This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About UniFirst
The Croatti Family is living proof that the American Dream is so real.
What began in 1936 as the National Overall Dry Cleaning Company inside of a horse barn (you can’t make this stuff up) with a single washing machine and one delivery truck has blossomed into a leader into a uniform rental company that essentially cleans and leases out clothing and other supplemental protective workwear to the majority of the Fortune 500.
Some of the company’s customers include the likes of Costco, CarMax, The Hershey Company, Target, Goodyear, Land O’Lakes, Bristol-Myers Squibb, The Coca-Cola Company and heck, one of the founding members of MacroHint recently saw one of the company’s delivery trucks parked out on his university’s campus.
While uniform rental is where UniFirst seemingly concentrates the majority of its capital and operating efforts, the company, like one of its competitors that we have analyzed in the past, has other available services and offerings to its customers.
These other offerings include floor mats, floor mops, wipers and towels, supplemental cleaning products, hand sanitizer dispensers and paper towel dispensers.
Although this company operates on a rather broad base and has crafted quite the business for itself, it still has a lot of catching up to do in relation to a few of its fiercest competitors, leaders in the uniform rental market (and also an operator in the previously mentioned supplemental spaces UniFirst is in), Cincinnati, Ohio-headquartered Cintas as well as uniform rental and supplier of other facilities services, Philadelphia-based Aramark.
Nevertheless, the star of this stock analysis show is Wilmington, Massachusetts-based UniFirst and now seems to be just about the best time to dive into figuring out whether or not this company’s stock is worth buying and holding indefinitely.
UniFirst’s stock financials
A $3.03 billion company that made an appearance on Undercover Boss (please excuse our random fun fact), UniFirst is trading at a share price of $162.33 with a price-to-earnings (P/E) ratio of 29.43 and shells out an annual dividend of $1.24 to its shareholders.
At first glance, shares of this company’s stock (NYSE: UNF) seem a little more than modestly overvalued as it is generally accepted that a P/E of 20 indicates that a company’s stock is trading at exactly fair value and anything higher implies that its stock is trading at a premium relative to its actual worth.
This being the case, UniFirst’s stock is a little expensive right now.
However, perhaps this company could be experiencing some meaningful growth and thus it’s worth paying a growth premium for this company’s stock (NYSE: UNF).
Let’s dig deeper into UniFirst.
According to the company’s balance sheet, UniFirst’s executive members are in charge of handling and properly deploying in the neighborhood of $2.4 billion in terms of total assets as well as $512 million in terms of total liabilities.
All we have to say is well done, UniFirst, as the uniform rental company’s total assets largely outweigh the amount of its total liabilities, implying that this company is run by sound financial stewards.
Shifting gears to the company’s income statement, generation of total annual revenue over the last handful of years hasn’t been much of a problem for UniFirst, as the company (since 2018) has been able to produce, on average, $1.8 billion each year, seeing an incremental rise with its latest reported revenue figure (2022) of a little more than $2 billion, which can very likely be chocked up to price increases due to inflationary headwinds experienced by the company.
UniFirst’s recent total annual revenue picture isn’t surprising to us in the slightest as uniform rental has been a historically predictable business, during both economic boom and bust cycles, as it is more than likely uniform rental companies do their best to lock in long-term contracts with their customers so as to ride out any economic turbulence that may comes its way during the life of each contract.
Regarding the company’s cash flow statement, both generating net income and total cash from operations have been just as consistent as its total revenue, as there have been no major fluctuations year-over-year (YOY), which, again, speaks to the predictability of the uniform rental sector and, of course, bodes well for a company such as UniFirst.
UniFirst’s stock fundamentals
It also pays to be a consistent company in a predictable industry in the sense that UniFirst’s trailing twelve month (TTM) net profit margin, according to TD Ameritrade’s platform, is notably competitive with the industry’s average.
Namely, the company’s TTM net profit margin stands at 4.88% to the industry’s average of -7.25%.
