The market sees a strong signal for value appreciation

$171.50

-4.54 (-2.58%)

(As of June 27, 2024 ET)

52-week range

$149.58

▼

$187.22

Dividend yield

0.77%

P/E

25.04

Target price

186,00 €

UniFirst NYSE: UNF is a quality company with savvy management that is working hard to increase value for shareholders. Efforts include upgrading technology to the latest enterprise resource planning (ERP) and customer relationship management (CRM) software to increase margins. While headwinds remain, they are fading and the company is able to leverage its earnings growth as it scales. Today, the company’s operations contribute to self-funded growth, a solid balance sheet, dividends and share buybacks. At first glance, the company is reminiscent of the early days of larger competitors Ribbons NASDAQ: CTASwhose share price has risen by 800% in the last ten years and which is now a dividend king.

UniFirst signals higher margins and improved profitability

UniFirst’s third-quarter results are much better than expected, with strength coming from margins. The company reported revenue of $603.3 million, up 4.6% and slightly above the consensus estimate, with margins significantly higher. Revenue was driven by a 5.3% increase in the core laundry segment, offset by a slight decline in the specialty segment. Mitigating details include seasonality in the specialty segment and the impact of CRM and ERP on the core business.

The company reported a 320 basis point improvement in core operating margin in the laundry segment and a 280 basis point improvement in operating margin. This and the lower impact of CAPEX expenses related to the ERP and CRM software resulted in double-digit increases in income and profit. Operating income increased 45% to $48.5 million, net income increased 56.8% and EBITDA increased 29%. Net income is a 58% increase in diluted GAAP earnings, which beat the consensus reported by MarketBeat by $0.33.

Among the news supporting the rise in share prices is the forecast. The company maintained its revenue growth forecast but increased earnings expectations. UniFirst executives raised the lower bound of the target range by 5.5% to above the upper bound of the previous range and may be cautious in their estimates. The focus on ERP and CRM should help the company accelerate growth and increase its margin, with the potential to match industry leader Cintas’ 21.6%, representing 1400 basis points of gain over time.

UniFirst Capital’s returns are rising

While UniFirst’s dividend yield is not market-beating, it is among the safest payouts on the market. The 0.75% yield is offset by the payout ratio, balance sheet, and earnings growth that support the prospect of payout growth. The company has made annual increases and is expected to continue doing so, as the payout ratio is under 5% and the balance sheet is a fortress. The pace of increases has slowed from the triple-digit pace it reached earlier this decade, but remains solidly in the mid-single digits and will help boost the yield.

UniFirst also buys back shares to offset dilution and is likely to continue doing so for the foreseeable future. In terms of the balance sheet, the company has no long-term debt; total liabilities are just 0.2 times equity, with equity increasing.

Analysts push UniFirst shares up: The low point has been reached

The trend in analyst sentiment is only lukewarm but supports the market for the stock. Subsequent revisions include increased price targets from JPMorgan Chase, Robert W. Baird and UBS, who see this stock in a range of $175-$190, or 0-9% upside. JPMorgan sets the price target at $175, its lowest target ever, providing a floor for action consistent with the price movement.

UNF shares rose more than 12% following the news, trading near the $175 mark. The move created a long green candle, indicating support at a critical level while breaking to a three-month high. The market is facing resistance at the $180 mark, but will likely overcome it when more earnings reports are released later in the year.

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