February 2012 Jobs Growth in Uniform Sectors

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RW Baird report regarding job growth in "heaviliy uniformed" industries. Reveals positive outlook for uniform comapnies. Download it here.

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February 2012 Jobs Growth in Uniform Sectors

  1. 1. March 9, 2012 Baird Equity Research Business ServicesFacility ServicesBLS Payroll Data; Still Positive for Uniform StocksThe February BLS jobs report was as expected with uniform-wearing industry gains INDUSTRY UPDATEcontinuing to outpace the broader economy, supporting recent positive trends in Prices as of 3/8/12uniform rental stocks. Add/Stop employment (traditional uniform wearing-industries) Mkt Capgains remain consistent with prior mid-cycle recovery levels (e.g., mid-late Ticker Price Rating Risk (mil)1990s/2004-2006) with YTD employment gains near the high end of prior growth cycles. CTAS $39.26 $5,092 O AWhile we have been clear to recognize the sectors recent stock performance, we continue GKSR $32.65 $611 O Ato view the data as supportive of a modestly overweight portfolio. UNF $58.96 $1,156 O A Baird covered companiess Payrolls meet healthy expectations. February payrolls met strong expectations, increasing by 227,000, above the +210,000 consensus, suggesting sustainability after three sequential months of 200,000+ gains. The YOY change in employment increased +1.55% (highest rate this cycle) with the unemployment rate holding constant at 8.3% (as expected). We note particular strength in professional and business services (+82,000), education and health (+71,000) and leisure and hospitality (+44,000). Manufacturing employment also continues to outpace the broader economy (+1.9% YOY).s Uniform-related employment growth near high end of previous growth cycles. Bairds Add/Stop Employment Index specific to uniform rental-related employment remains healthy, increasing by 59,000, with an additional 14,000 wearers added through previous data revisions. While the monthly gain is below last months exceptionally strong read (+96,000, revised), average gains over the past three months (+81,000) are consistent with high-end growth rates of prior mid-cycle recovery levels (e.g., mid-late 1990s / 2004-2006). Stable organic growth is realized when the Baird index is in the 50-70k jobs range.s Remain modestly overweight in uniform stocks. Add/Stops are now becoming a greater contributor to overall growth rates and our recent conversations with both public and private uniform providers suggest prior pricing initiatives have been maintained, reducing a long-time headwind for the industry. We continue to view uniform stocks positively, with conservatively set guidance providing a pathway to upwardly biased earnings revisions; nonetheless, we expect alpha generation likely to be more modest than 2011s gains.s G&K (Outperform): We continue to see opportunity through progress on managements turnaround strategy. We suggest investors focus on EBITDA margin expansion and long-term earnings power, supported by GKSRs cash flow and balance sheet.s Cintas (Outperform): Recent performance has been strong, though more difficult comps are approaching. We still see opportunities across CTASs business (particularly beyond garment rental) and cite likely upside to conservatively set guidance.s UniFirst (Outperform): UniFirst continues to execute above peers, suggesting share gains. Although rising merchandise costs have pressured earnings, we believe opportunities for balance sheet deployment provide a potential catalyst. [ Please refer to Appendix - Important Disclosures and Analyst Certification ]Andrew J. Wittmann, CFA Justin P Hauke .awittmann@rwbaird.com jhauke@rwbaird.com414.298.1898 314.445.6519
