February 3, 2012             Baird Equity Research                             Business ServicesFacility ServicesUniformed...
February 3, 2012 | Facility ServicesDetails                          Uniform Estimates Likely Biased Higher Following Stro...
February 3, 2012 | Facility Services                           G&K Services Quarterly EPS vs. Consensus                   ...
February 3, 2012 | Facility Services                           Uniform Stock Performance                                  ...
February 3, 2012 | Facility Services                          The January BLS Employment Report                          J...
February 3, 2012 | Facility Services                           Nonfarm Payroll Growth (indexed at month of cyclical employ...
February 3, 2012 | Facility Services                          Baird Add/Stop Employment Index Gains Remain Solidly Mid-Cyc...
February 3, 2012 | Facility Services                           Baird Add/Stop Employment Index (000s), recent performance ...
February 3, 2012 | Facility Services                           Baird Add/Stop Employment Index Component Industries: 1-Mon...
February 3, 2012 | Facility Services                          that a January surge is typically expected.                 ...
February 3, 2012 | Facility Services                           Initial Jobless Claims                            700,000  ...
February 3, 2012 | Facility Services                           Civilian Unemployment Rate (persons 16 years of age and old...
February 3, 2012 | Facility Services                          Uniform Stock Investment Perspectives                       ...
February 3, 2012 | Facility Services                             provides support for the stock and remains an important d...
February 3, 2012 | Facility ServicesAppendix - Important Disclosures and Analyst CertificationCovered Companies MentionedA...
February 3, 2012 | Facility Services                                Rating and Price Target History for: UniFirst Corporat...
February 3, 2012 | Facility ServicesBaird prohibits analysts from owning stock in companies they cover.This is not a compl...
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January 2012 Baird Industry Report

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RW Baird overview report on the health of uniform market. Reviews jobs data, key laundries and more.

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January 2012 Baird Industry Report

  1. 1. February 3, 2012 Baird Equity Research Business ServicesFacility ServicesUniformed Employee Growth Rates at 6-Year HighThe January BLS jobs report continued last months momentum and is a positive for INDUSTRY UPDATEuniform rental stocks. Add/Stop employment (traditional uniform wearing-industries) Prices as of 2/2/12gains remain strong (growth rates at a 5-year high) and consistent with prior mid-cycle Mkt Caprecovery levels (e.g., mid-late 1990s/2004-2006). While we recognize that the stocks are Ticker Price Rating Risk (mil)increasingly discounting stronger employment momentum (and call volume has picked up CTAS $37.33 $4,842 O Arecently), we continue to view expectations as reasonably set, with estimates likely biased GKSR $33.45 $626 O Ahigher, at least near term. UNF $61.41 $1,201 O A Baird covered companiess Payrolls positively surprise. January payrolls positively surprised, increasing by 243,000 (+257,000 private sector only), above the +155,000 consensus and lending credibility to last months strong data which some critics had attributed to seasonal distortions. The YOY change in employment increased +1.5% (highest rate this cycle) with the unemployment rate ticking down to 8.3% (from 8.5%). While job growth was widespread, we note particular strength in professional and business services (+70,000), leisure and hospitality (+44,000), and (encouragingly) manufacturing (+50,000).s Uniform-related employment quite strong. Bairds Add/Stop Employment Index specific to uniform rental-related employment maintained momentum, increasing by 86,000. The monthly gain is the second highest this cycle and consistent with 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. In 2011, the average monthly gain was 56,000, consistent with the middle of this range. Over the past three months however, Add/Stop employment has averaged +84,000.s Continue to recommend owning uniform stocks. Recent employment data remains supportive with Add/Stops slowly becoming a greater contributor to overall growth rates. We continue to view the uniform stocks positively, with conservatively set guidance providing a pathway to upwardly biased earnings revisions. That said, valuation has become more balanced with near-term 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; recent stock performance suggests expectations are migrating higher, increasing risk, however.