Equity research: Does EnviroStar present a good investment? (Part 3 of 7)
The commercial and industrial laundry, dry-cleaning equipment, and boiler distribution business is highly fragmented, with over 100 full-line or partial-line equipment distributors in the United States. Substantially all distributors are independently owned and primarily focused on local markets. In 2009, U.S. and Canadian sales in the commercial laundry equipment industry were made to the following customer segments: laundromats, at 43%, multi-housing laundries (30%), and on-premise laundries (motels, hotels, nursing homes, prisons, et cetera), at 27%.
Commercial laundry equipment sales historically have been relatively insulated from business and economic cycles, given that economic conditions tend not to affect the frequency of use or replacement of laundry equipment. Continued growth will likely be sustained by population expansion and by customers increasingly trading up to equipment with enhanced functionality and therefore higher average selling prices.
The commercial dry-cleaning industry in the United States consists of approximately 36,000 shops. Most of these shops are small businesses with fewer than ten employees. This is a highly fragmented sector and it’s estimated to be an $8 billion annual opportunity.
Larger players in this industry include Whirlpool Corporation, The Dexter Company, Super Laundry Equipment Corp., and Alliance Laundry Systems. Also, Proctor and Gamble has entered into the commercial dry-cleaning business. P&G launched its Tide Dry Cleaners franchise to leverage its marketing prowess as well as 60 years of experience in fabric care. Franchise costs include a $50 thousand one-time franchise fee, an initial investment of $650 thousand to $1.0 million, a 7% royalty fee and 5% marketing fee. As a point of comparison, franchise fees for a Papa John’s is a $5 thousand one-time fee and a 5% royalty fee. This data point illustrates that Tide is targeting the high end of the franchise market, given the higher start-up costs.
Given the size of EnviroStar as well as the privately held nature of many of its direct competitors (specifically within the distribution business), public market comps and private market comps are not meaningful.
Accounting and financials
The accounting of the business is straightforward. Sales of products are generally recorded as they are shipped. Due to special options and features on most of the larger and more expensive equipment ordered by customers, in most instances, the company purchases the equipment sold by it after its receipt of the orders from its customers. Commissions and development fees are recorded when earned, generally when the services are performed.
In 2003, the company had total revenues of $14.5 million and had $0.9 million of operating income. During the LTM period ending FY 1Q14, the company had $38.2 million of revenues and $3.0 million of operating income. This represents a revenue and operating income CAGR of 10.4% and 12.8%, respectively. Lastly, earnings per share grew during this period from $0.09 to $0.27, representing a CAGR of 11.3%.
The company has a favorable outlook for FY 2014. Venerando Indelicato, chief financial officer, stated:
- “As previously reported, we received a number of large orders for delivery in fiscal 2013, which we successfully delivered during the year. We are beginning fiscal 2014 with a solid backlog containing a few large orders, and while comparisons will be difficult when comparing fiscal 2014 with our recent banner year, we still expect fiscal 2014 to be a very successful year.”
Reported results for FY 1Q14 were strong. Equipment sales, spare part sales, and foreign sales increased by 40.7%, 14.6%, and 70.4%, respectively, versus FY 1Q13. The company only reports growth rates for these segments.
The company currently has a market capitalization of $21.4 million and an enterprise value of $15.9 million. This calculation is based on a stock price of $3.05 (as of January 16, 2014), no debt, and $5.5 million of net cash (adjusted for a one-time dividend paid in December 2013). Note that this calculation of enterprise value assumes all cash is excess cash; based on discussions with knowledgeable investors, there is a view that approximately 50% of cash is required for working capital.
During the LTM period ending September 30, 2013, the company generated $38.2 million of revenue and $3.0 million of operating income. Based on LTM results, this implies an earnings yield (EV/LTM EBIT) of 18.9%.
The company is not covered by sell-side analysts and is thinly traded.
EnviroStar is a business with superb economic characteristics and is trading at reasonable valuations.
The Market Realist Take
EVI’s management believes that no one distributor in this space has a major share of the market—substantially all distributors are independently owned With the exception of several regional distributors, distributors operate primarily in local markets. In Florida, the company’s principal domestic market, EVI’s primary competition is from a number of full-line distributors and several manufacturers that sell direct. In the export market, the company competes with distributors and manufacturers as well. Competition is based primarily on price, product quality, delivery, and support services provided to the customer. In all geographic areas, the company competes by offering an extensive product selection, value-added services (such as product inspection and quality assurance, a toll-free customer support line, and a technical website), reliability, warehouse location, price, competitive special features, and, with respect to certain products, exclusivity from the manufacturer.
EVI’s larger peer, Procter & Gamble, had long been eyeing the U.S. dry-cleaning industry as a potential new market. The company’s earlier ventures into home dry-cleaning products under new brand names had not yielded the required results. Recognizing that consumers were used to having their dry-cleaning done by retailers, P&G decided to launch the Tide brand into the retail dry-cleaning environment and is expanding its franchise throughout U.S.
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