  2. 2. March 9, 2012 | Facility ServicesDetails Employment Trends Remain Conducive to an Overweight Uniform Portfolio The February BLS jobs report was as expected with uniform-wearing industry gains continuing to outpace the broader economy, supporting recent organic growth trends and operating leverage at uniform rental companies. Add/Stop employment (traditional uniform wearing-industries) gains remain consistent with prior mid-cycle recovery levels (e.g., mid-late 1990s/2004-2006) with YTD employment gains near the high-end of prior growth cycles. While we have been clear to recognize the sectors recent stock performance, we continue to view the data as supportive of a modestly overweight portfolio. Our primary basis for sector recommendation at this point remains upwardly biased estimates, continuing recent trend (see below), as consensus expectations may still not fully appreciate top-line momentum. We note that this has been our teams position on the group since early this year. We previously (prior to December 2011) highlighted opportunities for both positive estimate revisions as well as multiple expansion for the group. Management guidance appears relatively conservative across our list, in our view, with estimates likely biased higher at least over the near-term. Indeed, this has been the pattern of uniform stock performance throughout the recovery as estimates have been slow to adjust to an improving labor market (we note, however, that the reverse phenomenon was also apparent on the way down). The charts below demonstrate quarterly EPS outperformance versus consensus at CTAS, GKSR, and UNF over the past 10 quarters. Cintas Corp. Quarterly EPS vs. Consensus $0.60 Consensus $0.50 Actual $0.40 $0.30 $0.20 $0.10 $0.00 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 F2Q12 Source: Company reportsRobert W. Baird & Co. 2
  3. 3. March 9, 2012 | Facility Services G&K Services Quarterly EPS vs. Consensus $0.60 Consensus $0.50 Actual $0.40 $0.30 $0.20 $0.10 $0.00 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 F2Q12 Source: Company reports UniFirst Quarterly EPS vs. Consensus $1.40 Consensus $1.20 Actual $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 F1Q09 F2Q09 F3Q09 F4Q09 F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 Source: Company reports The uniform stocks were strong alpha generators in 2011 and have continued to outperform in 2012. Previous stock performance was driven largely by cyclical momentum (both revenue and margins) on previously low expectations. Recently the “buy USA” trade has brought new interest to uniform rental companies, in our view. Cintas (CTAS) has consistently outperformed both the group and the market over the past year.Robert W. Baird & Co. 3
  4. 4. March 9, 2012 | Facility Services Uniform Stock Performance One-Month Percentage Price Change YTD Percentage Price Change C intas C intas S & P 50 0 G & K S erv ices G & K S erv ic es U niform In dex U n iform Inde x S & P 5 00 U n iFirs t U niFirst -6% -4 % -2% 0% 2% 4% 0% 2% 4% 6% 8% 10 % 12% 14% Three-Month Percentage Price Change Trailing 12 Months Percentage Price Change C in tas C intas U n ifo rm Index U niform Index G & K S e rv ic es U niFirst S & P 500 S & P 500 U niFirs t G & K S erv ic es 0% 5% 10% 15 % 20% 25% 30% 35 % 40% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Source: FactSet Research Systems As noted above, we now see upwardly biased earnings revisions for the group as the primary driver of additional alpha generation as multiples have recovered to historical (5-year) averages (in fact, a slight premium). The group is now trading at an average forward 12-month EV/EBITDA multiple of 7.3x and 15.2x earnings, compared to average (5-year) levels of 6.9x and 15.0x. We believe multiples reflect recent momentum, but could offer opportunity should estimates prove conservative. Uniform Industry Valuation EV/EBITDA, ftm P/E, ftm Company Ticker Price Price Target Rating MktCap ($M) FTM AVG FTM AVG Cintas CTAS $39.30 $42 O $5,098 8.3x 7.7x 16.4x 16.2x G&K Services GKSR $32.64 $38 O $609 7.4x 7.3x 14.6x 15.9x UniFirst UNF $59.25 $68 O $1,159 6.3x 5.7x 14.4x 13.0x Average: 7.3x 6.9x 15.2x 15.0x As of 03/09/2012 Source: FactSet Research Systems and Baird estimates Facility Services Valuation, EV / EBITDA (FTM) 19.0x 17.0x 5-YR AVG 15.0x Current 14.1x 13.0x 11.0x 10.4x 9.5x 9.0x 8.9x 8.3x 7.0x 7.4x 6.3x 5.0x 3.0x ROL ECL ABM IRM CTAS GKSR UNF Note: The blue bars indicate FTM 5-year ranges; IRM reflects 3-year average/range Source: FactSet Research Systems and Baird estimatesRobert W. Baird & Co. 4
