Story Stocks^®

Investors are applauding a solid beat-and-raise from work equipment and uniform supplier Cintas (CTAS +6%) in Q3 (Feb) today, pushing the stock past early March highs and levels traded before a sizeable gap-down in December following mediocre Q2 (Nov) results. The letdown last quarter was CTAS's trimmed FY25 (May) organic growth guidance, lowering the high end by 40 bps to +7.7%. While CTAS kept this part of its FY25 organic growth forecast unchanged today, it did bump up the lower bound to +7.4% from +7.0%, sufficient to alleviate fears over a less digestible worst-case scenario and trigger a moderate rally today.

• Given its footprint as a supplier of numerous items, from work uniforms to cleaning supplies and fire extinguishers, to businesses of all sizes, CTAS's quarterly results often paint a decent picture the the economic health of U.S. companies. Encouragingly, there were no surprises on CTAS's top and bottom lines, exceeding earnings for five years running while delivering revenue a hair above analyst forecasts, a typical trend for the company.
• Earnings expanded by 17.7% yr/yr to $1.13 (CTAS conducted a 4:1 stock split last year) supported by a 120 bp jump in gross margins yr/yr to 50.6%.CTAS has put on a show of consistency regarding its margin profile, steadily setting new quarterly records as it benefits from robust volumes, operating leverage, and ongoing operational efficiencies. Impressively, CTAS has been able to grow its margins despite an unfavorable trend of price increases coming down as inflationary pressures ease.
• Revenue marched 8.4% higher yr/yr in Q3 to $2.61 bln, lifted by a 7.7% improvement in CTAS's core uniform rental and facility services division and an 11.0% jump in other revenue (consisting of fire protection services and uniform direct sales). Echoing its comments from last quarter and consistent with remarks from peer Aramark (ARMK) earlier this month, CTAS continued to enjoy solid demand during Q3, underpinning the necessity of the company's services. Nearly every business requires something that CTAS offers, from exit lighting to bathroom supplies.
• Tariffs remain top-of-mind for investors given the recent stock market shakiness. However, CTAS reiterated its thoughts from last quarter, noting that it remains too early to tell what impacts tariffs will have. However, like ARMK, CTAS sources less than 10% of its products and is in a favorable position to negotiate from that standpoint.
• Foreign exchange is clearly acting as more of a headwind than tariffs. For FY25, CTAS sliced $15 mln off the top of its FY25 net sales outlook to reflect FX headwinds, changing it to $10.280-10.305 bln from $10.255-10.320 bln. Conversely, highlighting ongoing efficiencies and volume growth, CTAS raised its FY25 EPS outlook to $4.36-4.40 from $4.28-4.34.

Fears over a recession have kept CTAS trading mostly sideways over the past several weeks leading up to Q3 results. By raising its FY25 guidance, including bumping up the lower bound of its FY25 organic growth outlook, investors are breathing a heavy sigh of relief. We continue to like CTAS given its formidable presence and diversified revenue stream, selling products commanding relatively low price elasticity.