTAS's initial FY24 outlook was bearish, making its FY25 guidance much more appealing by comparison.

CTAS capped off a banner year on a high note. A favorable combination of robust volumes and ongoing cost-improvement initiatives in Q4 led to another healthy earnings beat on stable revenue growth. We have been long-time fans of CTAS, which continues to post excellent numbers even as some concerns begin to crop up, such as rising unemployment figures, which can lead to possible headwinds down the road. While cracks in the labor market present risks, as does CTAS's frothy forward P/E ratio of 45x, the company's dominant position in its industry, significant efficiency improvement opportunities, and further market expansion possibilities as employers look to outsource various functions to better focus on their core business, can support shares drifting higher.