Shares of professional uniform company Cintas (CTAS -9.58%) plunged 9.3% on Thursday as of 12 p.m. EDT.
Cintas has been a long-term winner in the market and, prior to the past week, had been up some 50% on the year. However, the past week’s inflation scare and last night’s “disappointing” earnings report sent shares tumbling today.
Cintas’ valuation didn’t leave room for error
At first glance, one might be confused as to why investors had such a negative reaction to these numbers. Revenue was up 7.8% to $2.56 billion, in line with expectations, while earnings per share (EPS) expanded 21.1% to $1.09, ahead of expectations.
Management also raised its full-year guidance to between 6.9% to 7.5% revenue growth, up from a prior 6.5% to 7.5% range. EPS growth guidance was raised from 10% to 12.1% previously to a range of 12.9% to 14.5%.
So what exactly is wrong with an earnings beat and raise? It’s likely that much had to do with Cintas’ lofty valuation heading into the report, which topped 50 times earnings.
Moreover, Cintas only raised the bottom end of the revenue-guidance range, not the top end, and the full-year guidance figures imply lower growth ahead than the second-fiscal-quarter’s results. While this was just a slight deceleration, Cintas’ valuation may have assumed a continuation of the current year’s strength and not a slowdown.
Uncertainty leads to profit-taking
There are a lot of 2024 winners that appear to be selling off right now as investors aim to lock in profits. Moreover, there’s a high amount of uncertainty around inflation, interest rates, and the policies of the incoming administration.
There may not be anything to panic about with Cintas, as its results were fine and guidance may have been conservative. That being said, investors appear to be paying attention to valuation a bit more amid all the uncertainty today.