Home > Stock Analysis

UniFirst: Look Sharp, Make Money

Posted: Jul 10, 2008 14:12 PM by Will Ashworth

Tickers in this Article: UNF, UPS, CTAS, GKSR

Companies can increase market share in tough economic times by increasing advertising spending when competitors are decreasing theirs, according to Harvard Business School professor John Quelch. One very effective form of advertising is company uniforms - think "Big Brown" for United Parcel Services (NYSE:UPS).

Get Free Stock Analysis By Email

Whenever we see a UPS driver running around town, we immediately think of the package delivery services. According to surveys conducted by JD Power and Associates, customers are more likely to do business with those in uniform; not to mention those in uniform are more likely to take greater pride in their jobs. UniFirst (NYSE:UNF) knows this first hand.

Dressed For Success Since 1936
UniFirst got its start in Boston, Massachusetts, before World War II, and today is a leader in the $13-billion uniform business. The company is vertically integrated with three manufacturing facilities in the U.S. and Mexico, as well as a distribution center in Kentucky. This infrastructure enables it to service 220 of the top 250 markets in the U.S. With over 200,000 customers in North America and Europe, its uniform program designs, manufactures, rents, sells, launders and delivers a wide range of company solutions.

Ten thousand employees will generate revenue in excess of $1 billion in fiscal 2008, up substantially from $600 million five years ago, producing a compound annual growth rate of 10.76% since 2003.

The Economy's Not Hurting, Yet
Its third quarter revenue was up 10.8% to $254.6 million from $229.8 million a year earlier. Net income jumped 23.8% to $16.9 million from $13.7 million in fiscal 2007. In terms of EPS, that's 87 cents per share, which is up from 71 cents one year earlier. This was also 10 cents better than analysts expectations, a 13% surprise on the upside. Its stock closed up $3.31 or 7.4% on July 2 after announcing Q3 earnings prior to the opening bell.

UniFirst's year-to-date chart shows that the stock is up approximately 22%; meanwhile, competitors Cintas (Nasdaq:CTAS) and G&K Services (Nasdaq:GKSR) as well as the S&P 500 are down between 10% and 20%.

Despite rising fuel prices hurting operating margins by nine-tenths of a percent, UniFirst was still able to improve margins by 100 basis points in the quarter and 200 for the nine months year-to-date. Its core laundry business grew revenue 11.5% in the quarter. The results were so impressive that it provided full-year guidance of $1.02-1.03 billion in sales, with EPS of $3.15-3.20 per share. Analysts are expecting $3.04 per share. (For related reading, check out Earnings Forecasts: A Primer.)

Storm Clouds On The Horizon
Analyst estimates for 2009 EPS are $3.36, which is higher than UniFirst's guidance of $3.25. Given a 13% EPS growth rate estimate, it is likely to disappoint those investors expecting continued success in very difficult economic conditions. CEO Ronald Croatti stated objectively in the third quarter conference call that the economy is affecting business, and while it should meet year-end numbers, the company expects the impact in Q1 2009 and beyond to be substantial. However, an analyst at Robert W. Baird believes UniFirst's growth will be higher than its competitors' and raised the price target to $53 from $45 while maintaining a 'neutral' rating on the stock. These days, that's a raving endorsement.

Good Run
As I said earlier, the stock's been on a bit of a tear in 2008. To some, it might appear that all the profit potential is already on the table and the first hint of bad news will jolt the small cap back into the thirties where it was in April. This might be the case but a few things need discussing first.

For instance, New York investment firm Tweedy Browne owns 2.12 million shares. Christopher Browne, one of its partners and author of "The Little Book of Value Investing" (2006), is one of the world's best value investors. Why do you suppose his firm has such a position? It might be that despite its performance year-to-date, the valuation metrics including price-to-sales, price-to-book and the PEG ratio are all currently below two; or it could be that non-U.S. sales account for only 9.4% of total revenue, but 16.3% of the total pre-tax income. International expansion is surely in the cards. (To learn about these ratios, read Analyze Investments Quickly With Ratios and Investment Valuation Ratios Tutorial.)

Bottom Line
With the markets in a free fall, boring companies that execute aren't such a bad commodity to own. I'd think twice before passing on this staid but growing business.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS