Cintas Ends UniFirst Talks—What’s Next for UNF Stock?

Key Points

• Cintas backed out of takeover talks for UniFirst after failing to make progress. 
• UniFirst's key initiatives, including CRM and ERP, have begun to pay off and widen the margin. 
• Institutional activity was robust in Q1 and provides a strong support base for this market. 

UniFirst NYSE: UNF stock price got a boost when Cintas NASDAQ: CTAS entered takeover talks for the company, but the price increase has since been corrected. Cintas backed out of the negotiations because of a lack of meaningful interaction, leaving them to go about their business, which is uniform rental and laundry services for businesses. What this means for Cintas is the continuation of trends that include industry-leading growth and capital returns. 

What this means for UniFirst is similar; however, the share price outlook isn’t quite the same. While Cintas' price is expected to resume its uptrend, UniFirst shares could wallow near early April lows, but there is an opportunity for investors.

UniFirst is a younger, less expensive version of Cintas that is on track to deliver comparable returns over time. Dividend growth investors can take advantage of the share price pullback to initiate, add to, and build a position. 

UniFirst Underperforms in Q2; Adjusts Guidance With Wider Margin

UniFirst’s Q2 results are tepid relative to the consensus forecasts reported by MarketBeat, unlike  Cintas, which outperformed. However, the weakness is offset by the obvious impact of “key initiatives.” Key initiatives include the company’s CRM and ERP efforts that have cut into results while boosting operating quality.

The takeaway is that the revenue of $602.2 million and $1.31 in diluted EPS fell short of the consensus, but revenue grew nearly 2%, and margins widened. The company’s operating income grew by 11.7%, net income by 19.6%, and EPS by 20.2%, including a $0.09 impact from CRM and ERP-related costs. 

Segmentally, the core Laundry operation grew by 1.5% and 1.9% on an FXN basis, while the Specialty segment rose 2.2%. This segment, which includes nuclear-related equipment, drove Q2 growth and represents a key long-term opportunity. With the nuclear industry projected to expand rapidly over the next two to four decades—adding hundreds of reactors and significantly growing its workforce—the growth potential is substantial.

Guidance is mixed and may impact the share price action in CQ3 2025. The company lowered its revenue forecast because of an increased FX headwind and increased the outlook for margin. The forecast for earnings was increased to a range with the low end above the prior high, but there is a problem. 

The top and bottom line guidance is weaker than analysts' forecasts, which may lead them to reduce their price targets despite the improvements in operating leverage and growth efforts. Growth efforts include the expansion of the Owensboro Distribution and Fulfillment Center, which is already the world’s most extensive personalization and emblem factory. It is expected to improve flow through and efficiency while providing a growth platform. 

Analysts Sell, But Institutions Buy UniFirst in Q1 2025

Analyst sentiment on UniFirst is bearish, with a consensus rating of Reduce from three analysts, and overall coverage has declined compared to last year. However, the analysts' price target range suggests that UniFirst stock is trading at rock-bottom pricing, and the institutions have been buying. 

Remove Ads

Institutions bought on balance every quarter of 2024 and ramped their buying to a multi-year high in Q1. They own nearly 80% of this capital return machine and provide strong support for the market at early April levels.

Regarding the capital return, the dividend yield aligns with Cintas' 0.75% and is equally safe at 15% of earnings. The company also buys back shares, reducing the count by 1% on average for Q2, and has sufficient reserves and authorization to sustain the pace for the next 10 quarters. 

Assuming UniFirst continues to build leverage and regains growth traction, it should sustain annual distribution increases and share buybacks like Cintas and drive its share price higher over time.

Potential catalysts also include a shift in analysts' sentiment trends to include increasing coverage and a rising price target that may begin later in 2025.