G&K Services, Inc.

Estimates have been rising for G&K Services, Inc. (GKSR) after the company delivered better than expected results for its fiscal 2012 first quarter. Earnings per share jumped 29% year-over-year to 45 cents, beating the Zacks Consensus Estimate by 5%.

It is a Zacks #2 Rank (Buy) stock.

Based on current consensus estimates, analysts project 16% EPS growth for G&K this year, and 18% growth next year. On top of this growth, the company pays a dividend that yields a solid 1.7%. It has been steadily increasing this dividend over the last several years.

Valuation is reasonable too, with shares trading well below their historical median.

Company Description

G&K Services provides branded uniform apparel and facility services programs to businesses across North America. The company was founded in 1902 and has a market cap of $566 million.

First Quarter Results

G&K delivered better than expected results for the first quarter of its fiscal 2012 on November 1. Earnings per share came in at 45 cents, beating the Zacks Consensus Estimate by 5%. It was a stellar 29% increase over the same quarter in 2011.

Revenue rose 7% to $209.7 million, ahead of the Zacks Consensus Estimate of $208.0 million. The increase was driven by strong new account sales, better customer retention, improved pricing and increased direct sales volume.

The operating margin improved 20 basis points to 7.4% of revenue as the company leveraged its fixed expenses, which more than offset rising cotton costs.

Raised Guidance

Management revised its earnings guidance higher for 2012 based on "first quarter performance and increased confidence in its outlook". The company now expects full-year EPS between $1.80 and $2.05, up from previous guidance of $1.70-$2.00.

This prompted analysts to revise their estimates higher too, sending the stock to a Zacks #2 Rank (Buy). The 2012 Zacks Consensus Estimate is now $1.94 (within guidance), representing 16% growth over 2011 EPS.

The 2012 consensus estimate is currently $2.29, corresponding with 18% EPS growth.

Dividend

In addition to strong earnings growth, G&K offers investors a dividend that yields a solid 1.7%. The company recently raised it by a whopping 37%.

Since the year 2000, G&K has increased it at an average annual rate of 18%:

Valuation

The valuation picture looks reasonable too. Shares trade at 14.8x 12-month forward earnings, a discount to its 10-year median of 17.3x.

It price to book ratio of 1.1 is well below the industry average of 1.5.

The Bottom Line

With rising earnings estimates, strong growth projections, a solid dividend and reasonable valuation, G&K Services offers plenty of upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.