Barrington Initiates Superior Uniform Group At Outperform, Expects Organic Growth To Remain Strong

Barrington Research has started coverage of Superior Uniform Group Inc (NASDAQ: SGC) with an Outperform rating and $21 price target, as it sees substantial opportunity for continued solid organic sales growth driven by market share gains and margin expansion from expense leverage.

The brokerage noted that the stock overreacted negatively to second-quarter results on July 21, thus presenting a buying opportunity.

In the second quarter, the company's organic growth flattened due to orders being pulled forward to first quarter, while EPS was impacted by growth-related spending. But, management expressed its confidence in the long-term outlook by buying shares in the open market following its recent weakness.

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"We believe Superior's direct sale uniform business is distinguished by an end-to-end solution that encompasses state-of-the-art design, manufacturing, distribution, and service enabling customers to provide their employees with high-quality, branded work apparel in a reliable and cost-effective manner," analyst Kevin Steinke wrote in a note.

Superior is expected to pursue acquisitions with high growth potential. "On March 1, 2016, the company acquired BAMKO to further build its promotional products business, which is a logical extension of the core uniform offering since customers desire a 'one-stop shop' for their branded product needs."

Excluding BAMKO, the company sees average organic sales growth over 8 percent annually, consisting of growth in excess of 6 percent in the uniform/related products segment (94 percent of sales). BAMKO (13 percent of pro forma 2015 sales) Is expected to grow 15 percent-plus organically.

"We expect EPS growth to outpace sales growth over the next several years, driven by margin expansion," Steinke continued.

The analyst expects EPS of $0.90 for 2016 and $1.15 for 2017.

The $21 price target represents a potential upside of 27 percent over Monday's close of $16.49 and assumes a NTM P/E multiple of 17x and an EV/NTM EBITDA multiple of 10x one year from now.

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