  5. 5. March 9, 2012 | Facility Services The February BLS Employment Report The February payrolls report met strong expectations, increasing by 227,000, above the +210,000 consensus, suggesting sustainability after three sequential months of 200,000+ gains. The YOY change in employment increased +1.55% (highest rate this cycle) with the unemployment rate holding constant at 8.3% (as expected). We note particular strength in professional and business services (+82,000), education and health (+71,000) and leisure and hospitality (+44,000). Manufacturing employment also continues to outpace the broader economy (+1.9% YOY). We note this winters unusually warm winter weather has likely played some role in the strength of recent data reports. Should this be the case, we would not be surprised to see some sequential moderation in the March BLS report but expect underlying trends to remain healthy. BLS Nonfarm Payrolls 6% 1000 800 4% 600 400 2% 200 0% 0 (200) -2% (400) BLS Nonfarm Payrolls 1-month change (000s), right (600) -4% BLS Nonfarm Payrolls YOY Growth Rate, left (800) -6% (1000) 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Bureau of Labor Statistics and Baird Research Forward-looking employment indicators were little changed. Total average weekly hours held constant at 34.5 hours while wages rose slightly (+$0.03 to $23.31), +0.1% (some economists have cited worries of wage inflation given the stronger employment environment). We also note that the ISM Manufacturing Employment Diffusion Index remained positive in February at 53.2 (50 is a neutral rating). ISM Manufacturing, Employment Diffusion Index 75 70 65 60 55 50 45 40 35 30 25 Jan-90 Jun-91 Nov-92 Apr-94 Sep-95 Feb-97 Jul-98 Nov-99 Apr-01 Sep-02 Feb-04 Jul-05 Nov-06 Apr-08 Sep-09 Feb-11 Note: The solid red line reflects a "neutral" reading; A reading above (below) indicates sequential improvement (deterioration) Source: Institute for Supply ManagementRobert W. Baird & Co. 5
  6. 6. March 9, 2012 | Facility Services While the U.S. employment recovery has been slow, the pace of gains has gradually improved (in fact, the sequential rate of employment growth over the past two months has been similar to levels in the late 1990s and relatively strong when compared across all cycles). That said, the overall trajectory of employment growth is still well below prior post-recession recovery gains. Indeed, the figure below shows the growth in employment (indexed at the solid black line to cycle peak employment), which demonstrates the pronounced sluggishness of the current "recovery" but also the fact that growth rates have, at least, become more similar (actually now exceeding) to the mid-2000s cycle (off of a lower base). Nonfarm Payroll Growth (indexed at month of cyclical employment peak) 115 Sep-48 Jul-53 Aug-57 Apr-60 110 Mar-70 Jul-74 Mar-80 Jul-81 Jun-90 Feb-01 105 Jan-08 100 2000-2001 Cycle 95 Current Cycle 90 -26 -24 -22 -20 -18 -16 -14 -12 -10 0 2 4 6 8 -8 -6 -4 -2 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 Source: Bureau of Labor Statistics and Baird ResearchRobert W. Baird & Co. 6
  7. 7. March 9, 2012 | Facility Services Baird Add/Stop Employment Index Gains Similar to Prior Growth Cycles Bairds Add/Stop Employment Index specific to uniform rental-related employment remains healthy, increasing by 59,000, with an additional 14,000 wearers added through previous data revisions. While the monthly gain is below last months exceptionally strong read (+96,000, revised), average gains over the past three months (+81,000) are consistent with the high-end of growth rates seen in prior recoveries (e.g., mid-late 1990s / 2004-2006). Stable organic growth is realized when the Baird index is in the 50-70k jobs range. In 2011, the average monthly rate was 56,000, demonstrating the additional momentum in recent months. Baird Add/Stop Employment Index 4% 200 Average = 65k Average = 54k 2% 100 0% 0 -2% (100) Cycle Average = 49k (since Mar 2010) -4% 2011 Average = 56k (200) 3-Month Average = 81k -6% Baird Add/Stop Employment Index (000s), right (300) Baird Add/Stop Employment Index YOY Growth Rate, left -8% (400) 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Bureau of Labor Statistics and Baird Research Baird Add/Stop Employment Index (Recent Cycle) 4% 200 Baird Add/Stop Employment Index (000s), right 2% Baird Add/Stop Employment Index YOY Growth Rate, left 100 0% 0 -2% (100) -4% (200) -6% (300) -8% (400) Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Source: Bureau of Labor Statistics and Baird Research We continue to highlight the recent momentum in Add/Stop momentum over the past several months as a critical dynamic to the data. Following a slowdown in employment in mid-2011, hiring appears to have strongly recovered as we headed into the end of the year and now suggests evidence of stability. We note that this factor also parallels the increasing role of Add/Stops as a contributor to overall organic growth in 4Q11 at the uniform rental companies (a positive, as employee additions at existing accounts typically carry higher incremental margins). Our conversations with industry participants at this weeksRobert W. Baird & Co. 7
