Perennially underfollowed by Wall Street, Superior Group of Companies (SGC) is a unique mashup of three complementary businesses that help their customers with branding, explains Doug Gerlach, editor of SmallCap Informer.

While the company’s uniform and call center divisions were held back in 2020, its promotional product segment flourished by pivoting to offering branded personal protective equipment (PPE) solutions to businesses looking to establish a presence in the COVID-19 pandemic.

Despite the company’s record 2020 results, Superior Group’s stock remains undervalued. With economic recovery ramping back up in 2021, we expect to see the company’s call center and uniform businesses bouncing back, while the promotional products division provides a strong base for continued growth.

The Superior Uniform Group division manufactures and markets employee uniforms, image apparel, medical scrubs, and patient apparel. More than six million Americans wear Superior Group apparel each day, and roughly 80% of its customer base is considered “Essential Workwear.” This unit’s business is quite economically defensive.

The Superior BPO Solutions segment provides call center and BPO solutions to a variety of customers through The Office Gurus, delivering 8% of fiscal 2019 revenues. This business pivoted to a work-from-home model as the COVID-19 pandemic arrived, and returned to full-force pre-pandemic operating levels in June 2020.

The company launched its WonderWink line of “commercial laundry-friendly” fashion medical scrubs in the third quarter of 2020. Management has tagged this new product line a “game changer” and says interest from current customers is very high.

As Superior Group implements more and more warehouse automation and consolidation and expands its low-cost production capabilities, margins should improve significantly.

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A $100 million warehouse automation upgrade underway in its 220,000-square feet Eudora, Arkansas, semi-robotic distribution center will speed fulfillment and increase efficiency. Superior Group management has targeted 8-9% operating margins by 2024 for its consolidated business.

Return on equity has been generally stable as well, ranging from 13.3% to 15.0% in the past five years (excluding the 2019 down year). Superior Group’s debt is higher than we desire, but the company’s ample free cash has been directed towards paying down its borrowings.

The company has a record of paying dividends since 1977 and the current yield is 1.7%. The company suspended one quarterly dividend in 2020, but resumed the dividend as the year progressed and issued a special dividend to make up for the missed payment.

With our EPS forecast of $3.84 for fiscal 2025 and an average high P/E of 20, the stock could reach $78 or dip down to $18. Based on the current price of $23, Superior Group could deliver an annualized return of 28% over the next five years including dividends.

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