UPDATE: Barclays Upgrades Cintas (CTAS) to Overweight
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(Updated - August 17, 2016 11:43 AM EDT)
Barclays upgraded Cintas (NASDAQ: CTAS) from Equalweight to Overweight with a price target of $130.00 (from $110.00). Analyst Manav Patnaik thinks its agreement to acquire G&K makes a lot of sense.
"We have always viewed CTAS as a premium 'Industrials' idea given its strong CFs & consistent capital returns, but mainly because of its reliable MSD+ growth despite cyclical pressures (6%+ organic growth over last 4 years; 3x employment/GDP growth)," said Patnaik.
"An acquisition EV of $2.2B at 2.3x revenues, 18x EBIT & 14x EBITDA might sound rich, but the potential synergies could make it seem reasonable. 1) Guided to be EPS accretive in Year 2; but 2) initial synergy guidance of $130-$140M (13-14% of GK revenues or just 2.4% of combined co's) in Year 4 seems classic CTAS conservatism (mostly costs). Additionally: 3) CTAS gains +170K new customers to sell its much broader set of offerings; 4) leveraging a stronger supply chain, sourcing capabilities & additional processing capacity; which combined with 5) increased route density allows for more customer focus. 6) Geographic expansion was not high on the list given the "tremendous overlap" but could add to the 'significant revenue synergies' expected - but clearly not factored in yet. Lastly, 7) GK itself has made a lot of progress in fixing its operations, which should make this an easier integration for CTAS - especially given their tenure and experience (this report details Omni and Unitog merger case studies)," added the analyst.
Shares of Cintas closed at $112.99 yesterday.
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