  8. 8. March 9, 2012 | Facility Services CSC Convention support this trend. We also point to higher industry growth expectations from our recent 1Q12 industry survey. At what rate do you expect your revenue to grow excluding acquisitions in the next 12 months?" 7.0% 5.7% 5.7% 5.8% 5.9% 6.0% 5.6% 5.4% 5.3% 5.4% 5.0% 5.0% 5.1% 5.0% 4.7% 4.6% 4.5% 4.3% 3.8% 4.0% 3.3% 2.9% 3.0% 2.7% 2.3% 2.0% 1.5% 1.0% 0.3% 0.0% 0.0% Note: Growth rates reflect average responses of survey participants Source: Baird Research, March 2012 Uniform Rental Industry Survey Finally, we note that the YOY growth rate in Add/Stop Index employment categories continues to outpace the broader economy for the first time since late 2006/early 2007 (a phenomenon which has been apparent throughout 2011, supporting alpha generation in the uniform rental stocks, in our opinion). As we have highlighted, this has been a critical element of the data as uniform employment lagged broader employment categories throughout the recovery until February 2011. Total Non-Farm Employment vs. Baird Add/Stop Employment Index (YOY Change) 4.00% BLS Total Non-Farm Employment 2.00% Baird Add/Stop Employment Index 0.00% -2.00% -4.00% Growth in Baird Add/Stop Index employment continues to outpace -6.00% total NFP employment -8.00% Jan-07 Mar-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Jul-11 Sep-11 Nov-11 Jan-12 May-07 May-08 May-09 May-10 May-11 Source: Bureau of Labor Statistics and Baird Research Uniform growth led by F&B industries, but overall trends remains positive. Most uniform verticals comprising our Add/Stop Index posted positive growth in February, led by F&B industries, partially offset by a decline in Machinery employment. Previously (several months ago), trends had been more mixed. The figure below shows the absolute job gains/losses within several of the primary uniform-wearing industries comprising our Index over the last month. We also note continued good growth in various manufacturing verticals (which continue to outpace the broader economy).Robert W. Baird & Co. 8
  9. 9. March 9, 2012 | Facility Services Baird Add/Stop Employment Index Component Industries: 1-Month Employment Change (000s) Food Services and Drinking Places 41 Food Manufacturing 11 Chemicals 10 Motor Vehicle and Parts Dealers 5 Fabricated Metal Products 5 W holesale Trade - Nondurable Goods 3 Food and Beverage Stores 3 Repair and Maintenance 3 Specialty Trade Contractors 1 Truck Transportation (0) Gasoline Stations (1) W holesale Trade - Durable Goods (5) Machinery (15) 1-month Employment Change (000s) Source: Bureau of Labor Statistics and Baird Research Add/Stop Employment historically a good predictor of uniform organic growth. Importantly we continue to note that the YOY change in our Add/Stop Index has historically been well-correlated with uniform rental organic growth rates, particularly at CTAS. The figure below demonstrates this relationship. Continued momentum in employment could suggest positive bias to management guidance at all three uniform companies, in our view. CTAS Organic (Rental) Revenue Growth YOY vs. Baird Add/Stop Employment Index 15.0% R² = 0.7286 10.0% 5.0% Add/Stop Index 0.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% -5.0% -10.0% CTAS Organic Rental Revenue -15.0% Note: CTAS organic growth reflects interpolated calendar growth figures; 3Q11-4Q11 reflect Baird estimates Source: Bureau of Labor Statistics, Company Reports and Baird ResearchRobert W. Baird & Co. 9