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. February 3, 2012 | Facility ServicesDetails Uniform Estimates Likely Biased Higher Following Strong Employment Momentum The January BLS jobs report continued last months momentum and is a positive for uniform rental stocks. Add/Stop employment (traditional uniform wearing-industries) gains remain strong (indeed, YOY growth rates are now at a 6-year high), with total employment growth consistent with prior mid-cycle recovery levels (e.g., mid-late 1990s/2004-2006). While we recognize that the stocks are increasingly discounting stronger employment momentum, we continue to view expectations as reasonably set, with estimates likely biased higher near term. Our primary basis for recommendation at this point is upwardly biased estimates, continuing recent trend (see below), as consensus expectations appear to underappreciate top-line momentum. We continue to recommend ownership of all three uniform companies despite strong recent stock outperformance. Management guidance and Street consensus appears 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. February 3, 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 with this trend accelerating in recent months (particularly given recent improvement in macro employment data and impressive operating results in 3Q-4Q). We believe stock performance has been driven largely by cyclical momentum (both revenue and margins) and previously low expectations. Recently the “buy USA” trade has brought new interest to uniform rental companies.Robert W. Baird & Co. 3
  4. 4. February 3, 2012 | Facility Services Uniform Stock Performance One-Month Percentage Price Change YTD Percentage Price Change G & K S e rv ic es G & K S erv ices U n ifo rm Inde x U niform In dex U n iFirs t U niFirst C intas C intas S & P 50 0 S & P 5 00 0% 2% 4% 6% 8% 10% 12% 14% 16% 0% 2% 4% 6% 8% 10% 12% 14% 16% Three-Month Percentage Price Change Trailing 12 Months Percentage Price Change C in tas C intas U n ifo rm Index U niform Index U niFirs t U niFirst G & K S e rv ic es G & K S erv ic es S & P 500 S & P 500 0% 5% 10 % 15% 20% 25 % 30% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0 % 30.0% 35.0% Source: FactSet Research Systems The last several months labor reports suggest greater confidence in recent momentum and should provide a nice cyclical tailwind for all. That said, and while we previously highlighted valuation as forming a component of our rating (particularly at GKSR, which had previously failed to meaningfully participate in the recent rally), we now see upwardly revised estimates as the greatest catalyst for the group (versus multiple expansion). Indeed, the group is now trading at an average forward 12 month EV/EBITDA multiple of 7.5x and 15.7x earnings. While we believe current multiples may reflect a more balanced view of valuation (near 5-year historical average levels, see chart below), we see opportunity for upwardly revised estimates to allow the group to grow into its current multiples, potentially offering additional alpha opportunities. Uniform Industry Valuation Price Price Target Rating EV/EBITDA, ftm P/E Company Ticker FTM AVG FTM AVG Cintas CTAS $37.99 $38 O 8.2x 7.7x 16.4x 16.2x G&K Services GKSR $34.41 $38 O 7.7x 7.3x 15.4x 15.9x UniFirst UNF $62.16 $68 N 6.6x 5.7x 15.2x 13.0x Average: 7.5x 6.9x 15.7x 15.0x As of 02/03/2012 Source: FactSet Research Systems and Baird estimatesRobert W. Baird & Co. 4
  5. 5. February 3, 2012 | Facility Services The January BLS Employment Report January payrolls positively surprised, increasing by 243,000 (+257,000 private sector only), above the +155,000 consensus and lending credibility to last months strong data which some critics had attributed to seasonal distortions. The YOY change in employment increased 1.5%, the highest this cycle, with the unemployment rate ticking down to 8.3% (from 8.5%). While job growth was widespread, we note particular strength in professional and business services (+70,000), leisure and hospitality (+44,000), and (encouragingly) manufacturing (+50,000). We note that this months release also contained annual revisions to the BLSs establishment survey data, resulting in modest revisions to seasonally adjusted data from January 2007 forward. The benchmark revisions added a cumulative 165,000 jobs to the March 2011 reference benchmark including 77,000 jobs related to adjustments to the BLS firm birth/death model, used to estimate employment at new and exiting small firms not captured by the survey. We also note that the BLS made some minor adjustments to its industry classification system (now using NAICS 2012 classification versus the previous NAICS 2007 classification) which also created minor adjustments to our Add/Stop Index. Net, we see these revisions as consistent with annual industry practice with the cumulative effect minor but upwardly biased. Indeed, in thoroughly dissecting the data, we see the report as broadly positive, with few (if any) distortions that suggest a degree of skepticism to the strength. 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 as did wages (+$0.04 to $23.29). However, the rate of improvement in the private employment diffusion index improved from a healthy 62.4 to 64.1, continuing recent momentum in forward outlooks. We view the strong improvement in the employment diffusion index as an important data point suggesting potential sustainability of recent hiring momentum. 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 to the mid-2000s cycle (off of a lower base).Robert W. Baird & Co. 5