Perhaps this is a perk of being a smaller (relative to Cintas and Aramark, at least), more nimble company in the land of the aforementioned, more broad based leaders of the uniform rental sphere.
Regardless of the main reason, we’re not complaining.
However, we do find the company’s TTM returns on both assets and investment(s) to be points of concern, as they both stand substantially lower than that of the industry’s average.
For instance, also according to TD Ameritrade’s platform, UniFirst’s TTM returns on assets and investment(s) are tucked in at 4.23% and 4.7% to the industry’s respective averages of 8.08% and 11.14%.
To us, this implies that the company isn’t as efficient with its capital and other related resources as it could be, and thus its competition (on average) is doing an all around better job at extracting returns in these regards.
Maybe the company should look into ways in which it can better streamline its capital efficiency and operations overall.
Here we go.
Two considerations for UniFirst
Although in certain previous stock analysis articles we’ve presented a potentially beneficial hypothetical scenario for the company in question, we have two that come to mind with UniFirst.
First of all, crafting and maintaining a sturdy balance sheet is good for a few obvious reasons, one of which includes the innate ability to engage in meaningful mergers and acquisitions (M&A) activity that can better position the company and its shareholders and stakeholders more broadly.
Therefore, it might make some sense if the company took some of its cash and looked into buying out some of its smaller competitors so as to help better size itself up against the big players it goes up against today while also beefing up its total annual revenues and widening its national presence.
As an example, Salt Lake City, Utah-headquartered, privately owned linen and uniform supplier Alsco apparently turns out $5.5 billion in total annual revenue and has a solid strategic subsidiary in Admiral Linen and Uniform Service.
While it would require that the company (UniFirst) tack on a likely considerable amount of long-term debt on its books, buying Alsco outright would almost certainly bring UniFirst a massive step closer to the competition by non-organically expanding its market share and thus its revenue and operating capabilities, not to mention the potentially valuable intellectual property (IP) that UniFirst could gain as well.
If this sort of acquisition would turn out to be a bit too expensive and negative from a balance sheet perspective in the long run, UniFirst could easily turn to smaller yet impactful regional players such as Irvine, California-based Prudential Overall Supply, which pretty much does what UniFirst does on the uniform rental front, just at a smaller scale, as it apparently turns over around $159 million in total annual revenue.
That brings us to our next proposal; maybe UniFirst should consider putting itself up for sale instead of making an acquisition itself.
Larger industry operators such as Aramark and Cintas would more than likely seriously consider buying out arguably one of its most annoying, pesky competitors, especially after the dust settles following the current recession and valuations drift down.
While Cintas purchasing UniFirst would be a pure synergy play, as Cintas and UniFirst offer nearly the exact same types of products and services, it would be an opportunity for Cintas to continue growing and expanding its presence in the United States.
This would just simply be the big getting bigger.
From the perspective of Aramark, a bid for UniFirst could be seen as a greater overall push into the linen and uniform rental market as Aramark doesn’t concentrate as much of its operations in the uniform rental space as Cintas and UniFirst currently do.
In fact, Aramark is better known as being a dominant food service company for venues such as schools (elementary, high school and colleges), sporting events, correctional facilities and other entities worldwide, along with issuing mops and mats and other general facilities-related services, including uniforms.
However, when it comes to the top dog of the uniform rental industry, Cintas, Aramark has some catching up to do in the uniform rental space.
One way in which it can take a meaningful step in doing that is by buying out UniFirst.
Should you buy UniFirst stock?
On its own, UniFirst is a solid company.
Nothing more, nothing less.
Focused operations, many enterprise customers that are likely going to be able to pay during all economic cycles, as evidenced in the total annual revenue figures presented in previous paragraphs, a top-notch balance sheet, and a great TTM net profit margin as it stands versus the industry’s average.
However, consistency alone, to us, doesn’t make it worth picking up shares in this company when they are trading at a more than modest premium at the moment.
Therefore, all things constant, acquisition or no acquisition, buyout or no buyout, we give this company’s stock a “sell” rating until its valuation comes down to fair, reasonable levels.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.