Unifirst’s (NYSE: UNF), which reported solid results but fell short of analyst expectations, is seeing its stock price decline. UniFirst (NYSE: UNF) is not a great value when compared to other companies, but it’s on track to achieve a sustained increase in distribution similar to Cintas. UniFirst’s strong balance sheet, low leverage and potential to rebound in the future are all factors that will help it achieve a sustained rally.
Key Points
1. Unifirst’s solid report failed to meet analysts’ expectations and caused its stock price decline.
2. Dividends of the company are safe and increasing, although they may not be as large as those of competitors.
3. UniFirst could grow to a valuation similar to that of the industry leader Cintas. Cintas commands a premium on the market.
UniFirst’s stock price is on the decline after it released a strong report which fell short of analyst expectations. Even though the stock price has fallen, there are a few key things to remember about UniFirst.
Firstly, while UniFirst may not be an obvious value investment, with its earnings outlook trading at a higher multiple than the S&P 500, it does offer a safe and growing dividend. Investors are still attracted to the fact that, although UniFirst’s dividend is not as large as some other companies in comparison, it does grow.
Cintas is UniFirst’s nearest competitor in terms of comparison with other companies. Cintas, which is roughly four times bigger than UniFirst but both growing at similar rates, commands a premium valuation. Cintas is almost twice as large as UniFirst. However, it is a question of whether Cintas valuation is justified.
Cintas is valued higher because of its higher dividend yield. UniFirst pays less in absolute terms but the difference is not as significant when comparing dividend yields. UniFirst’s current yield is about 0.75%, compared to Cintas 0.95%. Cintas does pay out a larger portion of its profits as dividends.
UniFirst, despite these differences, is on course for a sustained increase in distribution, similar to Cintas. UniFirst’s payout is only 24%, at the low end of their guidance. Cintas has a payout of 35%. Cintas as a dividend aristocrat has increased its distribution for over four decades. UniFirst, too, could follow suit with a sustained increase in distribution.
UniFirst is a company with some debt but a relatively low leverage. This allows capital to be used for acquisitions, dividend growth, share repurchases and growth in growth opportunities. UniFirst’s distribution growth has been irregular over the years, but it has made three consecutive increases in recent times. These increases are accompanied by an annual compound growth rate (CAGR), which has been calculated at 40%. It is expected that this CAGR will decline over the next couple of years but remain double-digit.
UniFirst has had a good quarter, with net revenues up 12.7% compared to last year. Specialty revenue, which is supported by nuclear facilities, has seen a 20% increase. The report’s weakest point was a contraction in margins, which led to a decline in GAAP earnings compared to the previous year. Even so, adjusted earnings allowed the outlook to be maintained.
UniFirst’s forecast for the fourth quarter is based on the strengths as well as weaknesses experienced in the third quarter. There is a projected increase in revenue but no change is expected to the bottom line. These results are consistent with the long-term trajectory of the company, suggesting that a drop in the share price after the announcement may provide an entry point for new investors.
UniFirst stock has hovered at bottom-of-the barrel levels for the last year. There is still potential for a recovery, however, due to positive factors like EPS growth, strong balance sheets, and a dividend that’s reliable. UniFirst may experience a short-term sideways movement, but the outlook for the company is bullish.
UniFirst is not a value investment, but its dividends are growing and safe. Although the company’s distribution is not growing as fast as analysts expected, it remains on track. The company’s recent performance and solid financial situation indicate that the stock price could rise.
