Cintas Corporation (NASDAQ: CTAS) has reported 5.3 percent growth in the revenue to $1.28 billion in the third quarter of FY 17 ended on February 28th, 2017. The company has posted the organic growth for the Uniform Rental and Facility Services segment at a rate of 7.3% to $993 million. CTAS see the impact of weakness in the oil, gas and coal industry. This resulted fall in the revenue from affected customers, that has lowered the organic growth rate by about 60 basis points in the third quarter. However, impact of weakness is lower when compared to about a 75-basis point headwind in the previous quarter. The third quarter includes the SAP expenses amounting to about 20 basis points of revenue. Further, the effective tax rate on continuing operations for the third quarter was 34.5%, compared to 33.8% for last year’s third quarter. On the other hand, the third quarter rate is lower than historical rates due to the adoption of ASU 2016-09 on stock compensation. Additionally, the third quarter gross margin has improved to 44.2% from 43.1% last year, which is the 14th consecutive quarter of year-over-year gross margin improvement.
On the other hand, Cintas Corporation has completed the acquisition of G&K Services, Inc. for approximately $2.2 billion, including acquired net debt, after receiving all the requisite regulatory approvals. The transaction is expected to strengthen the leading market position of CTAS across the globe and likely to expand CTAS’ customer profile and augment its revenues. The combined company is likely to cater to over one billion business customers with an extended product portfolio and additional processing capacity. G&K Services has reported the annual revenues of $978 million in fiscal 2016. Moreover, the customer service is also likely to improve with increased route density and the synergies from the combined operations are expected to lead to $130 million to $140 million in cost savings. The transaction is expected to be accretive to CTAS’ earnings from the second year of its operation.
The acquisition funds included the $100 million of G&K senior notes, $50 million of additional existing Cintas senior notes due in 2022, $1 billion of senior notes due in 2027, $650 million of senior notes due in 2022, a new term loan of $250 million and commercial paper of about $250 million.
CTAS stock has risen 37.44% in a year (source: Google Finance). According to tipranks.com, 6 analysts has covered the stock while recommend a “Moderate Buy”. CTAS has an average price target of $125.40, which is a further upside of 0.83%.