Wednesday afternoon, uniform provider UniFirst (NYSE:UNF) posted solid results for the third quarter. Revenue climbed about 7%, but improved margins led to a 19% increase in net income. Although employment growth is still stagnant and higher energy prices have hurt, operating improvements have more than kept pace.
But just for a change of pace, let's look at UniFirst through the lens of how Peter Lynch described "the perfect stock."
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It sounds dull or it does something dull: Check. Manufacturing, renting, cleaning, and delivering uniforms and protective clothing? I'd say that's pretty dull.
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It does something disagreeable or depressing: Well, laundering uniforms isn't a lot of fun, especially because a part of this business deals with nuclear contamination.
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It's a spinoff: Nope, not this one. UniFirst has been a family-run company for almost 70 years.
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The institutional investors don't own it, and analysts don't follow it: I see only three analysts and about 43% institutional ownership, according to Yahoo! Finance numbers. That's pretty low.
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Rumors abound that it's involved with toxic waste: Well, radioactive materials may or may not be considered toxic waste, but I'd give UniFirst a "check" for this one, too.
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It's a no-growth industry: I wouldn't say that the uniform industry is a no-growth industry, but it's not going to grow a whole lot faster than the economy itself.
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It's got a niche; People have to keep buying it. It's a user of technology. Yes, yes, and yes.
- The insiders are buyers, or the company is buying back shares: Well, not really, but I'll explain this one more in a moment.
Looking through that list, I see a lot to like about this generally unknown company. Now for the potential bad news: The family that built UniFirst is still heavily involved in it.
"Whoa," you say, "doesn't The Motley Fool look for that?" Yes, we do. And I'm glad to see that the CEO is part of the founding family. But what I don't like so much is the dual-class share structure that gives the family preferential voting rights. In other words, it controls the company's destiny, not the shareholders.
I can understand that to some extent. If I started a business, I think outsiders would have to pry control out of my cold, dead hands. And thus far, shareholders have done all right over the long haul. But it is a concern that any new investors must analyze for themselves, because a shareholder's interests may or may not line up with the family's interests.
So let's wrap this up with a quick word on valuation. The stock looks neither terribly cheap nor terribly expensive. The business generates good cash flow, but a look at the competition suggests that UniFirst should be able to produce better margins and a better return on assets. While this certainly is a company worth watching, I'd prefer a lower price before slipping on this uniform.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned.
