Senior Facility and Industrial Services Research Analyst Andrea Wirth Discusses the Impact of Slowly Improving Employment and Federal Stimulus Spending
BOSTON, February 22, 2009
“This has become the leading conference for institutional and private equity investors interested in business services,” said Director of Research Robert Venable. “This year’s conference promises to be an excellent opportunity to gain insights from leading companies in the sector as they navigate the slowly improving economy and the implications of recent and new federal spending.”
As a preview to the conference, Baird spoke with senior research analyst Andrea Wirth for her outlook on the facilities and industrial services sectors.
Q&A with Senior Business Services Research Analyst Andrea Wirth, CFA
How well did facility services companies like uniform rental companies weather the downturn? Was cost cutting sufficient or is more needed?
The downturn has been highly challenging for uniform rental companies, and as employment continues to lag the broader economy, they will likely continue to rein in spending in the near term. The one exception is UniFirst (UNF) who has grown their sales force throughout the down turn and leveraged their existing stock of uniforms to meaningful reduce merchandise cost and boost margins to new highs. EcoLab (ECL) has also performed admirably throughout the downturn identifying meaningful opportunities to reduce costs. EcoLab also seeks to expand their sales force by roughly 4% as world economies level off.
How closely do you follow the monthly employment numbers published by the Bureau of Labor Statistics?
We watch the employment data very carefully and dissect the individual markets that are most heavily served by our uniform rental companies to get a better idea of how the employment situation is developing in these key markets. The January unemployment rate fell slightly to 9.7%, down from 10.0%. We find a more accurate picture of the true unemployment picture may be the U-6 unemployment rate. This number includes involuntary part-time employment and discouraged workers such as unemployed workers who have ceased looking for employment. While this metric also decreased in January, it is a much higher number at 16.3%.
What insights about the employment picture do you receive from the companies you cover?
Our uniform rental companies are still dealing with highly challenging macroeconomic conditions. While we are starting to see signs of stabilization in volumes, some of the markets these companies serve are continuing to see employment declines, and positive year-over-year growth is still several quarters out. Our quarterly survey of private uniform companies gives us very good insight into the industry. Recent surveys point to the fact that pricing issues have been a major challenge this cycle and are another reason margins will struggle coming out of this downturn. For the most recent Facility Services Survey, click here.
How have the stocks performed? Are you optimistic about the sector? Which companies do you feel most confident about?
The stocks tend to outperform before the low point in employment, and then once we reach the inflection point in year over year employment declines (which we reached roughly 5 months ago) the stocks actually tend to underperform. So I currently have a negative bias on the sector. This downturn has already proven to be more challenging than previous downturns and I expect the recovery to be slow. Additionally, the merchandise cost of ordering more uniforms is likely to depress margins as the volume starts to improve. Despite our negative bias, we are recommending UniFirst Corporation (UNF). The company is performing exceptionally versus its peers and we believe they will beat their conservative earnings guidance.
Have acquisitions been part of the growth thesis at any of these companies? If so, will an improving deal environment help? Any transactions on the horizon?
Acquisitions have been a key aspect of essentially all of these companies’ histories. Balance sheets are generally in good condition and we would expect them to continue to expand their businesses into new markets, especially Cintas Corporation (CTAS) and EcoLab ( ECL). Additionally, deal pricing may finally become more realistic and thus we would expect acquisition activity to pick up near term.
Shifting gears to Industrial Services Companies, government infrastructure projects have been a key component of stimulus spending as the country battles to recover from the recession. Which companies are benefiting from this spending?
Engineering and construction companies are beginning to benefit from stimulus dollars. However, the benefit thus far has been relatively small. Stimulus dollars are expected to flow in a more meaningful way in 2010 and 2011. Indeed, Aecom Technology Corporation (ACM) stated earlier this year that they expect to see roughly $1 billion of stimulus dollars over the next 12-18 months – essentially double what they’ve see thus far.
Environmental concerns and a pending energy bill are in the news. Are any of your companies poised to benefit? Are others more likely to see rising costs?
URS Corporation (URS) and Shaw Group (SHAW) are key players in clean air emission control work and should benefit from more stringent environmental regulations. We were encouraged by the proposed increase in loan guarantees to help build nuclear plants. The move toward nuclear would be a clear benefit to Shaw, URS and Fluor Corporation (FLR), as they would likely build these plants. Companies such as Quanta Services (PWR) and Tetra Tech (TTEK) would benefit from increased renewable standards and the installation of wind and solar power. Increased certainty on power standards alone would be a benefit for power generation companies and would help projects move forward.
Which stocks do you like in the industrial services and why?
Aecom Technology Corporation (ACM) is our top pick among engineering and construction companies as they continue to post positive sequential backlog growth and are well positioned to benefit from stimulus programs globally. We believe the valuation is attractive as the company should begin posting top line and bottom line growth near its historical average toward the second half of the year. The valuation for URS Corporation (URS) is attractive. Federal budget and stimulus proposals are positives, and loan guarantee expansion opens door for near-term nuclear contracts. We recommend Tetra Tech (TTKE) and Quanta (PWR) for investors willing to be early in this cycle. Results may be challenging near term, but the valuation is currently highly attractive. Activity should start to improve toward the back half of the year. Lastly, we also like Fluor (FLR) for patient investors. Oil and gas markets are currently challenging, but there appears to be a number of elephant projects that could go forward near term and help to move the backlog higher.
About Andrea Wirth and Baird’s Equity Research Team
Andrea Wirth is Baird’s senior research analyst covering Facility & Industrial Services. She joined Baird in 2000 and spent approximately eight years in equity research covering the process controls industry. Andrea has a BA in Economics and Business from Cornell College in Mount Vernon, Iowa, and served as a Young Trustee on Cornell College’s board of trustees from 2000-2004. Andrea received her MBA with concentrations in Accounting and Finance from the University of Chicago in 2008.
In addition to Wirth, Baird’s senior business services research staff includes Amy Junker (Education Services), David Koning (Business Process Outsourcing), Mark Marcon (Business Services), Craig Kennison (Consumer, Leisure, Auction and Auto Services), and Daniel Leben (Marketing and Information Services).
Baird’s Research Department consists of approximately 110 research professionals covering more than 600 U.S. companies. Baird analysts have been recognized repeatedly in The Wall Street Journal’s annual “Best on the Street” survey and honored by StarMine as top analysts.
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has more than 2,400 associates serving the needs of individual, corporate, institutional and municipal clients. Baird oversees and manages client assets of more than $75 billion. Committed to being a great place to work, Baird ranked number 11 on FORTUNE’s “100 Best Companies to Work For” in 2010 – its seventh consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s private equity operations. For more information, please visit Baird’s Web site at www.rwbaird.com.
For additional information contact:Anne Crago
Baird Public Relations