Superior Results For Superior Group of Companies Despite Headwinds

Summary

  • Despite inflation and supply chain disruptions, the company grew revenues, defended margins, and grew the dividend by 17%.
  • Expect more M&A in the medium term, especially supporting the promotional segment.
  • My target price remains $25 per share.

Portrait of friendly nurse smiling at hospital

Ridofranz/iStock via Getty Images

Since my last article in March, the stock for Superior Group of Companies, Inc. (NASDAQ:SGC) is down 5.5%, which is in line with the 5.8% decline of the consumer market. Worries about supply chain and inflation have been dragging the entire consumer market. In this article, I will go over the latest results and update my valuation on SGC stock.

Share price performance for Superior Group of Companies SGC and StrataQuant Consumer Index

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Q1 results

Adjusting for PPE, the results show strong organic growth and stable margins. Revenues grew 2% to 143.6M USD and gross margin decreased slightly from 34.8% to 34.7%. Looking at the results per segment:

  • Uniform revenue shrunk 11.8% to 62.2M USD, however, if we adjust for PPE, revenues grew 5.6% in the period. The lower volume impacted operational efficiency thus reducing gross margin from 33.8% to 33.0%;

  • TOG revenues grew 38% to 18.0M USD and gross margin improved from 59.3% to 59.4%;

  • BAMKO revenues shrunk 11.1% to 65.4M USD, however, adjusting for PPE, revenues grew 38%. The lower revenue base impacted operational efficiency so gross margin declined from 31.3% to 30.0%.

Net debt increased by 12.7M USD to 125.7M USD, but the debt ratio of 2.6x EBITDA is still well within the covenants.

Also, during the quarter, SGC finalized the automation of the distribution center at Eudora, Arkansas. This will result in labor savings of 2.4M USD per year.

Attractive dividend yield

On May 2, SGC announced a dividend increase of 17% to 14 cents, which implied a yield of 2.8%. Since 2013, the dividend has grown at a CAGR of 29.7%, from 7 cents in 2013 to the current run rate of 56 cents per year. It is very rare to find a company with such a steady dividend growth profile.

Divind Growth for Superior Group of Companies SGC

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I expect the dividend to continue growing thanks to the growth of the TOG segment and increased penetration of BAMKO supported by the recent acquisitions.

From a financial perspective, the dividend would cost SGC 9.1M USD annually, which can easily be financed from the free cash flow or the cash on hand.

Expect more M&A in the medium term

On May 2, SGC announced the acquisition of Guardian Products for an undisclosed amount. Guardian Products focuses on promotional products in the automotive space. This acquisition appears to open doors to SGC to expand its offerings, provide cross-selling opportunities, and capture efficiencies. However, it is difficult to judge whether it was a good deal for SGC without knowing the price paid.

I expect more M&As in the foreseeable future thanks to the company's current financial position and the opportunities in the market. First, the current Net EBITDA is at ~2.2x EBITDA, which is a healthy level in absolute terms and also historically for SGC. SGC could easily finance a $40-80M USD acquisition by increasing 1 to 1.5 turns on the leverage without distressing the business.

Net debt to EBITDA for Superior Group of Companies SGC

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Also, given the current macro-environment, I expect smaller operators not to be able to effectively fight inflation and stabilize the supply chain. SGC could offer them an exit and attractive terms to both parties.

Valuation

My target valuation is still $25 per share. Below are my main assumptions per segment, which are in line with management's guidance.

Financial estimates per segment for Superior Group of Companies SGC

Author Estimates

The healthcare segment will be the main driver of the growth of the Uniform segment. In fact, SGC will start reporting the healthcare segment separately starting next quarter. I think this will help analysts better tell the SGC story.

For the TOG segment, while my estimate is in line with management guidance, I believe there is even more upside in this segment. SGC just finished setting up a new center in the Dominican Republic that will support growth for the next couple of years.

Conclusion

Despite supply chain instability and inflation, SGC was able to grow its topline results, defend margins, and grow the dividend by 17%. In addition, we can expect better margins and revenue growth in the future thanks to its pricing strategy, the automation of Eudora, expansion into the Dominican Republic, and new acquisitions.

This article was written by

"Price is what you pay, value is what you get"Here is my advice:1. Save 10% of whatever you make, no matter how insignificant it can be. As a young engineer, I saved 10% of my income no matter if it was $10 or $1,000. PAYING YOURSELF is the best piece of advice you can give anyone. I recommend the book 'The Richest Man in Babylon', it is a bit repetitive but entertaining and gets the point across.2. Invest in your competitive advantage. If you are an oil veteran, you should be investing in E&P companies and not in biotech start-ups. If you want to diversify, pay someone to give you advice on other sectors or buy ETFs with the right exposure. As for me, I graduated very young and worked in transportation and consumers as an engineer. Post-MBA I worked for one of the largest hedge funds covering sectors such as natural resources (including oil & gas), TMT, consumers, industrials and transportation. After that, I was a finance executive for Fortune 500 companies leaders in the consumers and TMT sectors. So you will never see me investing in financials, education or healthcare. I get exposure to those sectors via ETFs and professionals I trust.3. Don't trade but rather invest. Once I left the hedge fund world, I started an asset management firm for family, friends and HNWI. I was able to manage this fund while having extremely demanding roles by investing in the long term. When I buy a company, I just sell if my investment thesis is not valid anymore. Thus, I would just dedicate my Saturdays to reviewing my portfolio and exploring new opportunities. 4. Do what you love, not what makes the most money. You may leave money on the table in short term, but you will be happier in the long term even if you make less money overall.In my spare time, I like reading, rowing and enjoying life.
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Disclosure: I/we have a beneficial long position in the shares of SGC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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