Equity research: Does EnviroStar present a good investment? (Part 1 of 7)
EnviroStar, Inc. (the “company”, “EnviroStar,” or “EVI”) is a distributor of commercial and industrial laundry and dry-cleaning equipment. The company has a proven long-term track record of consistently growing earnings per share. Over the past ten years, revenues have increased by 2.6x and earnings per share have increased by 3.0x. During this period, this business consistently generated highly attractive returns on tangible capital (~25% to in excess of 85%). Plus, the dry-cleaning and laundry business is well known for its resilience against recessions. Clothes get dirty and need to be washed. EnviroStar was profitable throughout the Great Recession and has a track record of effectively converting sales into cash.
Further in the report, we will discuss in detail several investment insights as to why we believe the company continues to face favorable tailwinds that will allow the company to grow over the next five, ten, and twenty years.
The company has a meaningful customer base that creates a significant barrier to entry for new entrants.
- Rising water and resource costs generate demand for more efficient commercial and industrial laundry equipment and steam boilers
- Regulatory catalysts will continue to drive the commercial dry-cleaning equipment upgrade cycle
- EnviroStar is the beneficiary of long-term population density and income growth in its core markets
- The company is managed by a talented and proven family-owner/operator
Our price target of $3.70 is based on a take private analysis. Our analysis examines a scenario where FY’14 revenues decline by 10% and EBITDA declines by 24%. Then, for the remainder of the projection period, revenues increase by historical long-term growth trends of 10%. This scenario assumes that EVI adds 3.0x EBITDA of debt and that the market gives the company credit for its long-term track record of growth upon exit over a five-year period. A price of $3.70 implies that the investor in this take private transaction could earn a 20% IRR, an attractive rate of return in the current market environment. Detailed assumptions can be found later in the report.
The Market Realist Take
A 2013 report by Research and Markets on the $10 Billion U.S. laundry facilities and dry-cleaning services market states that demand relates to growth in consumer income. The profitability of individual companies depends on efficient operations and favorable store locations. Large dry-cleaning companies can achieve economies of scale using centralized cleaning operations to serve multiple retail locations. Small companies can compete successfully by owning favorable locations or providing special services. The U.S. dry-cleaning segment is highly fragmented: the 50 largest firms generate less than 10% of revenue. The U.S. coin-laundry segment is fragmented: the 50 largest firms generate about 40% of revenue. According to the report, major U.S. companies in this segment include Coinmach Service, DRYCLEAN USA, Mac-Gray (TUC), and Martin Franchises.
In October, CSC ServiceWorks, Inc. announced a merger of Mac-Gray with CSC Fenway (which is a subsidiary of CSC) for $524 million. Following completion of the transaction, Mac-Gray is to be delisted from the New York Stock Exchange.
IBISWorld’s Dry Cleaners market research report issued last year said that while higher costs from environmental regulations will cut into profit, the industry will start to revive in the next five years. Stronger downstream demand from key markets like hospitals, restaurants, and hotels will stimulate revenue growth. Plus, an improved unemployment rate and higher disposable incomes will spur demand from consumers.
The report said that over the five years leading up to 2013, revenue fell at an average annual rate of 2.6%. With heightened unemployment limiting disposable income, consumers began using more inexpensive services to launder and dry-clean their clothes, such as household washers and dryers, home-use dry-cleaning kits, and coin-operated laundromats. Also, the dry-cleaners industry has experienced a long-term decline due to the continued trend toward business-casual clothing that generally doesn’t require dry-cleaning. With more consumers foregoing restaurants and hotels to save money during the recession, hotels and restaurants require fewer linens cleaned by industry operators.
Industry revenue in 2013 is expected to turn the corner as modest employment gains during the year drive needs for dry-clean and wash-and-fold laundry services for professional clothing. Over the year, revenue is expected to rise 1.2%, to $9.0 billion.
Larger players in this industry include Whirlpool Corporation (WHR), Proctor and Gamble (PG), and the privately owned Dexter Company, Super Laundry Equipment Corp., and Alliance Laundry Systems.
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