Geoff Gannon July 17, 2015

UniFirst (UNF): Maybe Too Expensive; Maybe Just Right

Here’s a stock trading for 1.4 times sales. We’re sure of that. What we can’t be sure of is whether it’s trading at 10 times normal pre-tax profits or 14 times normal pre-tax profits.

That word “normal” is the problem.

UniFirst provides uniforms and protective clothing to American and Canadian businesses of all sizes. These businesses typically sign a 3 to 5 year contract. UniFirst then personalizes, cleans, and delivers whatever uniforms the business needs. The ongoing task is basically showing up at a customer location once a week to deliver fresh uniforms and collect the dirty ones.

Quan and I have probably talked about most publicly traded uniform and textile rental companies in the U.S., U.K., and E.U. at some point. Sadly, they haven’t been cheap enough for us to buy. We like the industry.

If capital allocation is good and the stock is not clearly selling at a premium price – we’d be willing to consider buying almost any of them.

At the right price.

We’ve decided that “right price” is 10 times pre-tax profits.

Luckily, UniFirst does trade for about 10 times pre-tax profit. However, the price is closer to 14 times pre-tax profit if normalized a certain way. I’ll explain that “certain way” in a second – but first an aside.

When we investigate a business in depth we come up with a unique way of normalizing earnings that is appropriate to that company. For example, Hunter Douglas made $200 million last year but we think it can make $300 million in a normal year and $350 million in a good year for housing. That’s not surprising because its sales are lower in both the U.S. and Europe than they were in 2006 and 2007. Its market share isn’t. The U.S. market for blinds and shades should in a cyclically normal year – assuming the same real prices per window covering and the same demand for window covering per person – be more than 25% higher now than it was 10 years ago. That’s because of population growth and inflation. It’s an easy estimate to calculate. And I’m confident in it. America isn’t going to have a lot fewer windows per person. And blinds and shades aren’t going to cost a lot less in real terms. So, in the case of Hunter Douglas we were aggressive in saying that future earnings will be much, much higher than any year from 2008-2014. That’s a no brainer.

UniFirst’s earnings are not as simple to normalize.

Our standard way of normalizing the earnings of a company we know nothing about is to simply take the most recent year’s sales and multiply that by the median EBIT margin over as many years of history as we have for the company. This is far from perfect. But, it’s also very good at eliminating cyclically overearning stocks from our list. In recent years, UniFirst has had a 13% return on sales. Today, it’s up to a 14% EBIT margin. However, if you

Read more