Unifirst: Undervalued At Rock-Bottom Prices

Key Points

• Unifirst is moving lower after a solid report that fell short of analysts' expectations. 
• The dividend isn't large, but it is safe and growing. 
• Industry leader Cintas commands a premium, and UniFirst is on track to grow into a similar valuation. 

Unifirst NYSE: UNF is not an evident value trading at 24X its earnings outlook. The broad market S&P 500 trades at only 17X or 18X of its earnings, which is well below UniFirst and comes with a better dividend. The problem with that comparison is that its closest competitor Cintas NYSE: CTAS, trades at an even higher 40X its earnings which begs the question, why?

Among the many reasons is that Cintas is the industry leader and roughly 4 times the size of UniFirst; they are growing at approximately the same pace and are supported by the same trends. Cintas should have a premium, but is it worth nearly double the valuation? 

Another reason is the yield. UniFirst also pays a lesser dividend, but that’s only relative to yield, and other factors are in play. UniFirst yields about 0.75% compared to Cintas’ 0.95%, but that comparison opens the door to opportunity because Cintas is paying out more of its earnings.

The takeaway is that UniFirst is on track for sustained distribution increases, similar to Cintas’ history, which has the stock on track for a rebound, reversal, and sustained rally. UniFirst competes strongly with its larger peer and pays only 24% of its earnings (at the low end of guidance) compared to Cintas's 35%. Cintas is a Dividend Aristocrat with nearly 40 years of consecutive distribution increases. That suggests the same could be true for UniFirst; sustained increases with earnings growth offsetting distribution growth. 

UniFirst’s balance sheet has some debt, but leverage is incredibly low, leaving capital free for growth opportunities, acquisitions, repurchases, and dividend growth. The company has an irregular history of distribution growth over the long term but has made 3 consecutive increases recently. Those come with a 40% CAGR that will likely fall over the next few years but remain firm in double-digit territory.

UniFirst Falls On Solid Results

UniFirst had a solid quarter, but results are tepid relative to the analysts' expectations, weighing on the share price. The company reported $576.7 million in net revenue, a gain of 12.7% compared to last year. The top line result beat the Marketbeat.com consensus by 200 basis points; the problem is that strength did not carry through to the bottom line.

Revenue was driven by an 11.5% increase in core laundry services and a 20% gain in Specialty. Specialty revenue is underpinned by an increase in business at nuclear facilities. 

The margin news is the true weak spot in the report. Margin contracted compared to last year, leaving the GAAP EPS at $1.29, as expected, and down -3.0% compared to last year. The adjusted earnings, which include investments in digitization and customer retention, came in at $1.73, which is $0.02 below the consensus but sufficient to maintain the outlook.

The guidance for Q4 reflects the strength and weaknesses in Q3, including an increase to the top line and no change to the bottom. The takeaway is that these results are consistent with the company’s long-term trajectory, so the post-release share price drop looks like a potential entry point into the market. 

UniFirst Is Bumping Along At Rock Bottom 

UniFirst has been bumping at rock-bottom prices for the last year and may be ready to rebound. The Q3 results and guidance sparked a sell-off, but it was weak and showed support at a critical level. Assuming this level holds support, the market should move sideways within the current range until later in the year. However, the long-term outlook remains bullish due to the EPS growth, balance sheet, and dividend.