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Uniform Maker Cintas Beat Wall Street Estimates; Surge in COVID-19 Cases Key Risk

Mason-based corporate uniform maker Cintas reported better-than-expected in the second quarter of the fiscal year 2021 as demand recovered in the world’s biggest economy but raging COVID-19 cases posed significant downside risks to the nascent recovery.

Revenue for the second quarter of fiscal 2021 was $1.76 billion compared to $1.84 billion in last year’s second quarter, beating the market consensus estimate of $1.75 billion.

Earnings per diluted share from continuing operations (EPS) were $2.62 in the second quarter of fiscal 2021, an increase of 15.4% from last year’s second-quarter EPS. That was also higher than the Wall Street estimate of $2.17 per share.

“Wide-moat-rated Cintas’ second-quarter results met our expectations. We raise our fair value estimate to $233 from $231, due to a slight increase in our Stage II return on new invested capital assumption. Looking forward, we expect COVID-19 impacts will slow growth slightly through 2021, normalizing in the fourth quarter due to an easier year-over-year comparison,” said Joshua Aguilar, equity analyst at Morningstar.

Cintas shares closed 0.55% higher at $348.00 on Tuesday; the stock is up about 30% so far this year.

“What to do with Cintas (CTAS) shares: Buy more if you think the uniform rental/facility services and fire protection businesses will continue to improve sequentially and secular tailwinds in certain verticals will drive sustainable long-term growth. We also like the company’s low leverage and balance sheet catalysts heading into CY21,” said Hamzah Mazari, equity analyst at Jefferies.

Cintas Stock Price Forecast

Nine analysts who offered stock ratings for Cintas in the last three months forecast the average price in 12 months at $345.25 with a high forecast of $405.00 and a low forecast of $240.00. The average price target represents a -0.79% decrease from the last price of $348.00. From those nine equity analysts, four rated “Buy”, four rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $261 with a high of $448 under a bull scenario and $156 under the worst-case scenario. The firm currently has an “Underweight” rating on the uniform maker company’s stock.

“While revenue trends improved into quarter-end, 3Q guidance was not provided given increasing COVID-19 case counts. Though we largely view this as conservatism, we still think a more rapid recovery is needed to justify CTAS’ premium multiple. Stay UW,” said Toni Kaplan, equity analyst at Morgan Stanley.

Several other analysts have also recently commented on the stock. RBC raised the stock price forecast to $405 from $360. Credit Suisse upped the target price to $340 from $310. JP Morgan increased the price objective to $378 from $350. Cintas had its price objective hoisted by equities researchers at Barclays to $380 from $350. The brokerage currently has an “overweight” rating on the business services provider’s stock.

In addition, BidaskClub raised Cintas from a “buy” rating to a “strong-buy” rating. At last, Jefferies upped their price objective to $400 from $365 and gave the stock a “buy” rating.

Analyst Comments

“We expect COVID-19 to have an impact on Cintas, with the duration and lasting economic impact a key driver of the stock. Despite excellent execution and a strong track record of revenue growth and capital allocation, Cintas remains a cyclical company; we think risk-reward skews to the downside given the stock’s elevated multiple and the potential for uniform employment to remain muted especially if small businesses close,” Morgan Stanley’s Kaplan.

“MS economists are forecasting an extended period of lower employment and CTAS’ top-line growth could become challenged if labour growth stays under pressure.”

Upside and Downside Risks

Risks to Upside: 1) COVID-19 impact is limited and the economy returns to strong growth. 2) SAP implementation provides better-than-expected cost savings. 3) New cross-selling opportunities. 4) Further geographic expansion within First Aid segment. 4) G&K synergies exceed our estimates- Morgan Stanley.

Risks to Downside: 1) COVID-19 has longer than expected impact with lasting economic fallout. 2) Significant decline in uniform employment. 3) Acquisition outside of core competency.

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