The 2014 global oil price collapse helped some industries and hurt others. Unexpectedly, the event underscored just how much of the U.S. industrial supply chain had been benefitting from the renaissance in energy production tied to the shale revolution. While most industrial companies felt the pain, service industries which tend to be less cyclical than heavy industrial companies are included in the industries which were impacted.
Over a two-year period lasting until early 2017, economic ripples from job losses in the oil patch had a negative impact on uniform rentals. Uniform rental companies made it clear that this impact extended beyond their oil rig customers to the local economies surrounding them, which was affirmed by Government data showing resources-based employment in the US had fallen by at least 10%. Only very recently are we seeing a return to growth in uniform rentals corroborated by employment data.
Uniform rental data can be a compelling shorter-cycle data point for understanding the overall health of the economy. According to the Baird Add/Stop Index1 there is a strong historical correlation between employment trends and uniform rental stocks. Consider Cintas (by far the largest player in uniform rental at about three times the size of the next largest competitors), whose organic revenue growth over the past 16 years has been highly correlated to Baird’s Index. While correlation is not causation, it‘s interesting and somewhat unusual to see such a strong relationship.
Baird’s Outlook for Employment and the Uniform Rental Sector
Much of the bump we’ve seen in the market – and even potentially in employment data – post the recent election has been attributed to “animal spirits,” an industry term driven by an increased sense of economic optimism.
Last December, Baird’s quarterly survey of private uniform rental companies showed improving uniform rental trends for the first time in several quarters, in contrast to continued slowing employment trends. By March, the survey added to evidence of strengthening uniform fundamentals. While March employment data was a notable step back and worth watching, the multi-month trend line has been generally positive. A rebound in employment for “dirty jobs” in the uniform segment is improving with energy headwinds abating and manufacturing seeing some solid gains year to date. Construction trends also seem to support this scenario.
Employment growth at 4.5% tells even a novice economist that the US economy is operating in the later stages of an economic recovery. That said, there seems to be an accommodative enough backdrop that uniform rental companies can successfully grow. The largest factors driving growth will likely continue to be penetration of first-time outsourcers of the rental service, and expansion of the offering to previously underserved end-markets (like healthcare). This outlook doesn’t call for a strong economic tailwind, but one that is accommodating enough for uniform rental companies to post solid core growth.
Andrew Wittmann, CFA is Baird's Senior Research Analyst following Industrial Services.
1The Baird Add/Stop Index is a subset of monthly jobs numbers from the Bureau of Labor Statistics that is tied to typical uniform-wearing industries as an indication of the overall demand from the economy for uniform rental services.