  6. 6. February 3, 2012 | Facility Services 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. February 3, 2012 | Facility Services Baird Add/Stop Employment Index Gains Remain Solidly Mid-Cycle Bairds Add/Stop Employment Index specific to uniform rental-related employment maintained momentum, increasing by 86,000, with revisions adding an additional 20,000 jobs in November/December. The monthly gain is the second highest this cycle and consistent with 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. In 2011, the average monthly gain in Add/Stop employment was +56,000, consistent with the middle of this range. Over the past three months, Add/Stop employment has averaged +84,000. Baird Add/Stop Employment Index 4% 200 Average = 65k Average = 54k 2% 100 0% 0 -2% (100) -4% Cycle Average = 48k (200) 2011 Average = 56k 3-Month Average = 84k Baird Add/Stop Employment Index (000s), right -6% (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 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). Indeed, GKSR echoed this commentary on their F1Q12 earnings call earlier this week -- though, importantly, we note Add/Stops are yet to be the primary driver of overall growth (new account gains, service additions and positive pricing are also playing a role).Robert W. Baird & Co. 7
  8. 8. February 3, 2012 | Facility Services Baird Add/Stop Employment Index (000s), recent performance 140 More Bullish 120 100 More Bullish? 80 60 Less Bullish 40 20 0 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Source: Bureau of Labor Statistics and Baird Research We also 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 -6.00% continues to outpace 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 Most uniform verticals continue to posted positive growth. We also highlight that most uniform verticals comprising our Add/Stop Index continues to post positive growth in January, suggesting gains remain broad-based. Food Services led the way, but individual manufacturing components were also important contributors. 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.Robert W. Baird & Co. 8
  9. 9. February 3, 2012 | Facility Services Baird Add/Stop Employment Index Component Industries: 1-Month Employment Change (000s) Food Services and Drinking Places 33 Machinery 14 Food Manufacturing 11 Motor Vehicle and Parts Dealers 11 Food and Beverage Stores 7 Chemicals 5 Fabricated Metal Products 5 W holesale Trade - Nondurable Goods 4 Gasoline Stations 2 W holesale Trade - Durable Goods 1 Specialty Trade Contractors - Truck Transportation (1) Repair and Maintenance (5) 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 also 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. 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 Research More Positive Surprises in December Derivative Employment Data Derivative employment data was somewhat more mixed this month, though overall consistent with an improving labor market. Challenger Layoff Report. Negatively, the Challenger Layoff Report suggested a strong surge in planned layoffs in January, with 53,486 planned layoffs (mostly in retail and financial services) increasing 38.9% YOY, according to Challenger, Gray & Christmas, Inc. That said, we note that very strong Christmas retail hiring in 2011 may have contributed to the higher layoff number (temporary jobs). Sequentially, planned layoffs increased 28% (the highest level in four months), though the report notedRobert W. Baird & Co. 9
  10. 10. February 3, 2012 | Facility Services that a January surge is typically expected. ADP Employment Report. Positively, the January ADP report (published 2/1) suggested continued momentum though a sequential moderation from a very strong December report, though likely (admittedly) included seasonal distortion, indicating net job growth of 170,000, generally consistent with the 180,000 consensus. Gains were predominantly driven by small (+95,000) and medium (+72,000) businesses as well as the service economy (+152,000) versus goods-producing (+18,000) 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 10,000, its third consecutive month of positive gains. 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 held relatively constant in January and remain below the critical 400,000 level consistent with a declining unemployment rate). The weekly was report was, in general, consistent with expectations throughout the month with the 4-week moving average now at 375,750 versus 374,000 on 12/31/11 (see figure below).Robert W. Baird & Co. 10