  10. 10. March 9, 2012 | Facility Services Derivative Employment Data Derivative employment data also continued to improve in February. ADP Employment Report. The February ADP report (published 3/7) was similar to the BLS report, suggesting continued growth modestly above consensus expectations with net job growth of 216,000 (versus the +200,000 consensus). Similar to recent months, gains were predominantly driven by small (+108,000) and medium (+88,000) businesses as well as the service economy (+170,000) versus goods-producing (+46,000) industries. Large firm (+500 employees or more) employment continues to hold relatively flat, which may suggest hiring has come primarily through attrition. Manufacturing employment grew by 21,000, its fourth consecutive month of positive gains and the largest 1-month job gain in nearly a year. Recall, that the ADP report tracks private payroll only and is based on actual payroll receipts received by ADP as opposed to the survey/model-driven BLS report, which may suggest that ADP provides a better , gauge of actual employment conditions. Total Nonfarm Private Payrols, by Firm Size (000s) 400 117,000 200 115,000 - 113,000 (200) 111,000 (400) Large Firms (499+), MoM Change Medium Firms (50-499), MoM Change 109,000 (600) Small Firms (1-49), MoM Change Total Employment, (right) 107,000 (800) (1,000) 105,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: ADP Employment Report Initial Jobless Claims. Initial jobless claims continued to improve in February and are now near 350,000/week, well below the critical 400,000 level consistent with a declining unemployment rate. The 4-week moving average is currently at 354,250 versus 374,000 as of 12/31/11 (see figure below).Robert W. Baird & Co. 10
  11. 11. March 9, 2012 | Facility Services Initial Jobless Claims 700,000 650,000 600,000 550,000 500,000 450,000 400,000 350,000 300,000 Claims below 250,000 400,000 since November 2011 200,000 150,000 Jan-67 Feb-70 Mar-73 Apr-76 May-79 Jun-82 Jul-85 Aug-88 Sep-91 Oct-94 Nov-97 Nov-00 Nov-03 Nov-06 Nov-09 Note: The red line reflects claim levels historically associated with net employment growth. Gray bars denote NBER recessions Source: U.S. Department of Labor, Bureau of Labor Statistics; National Bureau of Economic Research Initial Jobless Claims (Recent Cycle) 700,000 Initial Jobless Claims (4-wk MA) 650,000 600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Note: The solid red line indicates the level of jobless claims historically associated with net employment growth Source: U.S. Department of Labor, Bureau of Labor Statistics Continuing Jobless Claims. Continuing claims also continue to move steadily lower and remain below previous cyclical peaks. The 4-week moving average fell to 3.417 million at the end of February versus 3.50 million in January and 3.61 million on 12/31/11. Continuing claims are ~52.5% below the recent cyclical peak in early 2009 (see figure below).Robert W. Baird & Co. 11
  12. 12. March 9, 2012 | Facility Services Continuing Jobless Claims 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Jan-67 Feb-70 Mar-73 Apr-76 May-79 Jun-82 Jul-85 Aug-88 Sep-91 Oct-94 Nov-97 Nov-00 Nov-03 Nov-06 Nov-09 Note: Gray bars denote NBER recessions Source: U.S. Department of Labor, Bureau of Labor Statistics; National Bureau of Economic Research Unemployment Rate. The U.S. unemployment rate (which is based on a separate survey) held constant in February at 8.3%, consistent with expectations, but above the estimated (Federal Reserve) natural rate of unemployment of ~6.2%. Still, the unemployment rate is now at its lowest point of the current cycle (post-recession) and (positively) we continue to see a stable to declining unemployment rate despite a growing labor pool (which may signal an improving employment backdrop). The U-6 unemployment rate (which includes involuntary part-time employment and other underutilized labor) declined to 14.9% (-20 bps sequentially). The unemployment rate still remains well above the previous cyclical peaks of 6.3% in June 2003 and 7.8% rate in June 1992, however. Civilian Unemployment Rate (persons 16 years of age and older) 18 16 U3 rate ("Official" unemployment rate) 14 U6 rate (Total unemployed, plus all marginally attached workers) 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Note: The solid grey bars indicate recessions, as determined by the National Bureau of Economic Research Source: U.S. Department of Labor, Bureau of Labor StatisticsRobert W. Baird & Co. 12
