Uniform-Rental Stocks Rise as Play on Rally in U.S. Jobs Market
Companies are renting more uniforms as hiring in industries such as manufacturing and food service outpaces the U.S. economy’s best six-month streak of job growth since 2006.
Hiring for uniform-clad workers grew 59,000 last month following a 96,000 gain in January, according to an index created by Robert W. Baird & Co., a Milwaukee-based financial- services company. Payrolls at these businesses rose 2.3 percent from a year earlier to 30.7 million, the highest since March 2009 and more than the 1.6 percent gain for all employees on nonfarm payrolls, the Baird index and Bureau of Labor Statistics data show.
“What we’re seeing now is a pretty good resurgence in hiring in uniform-wearing industries,” said Andrew Wittmann, an analyst with Baird in Milwaukee. Gains in these types of jobs have exceeded the total market for more than a year, even amid the broader improvement, he said.
The unemployment rate held at 8.3 percent in February, a three-year low, while the economy added 734,000 jobs between December and February, the biggest three-month increase since May 2010, based on data from the Bureau of Labor Statistics.
One such sign is the Bureau of Labor Statistics’ employment-diffusion index, which was 57.9 (EMDINP1M) last month following 70.3 in January, the highest since 1997. A reading above 50 indicates more industries are hiring than firing, Price said.
An improved labor market is helping to drive up shares of the publicly-traded players in this industry -- Cintas Corp. (CTAS), UniFirst Corp. and G&K Services Inc. (GKSR) -- which have risen 16 percent, 5.8 percent and 15 percent since Dec. 30, 2011. This compares with a 12 percent gain for the Standard & Poor’s 500 Index and 13 percent for the Russell 2000 Index.
These stocks are attracting investors because improving results from uniform companies are representative of gains in the economy, said Lawrence Creatura, who helps oversee $369.7 billion as a Rochester, New York-based fund manager at Federated Investors Inc. (FII) “When growth is good, unit demand increases.”
G&K Services’ rental business -- which makes up about 92 percent of its total revenue -- is benefiting from more customers, Chief Financial Officer Jeffrey Wright said at a Feb. 29 conference hosted by Baird. This segment grew 6 percent organically, before the impact of exchange rates and acquisitions or disposals, during the quarter ended Dec. 31 from a year earlier, the Minnetonka, Minnesota-based company said Jan. 31.
‘Sweet Margin Business’
About 10 percent of Americans wear rented attire to work each day, so when these industries increase headcount, that’s relevant for the U.S. economy, said Andrew Steinerman, an analyst in New York at JPMorgan Chase & Co. This is “sweet margin business” for the uniform-rental companies because the garment comes out of a warehouse and already has been depreciated, he said.
As business picks up and an auto-shop hires another mechanic, for example, Cintas, UniFirst and G&K Services need to drop off an extra uniform each week for that employee, Steinerman said. That’s considered an “add,” whereas a “stop” is when a customer lays off a worker, he said.
The so-called “add-stop” metric of net customer hiring has been “slightly positive” for Cintas, Chief Financial Officer William Gale said on a Dec. 20 conference call. “There are some pockets of adds of uniform wearers,” which include jobs in health care. The Cincinnati, Ohio-based company is scheduled to report third-quarter earnings today.
Larger Market Share
Cintas is attractive to investors who want exposure to this industry because it has a larger market share and is more liquid than its competitors, said Wittmann, who maintains an “outperform” recommendation on the stock. He has the same recommendation on Wilmington, Massachusetts-based UniFirst and on G&K Services, which also will benefit from further job gains.
Even as these companies raised fiscal 2012 revenue guidance in their most-recent earnings reports, growth is more likely to come from new contracts, which creates a “huge margin headwind,” Steinerman said. If add-stops “kick in more,” this will be favorable for these stocks, he said. He has an “overweight” recommendation on Cintas and is “neutral” on UniFirst and G&K Services.
The industry still is very sensitive to the macroeconomic environment and if recent gains in the labor market deteriorate, this could hurt these companies, Wittmann said. Gross domestic product will expand 2.2 percent this year, according to the median estimate of economists surveyed by Bloomberg News. It rose 1.7 percent in 2011, Commerce Department data show.
UniFirst’s wear base was “slightly positive” for the six months ending March 3, as some areas of the U.S. remain “in a negative state,” President and Chief Executive Officer Ronald Croatti said at Baird’s Feb. 29 conference. The company gets about 65 percent of its revenue from uniforms, while ancillary businesses -- including floor mats and towels -- “add balance,” because UniFirst hasn’t seen “what we call a trend of steady improvement,” Chief Financial Officer Steven Sintros said that day.
The jobless rate has “declined notably in recent months but remains elevated,” the Federal Reserve said March 13 in a statement following its March meeting. Unemployment was less than 5 percent before the 18-month recession began in late 2007.
Applications for unemployment-insurance payments fell by 14,000 to 351,000 in the week ended March 10, matching a four- year low, Labor Department data show. The total has remained below 400,000 for nine weeks, a threshold the economy had trouble breaking as the labor market started to “gain momentum” in 2010, Price said.
Now that the economy has broken this level on a sustained basis and there are signs hiring has been broad-based, Price said he’s more optimistic about further improvement. He forecasts the jobless rate will be 8.2 percent at year-end. “We’re finally petering out on some of the job cuts.”
Improvement in the labor market will translate to continued momentum in Cintas’ rental business, which grew across all categories in the quarter ended Nov. 30, Vice President and Treasurer Michael Hansen said Dec. 20.
“If we can see some pickup in the hiring from our customers, we should see even more improvement.”
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