Undervalued Unifirst Corporation Pulls Back To Support

Unifirst Falls On Strong Results, Positive Guidance

Anyone not expecting strong results from Unifirst Corporation NYSE: UNF isn’t paying attention to the labor market. While there are still lingering issues within the labor force, the labor market is strong and employment levels are back to their pre-COVID levels. This is driving business not only for Unifirst but for its competitors like Cintas NASDAQ: CTAS, a competitor that may one day be interested in acquiring Unifirst but that is a story for a different day. Today, Unifirst is an undervalued issue compared to its much larger competitor and growing at a comparable rate while paying an incredibly safe dividend. 

Unifirst Beats And Guides Higher 

Unifirst had a good quarter if one impaired by rising costs and the cost of growth initiatives. The $486.2 million in net revenue is up 8.8% over last year and beat the consensus by 230 basis points on an increase in clients and employees per. The revenue is also up on a two-year basis and a company record we see falling as soon as the current quarter. On a segment basis, the core laundry business grew by 9.1% while the specialty business (primarily nuclear decontamination/prevention) grew by a smaller 3.5%. 

Moving down the report the margin details are a bit mixed but are, ultimately, bullish. On a segment basis margin in the core segment fell slightly YOY due to rising costs but was offset by wider margins in the specialty segment. This mix, along with revenue strength, helped drive the adjusted earnings to $2.00 or $0.05 better than expected. On a GAAP basis, the $1.77 is only as expected but includes the cost of the company’s Key Initiatives which include launching a CRM program as well as an ERP and branding efforts. 

Turning to the guidance, the news is also mixed but net-bullish in our opinion. The company raised its guidance for both revenue and earnings but the earnings guidance is a little weak. The revenue guidance is calling for Q3 results in the range of $1.94 billion to $1.955 billion compared to the consensus of $1.93 with the EPS guidance bracketing consensus and the consensus in the lower portion of the range. 

Unifirst Is A Safe Dividend If Nothing Else 

Unifirst is not a large dividend payer or even one with a robust history of dividend growth but it is a very safe payer and one with an outlook for dividend growth. The current payout is only about 0.60% compared to Cintas 1.20% but the payout ratio is a much more attractive 16% and comes with a very high double-digit CAGR. In our view, investors should expect to see dividend increases continue and possibly with a 20% to 30% CAGR over the next few years. And Unifirst is buying back shares as well. The company bought back about 0.12% of the shares during the first quarter and still has $97.3 million or roughly 2.4% of the market cap left in the buyback allotment. 

The Technical Outlook: Unifirst Retreats And Confirms Support 

Shares of Unifirst have been trying to reverse over the past few months and look like they will continue to drift upward within the trading range. The Q1 results caused price action to pull back to the short-term EMA and it may fall further. Assuming price action continues to fall we see this stock moving back down to retest the $200 level and possibly the $190 level. If, however, support kicks in at the EMA, we see this stock moving sideways until more details arise.