  11. 11. February 3, 2012 | Facility Services Initial Jobless Claims 700,000 650,000 600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 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 Continuing Jobless Claims. Encouragingly, continuing claims continue to move steadily lower and are now below previous cyclical peaks. The 4-week moving average fell to 3.487 million at the end of January versus 3.61 million on 12/31/11. Continuing claims are ~52.5% below the recent cyclical peak in early 2009 (see figure below). 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) improved by 20 bps in December to 8.3%, below the 8.5% consensus. Indeed, the unemployment rate is now at its lowest point of the current cycle (post-recession) and (positively) was a function reflected a larger labor pool (in other words, the decline was not a function of potential job seekers exiting the labor pool -- i.e., discouraged workers). The improvement also drove a decline in the U-6 unemployment rate (which includes involuntary part-time employment and other underutilized labor) to 15.2% (-40 bps sequentially).The unemployment rate still remains well above the previous cyclical peaks of 6.3% in June 2003, but is approaching the 7.8% rate reported in June 1992.Robert W. Baird & Co. 11
  12. 12. February 3, 2012 | Facility Services 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. February 3, 2012 | Facility Services Uniform Stock Investment Perspectives 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). While we recognize that F2012s gross margin pressures and the likelihood of slowing top-line momentum on more difficult comparisons creates fewer immediate catalysts, our valuation continues to contemplate 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, we highlight what could prove to be stronger-than-expected results, particularly in F2013. - 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 continues 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, below the stocks historical average of ~8.0x recognizing, perhaps, lower long-term growth rates for the industry relative to history, but still discounting 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 (on full realization of managements 10% EBIT margin target), supporting the value of the franchise beyond simple multiples analysis - Risks to our price target include a highly competitive industry, employment trends, and energy price fluctuations. s We rate Cintas (CTAS; $38 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. - Our $38, 12-month price target reflects 7.5x FTM EBITDA and 14.8x EPS roughly consistent with current levels but at a discount to five-year historical levels of 8.8x and 18.3x, respectively, recognizing more mature industry dynamics and secular multiple compression. - Risks to our price target include a highly competitive industry, employment trends, energy and scrap paper price fluctuations and acquisition integration. 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. 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 up to $400 million of incremental balance sheet capacity, or $20/share) and is the primary catalyst for the stock today, in our opinion. - Our $68 price target reflects an essentially constant 6.2x FTM EBITDA multiple on our estimates 12-months from today. We believe current multiples are appropriate, at a modest premium to historical levels but at a discount to peers near 7.5x EBITDA (we note UNFs dual-class share structure has historically driven a ~1-2 point valuation discount versus peers), but reflective of positive cyclical momentum. - Inaddition, we note that adjusted for UNFs underlevered balance sheet, the stocks forward earnings multiples (ex-cash) is closer to 10x versus a ~13x historical average. While we are hesitant to ascribe the full value of UNFs potential balance sheet to valuation, we do note that it likelyRobert W. Baird & Co. 13
  14. 14. February 3, 2012 | Facility Services provides support for the stock and remains an important driver of potential value creation, keeping risk/reward biased higher. - Risks to our price target include a highly competitive market, employment trends, energy price fluctuations and a 10:1 super-voting dual-class insider share structure.Robert W. Baird & Co. 14
  15. 15. February 3, 2012 | Facility ServicesAppendix - Important Disclosures and Analyst CertificationCovered Companies MentionedAll stock prices below are the February 2, 2012 closing price.Cintas Corporation (CTAS - $37.33 - Outperform)G&K Services, Inc. (GKSR - $33.45 - Outperform)UniFirst Corporation (UNF - $61.41 - Outperform)(See recent research reports for more information) Rating and Price Target History for: Cintas Corporation (CTAS) as of 02-02-2012 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 O:$38 Created by BlueMatrix Rating and Price Target History for: G&K Services, Inc. (GKSR) as of 02-02-2012 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. February 3, 2012 | Facility Services Rating and Price Target History for: UniFirst Corporation (UNF) as of 02-02-2012 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 January 31, 2012, Baird U.S. Equity Research covered 673 companies, with 55% ratedOutperform/Buy, 43% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 12% of Outperform/Buy-rated,9% 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. February 3, 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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