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.

Check out FX Empire’s earnings calendar

Earnings to Watch in Holiday-Shortened Week: Heico, Carnival, CarMax, Cintas and Weibo in Focus

Monday (December 21)

IN THE SPOTLIGHT: HEICO, CARNIVAL

HEICOHeico, an aerospace and electronics company, is expected to report a profit of $0.42 in the fourth quarter, down from $0.62 per share seen in the same quarter a year ago. The Hollywood, Florida-based company will post a more than 20% decline in revenue to $414.782 million from $ 541.53 million a year ago.

CARNIVALCarnival, the world’s largest cruise ship operator, is expected to report a loss for the third consecutive time in the fourth quarter. The Miami, Florida-based company’s revenue will plunge ​nearly 100% to $142.09 million from $4.78 billion posted in the same period a year ago. Carnival is expected to report a loss of $1.86 per share, worse compared to a profit of 62 cents per share registered in the same quarter last year.

“We think the cruise industry will be one of the slowest sub-sectors to recover from the COVID-19. Cruising needs just not international travel to return, but ports to reopen, authorities to permit cruising, and the return of customer confidence,” said Jamie Rollo, equity analyst at Morgan Stanley.

“We expect cruising to resume in January 2021, and only expect FY19 EBITDA to return in FY24 given historically CCL has lacked pricing power, and EPS to take even longer given dilution of share issues and higher interest expense. We see debt doubling in FY21 vs FY19 due to operating losses and high capex commitments, and leverage looks high at 4-5x even in FY23-24e, so we see a risk more equity might need to be raised,” Rollo added.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE DECEMBER 21

Ticker Company EPS Forecast
HEI Heico $0.42
CUK Carnival -$1.84
CCL Carnival -$1.84
GCTAY Siemens Gamesa ADR $0.01
CCL Carnival -£1.39

Tuesday (December 22)

IN THE SPOTLIGHT: CARMAX, CINTAS

CARMAX: CarMax, America’s largest used-car retailer and a Fortune 500 company, is expected to report a profit of $1.14 per share in the fourth quarter, up from $1.04 per share reported in the same quarter a year ago. Revenues are expected to be $5 billion, rising more than 4% from the year-ago quarter.

William Blair upgraded their earnings per share forecasts to $1.29 for Q4 2021, up from the previous $1.26. The Chicago-based investment bank also forecasts FY2023 earnings at $6.15 EPS.

“Based on historical & current data, we expect to see strength in used car sales as we move forward, particularly given the shortage of new car inventory, manufacturers pulling back on incentives, and potential tailwinds from de-urbanization, mass transit, ride-sharing, and travel. We expect Carmax to successfully execute their Omnichannel strategy, providing both online and physical dealer options to the consumer,” said Adam Jonas, equity analyst at Morgan Stanley.

“Carmax has consistently generated profitability and has one of the strong balance sheets amongst the dealers. Long term, we estimate strong growth in same-store sales along new store openings, allowing Carmax to achieve operating leverage, with upside from the omnichannel rollout,” Jonas added.

CINTAS: Mason-based corporate uniform maker Cintas is expected to report a profit of $2.17 per share in the second quarter fiscal 2021, lower than $2.27 per share reported in the same quarter a year ago. Revenue is forecast to decline to $1.75 billion from $1.84 billion.

“We expect COVID-19 to have an impact on CTAS, 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,” said Toni Kaplan, equity analyst at Morgan Stanley.

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

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE DECEMBER 22

Ticker Company EPS Forecast
KMX CarMax $1.14
NEOG Neogen $0.31
CTAS Cintas $2.17
ACI AltaGas Canada $0.41
HOCPY Hoya Corp $0.74

Wednesday (December 23)

Ticker Company EPS Forecast
PAYX Paychex $0.66
AUOTY AU Optronics $0.09

Thursday (December 24)

Ticker Company EPS Forecast
ASEKY Aisin Seiki Co $0.42
RLAY Relay Therapeutics Inc. -$0.32

December 25-January 1

IN THE SPOTLIGHT: WEIBO

No major earnings scheduled for release during this period. However, Chinese microblogging website Weibo Corporation will announce its unaudited financial results for the third quarter of 2020 before the market opens on Monday, December 28, 2020.

China’s biggest social media platforms Weibo is expected to report a profit of 61 cents​ per share according to the mean Refinitiv estimate from twelve analysts. Wall Street expects results to range from 57 cents to ​65 cents per share, Reuters reported.

“Weibo is affected by macro and competitive headwinds that have been pressuring other online ad platforms, including Baidu, iQIYI and Sohu, which could linger – it may take time to recover. We think the structural challenge from ad inventory increase across the industry will be hard to mitigate in the near term,” said Alex Ko, equity analyst at Morgan Stanley.

“We await more visibility on ad demand recovery and Weibo’s monetization progress amid healthy user momentum. Our price target implies 15x P/E on our 2021 non-GAAP EPS forecast vs. the historical trough of 12x, given earnings growth trajectory,” Ko added.

Three Hidden Gems In The Nasdaq-100

Market players tend to focus their capital on just a handful of well-known Nasdaq-100 components, like Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Tesla Inc. (TSLA). Another sizable group just trades the index as a whole, through Investo QQQ Trust or the CME index futures contract. However, many lesser-known components have carved stronger price action since March 2020, or have outperformed their Silicon Valley rivals for a decade or more.

Traders and market technicians can uncover these hidden gems by sorting a list of Nasdaq-100 index components by relative strength. There are many ways to accomplish this task but the most effective method I’ve found is to list securities by relative positioning above or below their 200-day exponential moving averages (EMAs). Not surprisingly, running a list in this mixed autumn market reveals three companies that required searches to find out how they make money.

Pinduoduo

Pinduoduo Inc. (PDD) was added to the Nasdaq-100 index in August. The Shanghai-based company operates a hugely-popular mobile e-commerce platform that specializes in apparel, appliances, and household goods. The stock now sits at the top of the index performance list, carving a series of new highs while better-known tech stocks grind through fourth quarter corrections. However, this isn’t a cheap security by any metric, with a 363% 2020 return-to-date.

Align Technology

Align Technology Inc. (ALGN) manufactures and markets Invisalign clear dental aligners and iTero intraoral scanners, as well as other products for dentists and orthodontists. The stock posted a 3-year low in March 2020 and turned sharply higher, completing a breakout above the September 2018 high near 400 in October. It posted an all-time high at 507 on Nov. 9 and pulled back, testing new gains. It’s now approaching support, setting the stage for further upside.

Cintas

Cintas Corp (CTAS) provides janitorial and safety-oriented uniforms and business services in North America, Latin America, Europe, and Asia. This is one of the top Nasdaq-100 performers in the last decade, despite their relatively humble business model. The stock got cut in half during the first quarter’s pandemic decline and bounced strongly, recouped 100% of the losses into June. An August breakout is now gathering steam, opening the door to significant upside.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.