Resilient labor markets, foresightful management, and capital returns drive long-term gains for investors in Cintas (NASDAQ: CTAS) and UniFirst (NYSE: UNF); the only question is which is the better buy. The answer depends on numerous factors, including risk tolerance and timeframe. Investors looking for safe, steady growth and capital returns may seek shelter in Cintas, while those with a higher tolerance for risk and at least a few years until retirement may find UniFirst the better choice. And it’s not like UniFirst is a risky stock or business. Its stock trades with a beta below 0.85, and the company is solid. 

Cintas: The Proven Winner Keeps Delivering More Than Promised

Cintas is the proven winner, and decades of performance support the claim. The company has grown steadily since the economic recovery began in 2009 and has outperformed the entire time. The latest results include top and bottom-line strength and improved guidance above the analysts' forecasts. The company produced industry-leading 10% top-line growth aided by acquisitions. Organic growth is also industry-leading at 7.7%. Execs report strength in both operating segments and are guiding for the same in Q4. 

Margin is another area of strength, with gross and operating margins widening compared to last year. The improvement resulted in a 22% increase in net income and a 22.3% rise in GAAP earnings. GAAP earnings are 720 basis points ahead of the Marketbeat.com analysts' consensus estimate and aided a significant increase in shareholder equity. Regarding guidance, the outlook for revenue and earnings was raised to a range with the new low end above the prior high end and included a wider margin.

The balance sheet is rock solid. Cintas carries some debt, but leverage is low at roughly 0.6X equity. Highlights from Q3 include increased cash, inventory, receivables, assets and relatively flat liabilities. Shareholder equity improved by 9%, and additional gains are expected this year. 

UniFirst Is First In Line To Follow In Cintas Footsteps

UniFirst is a smaller company but equally well-positioned within the uniform services industry. The company isn’t growing as fast as Cintas but sustained a high-single-digit pace in FQ2 aided by acquisitions. Organically, the company grew by 4.8%, with strength in the core business offset by specialty. UniFirst also widened its margin but less than Cintas. The caveat is that UniFirst's margin is impacted by investment in CRM and other digital advancements expected to aid growth and margin over time. 

Among the biggest differences is the guidance. UniFirst reaffirmed compared to Cintas's beat and raise quarter, suggesting caution on the part of management. Regardless, the company is guiding for growth and margin expansion, which plays into the capital return outlook and valuation. 

UniFirst’s Valuation and Dividend Increases Are An Opportunity

UniFirst trades at half the valuation of Cintas but may experience a significant multiple-expansion over time. Its balance sheet is in better condition than Cintas’s, which is a fortress. This allows it ample flexibility to invest in growth while paying dividends, increasing the distribution, and repurchasing shares. 

Distribution growth is a primary catalyst because of the payout ratio. UniFirst’s payout ratio is about half of Cintas’, suggesting that is why Cintas is so highly valued: it has a fortress business that pays out 40% of earnings with ample fuel to increase the distribution for decades to come. In the case of UniFirst, that outlook is compounded by a significantly lower payout ratio that allows for more aggressive dividend increases. Assuming UniFirst raises the payout ratio over time, its share price-multiple should follow it higher to compound the organic growth and reinvested dollars. 

Cintas In Rally Mode: Unifirst At Rock Bottom 

The chart action in these stocks differs greatly, with Cintas in a protracted uptrend and surging 10% while UniFirst is wallowing near long-term lows. Because Cintas’s results and outlook support the rally, Cintas will likely continue to rally this year. Because UniFirst’s results and outlook forecast growth and operational quality suggest capital return increases, it will likely rebound at some point; the question is when. Until then, UniFirst pays a dividend with a yield equal to Cintas's 0.85%.