  13. 13. March 9, 2012 | Facility Services Investment Perspective and Valuation Holding Outperform rating on all three uniform companies, but GKSR is our top idea. We believe fundamentals remain strong enough to suggest continued upside to consensus estimates near-term, with risk/reward likely biased higher. We view valuation as fair, but not cheap, with EPS upside likely to be the largest driver of future stock performance. While all three companies should benefit from strong employment fundamentals over the near-term, our top idea remains GKSR for longer-term (12-18+ months) investors, as we view profitability initiatives underway as offering outsized earnings growth potential over the next several years, relative to peers. Our company-specific investment theses are summarized below. UNIFIRST s We rate UniFirst (UNF; $68 price target) at Outperform. Our upgrade from Neutral to Outperform last quarter was primarily based on valuation, but also due to opportunities for balance sheet deployment which could be accretive to earnings/value. While the relative valuation gap versus peers (which formed the basis of our upgrade) has likely closed, we continue to see modest upside through continued execution, cyclical tailwinds, and, importantly, deployment of a potentially underlevered balance sheet. Indeed, return-of-capital initiatives and/or M&A could create shareholder value through strategic deployment (we see potential for up to $400 million of incremental balance sheet capacity, or $20/share) and is the primary catalyst for the stock today, in our opinion. - Thoughts on the balance sheet. Net debt/capital has declined to just 6.2% and 0.6x TTM EBITDA, well below historical levels in the 20-25%/1.5x range providing (we believe) roughly $400 million of available balance sheet capacity today. Historically, UNF has utilized the balance sheet to pursue M&A. However, with the M&A market still soft (supported by anecdotal discussions) and free cash flow generation likely to bring UNF to a net cash position by the end of F2012, we view some form of shareholder deployment as a likely use of cash going forward. s Valuation. Our $68 price target reflects a 6.2x FTM EBITDA multiple, generally consistent with current levels, on our estimates 12-months from today. We believe current multiples are appropriate, at a modest premium to historical (five-year) levels but at a discount to peers in the 7-8x EBITDA range today (we note UNFs dual-class share structure has historically driven a ~1-2 point valuation discount versus peers). In addition, we note that adjusted for what we see as an underlevered balance sheet, we believe the stocks forward earnings multiples (ex-cash) is closer to 10x versus a ~13x historical (five-year) average. s Risks. Risks to our price target include a highly competitive market/pricing, employment trends, energy and other commodity price fluctuations and a 10:1 super-voting dual-class insider share structure. G&K Services s We rate G&K Services (GKSR; $38 price target) at Outperform. F1Q12 results (January) were ahead of expectations, with better-than-expected organic growth and SG&A leverage offsetting gross margin pressure (merchandise cost from new accounts). Our valuation contemplates what we see as opportunity for multi-year value creation over the next 2-3 years. With continued opportunity to drive additional operating efficiencies, solid execution, achievable forward estimates and reasonable valuation, in our view, we highlight what could prove to be stronger-than-expected results, particularly in F2013. s Valuation. We believe investors are best served by taking a multi-year look at GKSR’s earnings power. In addition, we believe outsized earnings growth potential at GKSR relative to peers continuesRobert W. Baird & Co. 13
  14. 14. March 9, 2012 | Facility Services to justify a growth multiple for the stock. Our $38 price target assumes an essentially constant multiple of 7.3x EBITDA and 15.0x earnings, consistent with the stocks historical (five-year) average on an EBITDA basis and perhaps providing additional opportunity given what we see as above average EPS growth potential over the next several years with an implied PEG ratio of just 0.75x (we assume ~20% EPS growth through F2013). We also note that our DCF model supports a price target in the upper $30s, supporting the value of the franchise beyond simple multiples analysis. s Risks. Risks to our price target include a highly competitive industry/pricing, employment trends, and energy and other commodity price fluctuations. CINTAS s We rate Cintas (CTAS; $42 price target) at