UniFirst currently trades at $198 per share and has shown little upside over the past six months, posting a middling return of 4.4%.
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We don't have much confidence in UniFirst. Here are three reasons why you should be careful with UNF and a stock we'd rather own.
Why Is UniFirst Not Exciting?
With a fleet of trucks making weekly deliveries to over 300,000 customer locations, UniFirst (NYSE: UNF) provides, rents, cleans, and maintains workplace uniforms and protective clothing for businesses across various industries.
1. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect UniFirst’s revenue to stall, a deceleration versus its 8.9% annualized growth for the past two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for UniFirst, its EPS declined by 4.5% annually over the last five years while its revenue grew by 5.8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
UniFirst historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.6%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
UniFirst isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 25.6× forward price-to-earnings (or $198 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at the most dominant software business in the world.
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