Outperform. F2Q12 earnings in December demonstrated meaningful momentum, with managements view for the balance of the year improved. Importantly, CTAS sees runway for additional margin gains ahead, with recent performance providing confidence and the companys strong cash flow and healthy balance sheet likely providing opportunities for additional return of capital initiatives. We see conservative guidance setting the stage for additional beat-and-raise quarters as the most likely catalyst for the stock today. s Valuation. Our $42 price target assumes a constant multiple of 8.0x our FTM EBITDA estimate 12-months from today and 15.9x earnings. While these multiples are generally consistent with the stocks five-year average of 7.7x/16.2x, we view industry fundamentals as stronger today relative to our historical valuation history with significant operating leverage providing opportunity for above-average EPS growth. s Risks. Risks to our price target include a highly competitive industry/pricing, employment trends, energy and scrap paper price fluctuations and acquisition integration.Robert W. Baird & Co. 14
  15. 15. March 9, 2012 | Facility ServicesAppendix - Important Disclosures and Analyst CertificationCovered Companies MentionedAll stock prices below are the March 8, 2012 closing price.Cintas Corporation (CTAS - $39.26 - Outperform)G&K Services, Inc. (GKSR - $32.65 - Outperform)UniFirst Corporation (UNF - $58.96 - Outperform)(See recent research reports for more information) Rating and Price Target History for: Cintas Corporation (CTAS) as of 03-08-2012 06/01/09 09/23/09 12/23/09 02/17/10 07/21/10 09/22/10 12/22/10 03/14/11 03/23/11 07/20/11 09/12/11 N:$27 U:$28 U:$26 U:$22 N:$28 N:$30 N:$32 O:$34 O:$35 O:$36 O:$34 40 32 24 16 8 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 2009 2010 2011 2012 12/21/11 02/21/12 O:$38 O:$42 Created by BlueMatrix Rating and Price Target History for: G&K Services, Inc. (GKSR) as of 03-08-2012 04/29/09 06/01/09 08/07/09 09/23/09 10/28/09 01/27/10 04/28/10 06/15/10 08/18/10 11/02/10 01/19/11 N:$26 N:$22 N:$21 U:$21 N:$23 N:$26 N:$28 N:$23 N:$24 N:$30 O:$37 40 32 24 16 8 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 2009 2010 2011 2012 02/02/11 05/03/11 08/17/11 01/31/12 O:$38 O:$40 O:$37 O:$38 Created by BlueMatrixRobert W. Baird & Co. 15
  16. 16. March 9, 2012 | Facility Services Rating and Price Target History for: UniFirst Corporation (UNF) as of 03-08-2012 06/01/09 06/02/09 07/02/09 09/23/09 10/29/09 01/07/10 04/01/10 07/01/10 10/20/10 01/05/11 01/19/11 N:$37 N:$36 N:$39 U:$42 U:$43 O:$59 O:$60 O:$51 O:$54 O:$57 N:$58 75 60 45 30 15 0 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 2009 2010 2011 2012 03/30/11 06/30/11 09/12/11 10/19/11 01/05/12 N:$60 N:$61 N:$57 O:$60 O:$68 Created by BlueMatrix1 Robert W. Baird & Co. Incorporated makes a market in the securities of CTAS, GKSR and UNF .Robert W. Baird & Co. Incorporated and/or its affiliates expect to receive or intend to seek investment banking related compensationfrom the company or companies mentioned in this report within the next three months.Robert W. Baird & Co. Incorporated may not be licensed to execute transactions in all foreign listed securities directly. Transactions inforeign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information.Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity marketover the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months.Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12months.Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis onsafety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue andearnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Companycharacteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H -Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Companycharacteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and pricevolatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk.Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changingmarket dynamics, high leverage, extreme price volatility and unknown competitive challenges.Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by asubjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may beused to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons,and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific informationregarding the price target and recommendation is provided in the text of our most recent research report.Distribution of Investment Ratings. As of February 29, 2012, Baird U.S. Equity Research covered 672 companies, with 53% ratedOutperform/Buy, 45% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 13% of Outperform/Buy-rated,8% of Neutral/Hold-rated and 17% of Underperform/sell-rated companies have compensated Baird for investment banking services inthe past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months.Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analysts recommendations and stock priceperformance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) Theanalysts productivity, including the quality of the analysts research and the analysts contribution to the growth and development of ouroverall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by BairdsResearch Oversight Committee.Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does notcompensate research analysts based on specific investment banking transactions.A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed athttp://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx .You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee,WI 53202.Analyst Certification. The senior research analyst(s) certifies that the views expressed in this research report and/or financial modelaccurately reflect such senior analysts personal views about the subject securities or issuers and that no part of his or her compensationwas, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.DisclaimersRobert W. Baird & Co. 16
  17. 17. March 9, 2012 | Facility ServicesBaird prohibits analysts from owning stock in companies they cover.This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflectour judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but wecannot guarantee the accuracy.ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUESTThe Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure andreport performance of various sectors of the stock market; direct investment in indices is not available.Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securitiesand Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ fromAustralian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers andnot Australian laws.Copyright 2012 Robert W. Baird & Co. IncorporatedOther DisclosuresThe information and rating included in this report represent the Analyst’s long-term (12 month) view as described above. Robert W. Baird& Co. Incorporated and/or its affiliates (Baird) may provide to certain clients additional or research supplemental products or services,such as outlooks, commentaries and other detailed analyses, which focus on covered stocks, companies, industries or sectors. Not allclients who receive our standard company-specific research reports are eligible to receive these additional or supplemental products orservices. Baird determines in its sole discretion the clients who will receive additional or supplemental products or services, in light ofvarious factors including the size and scope of the client relationships. These additional or supplemental products or services mayfeature different analytical or research techniques and information than are contained in Baird’s standard research reports. Any ratingsand recommendations contained in such additional or research supplemental products are consistent with the Analyst’s long-termratings and recommendations contained in more broadly disseminated standard research reports.UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W.Baird Limited holds an ISD passport.This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Servicesand Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed toprivate clients. Issued in the United Kingdom by Robert W. Baird Limited, which has offices at Mint House 77 Mansell Street, London, E18AF and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services ,Authority requirements, this investment research report is classified as objective.Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated bythe Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has beenprepared in accordance with FSA requirements and not Australian laws.Ask the analyst a question Click here to unsubscribeRobert W. Baird & Co. 17

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