Envirostar, Inc.
1. Company Summary:
EnviroStar, Inc., through its wholly owned subsidiary, Steiner-Atlantic Corp., supplies commercial and industrial laundry and dry cleaning equipment and steam boilers in the United States, Caribbean and Latin America. It both distributes machinery built by others as well as outsources the manufacturing of its own branded equipment. It designs laundry systems for clients, supplies replacement equipment and provides regular maintenance services.
2. Strengths and Weaknesses:
a) Strengths
- Financially Secure: Zero debt, high levels of cash.
- Management Ownership: The CEO and President combined own more than 55% of the company, which should align interests with that of shareholders. However, see weakness below.
- Revenue Stability: Revenue has been remarkably stable throughout the recession, deviating by less than 10%. This is reflective of the fact that the company has a highly diverse revenue base with more than 1700 customers in a multitude of industries.
- Flexible Cost Structure: Envirostar outsources the manufacturing of its equipment, meaning that it can respond quickly to changes in demand. This is evidenced by the stability of its COGS, which had a standard deviation of just 1% throughout the recession). Combined with #1 above, this company has had no trouble weathering the recession.
b) Weaknesses
- Cash Balance: With such a large cash balance, there is a risk that management may waste it on frivolous projects rather than returning it to shareholders. Management has expressed interest in putting the cash to work through the lease of equipment at implied interest rates that are superior to what the company has traditionally earned on its bank deposits.
- Management Ownership: The CEO and President’s combined majority control of the company eliminates some catalyst opportunities and create some governance issues.
- Product Market: The company competes in a highly competitive industry against hundreds of small, regional players
3. Valuation:
Using a figure below this past year’s revenue (which was already several million below the last four years), I used the most conservative average margins from the last 3, 5 or 10 years to calculate COGS, SG&A and Depreciation as a % of Net PP&E. Then, to calculate a no-growth perpetuity and a conservative discount rate, I calculated enterprise value from FCFF, and derived the market value of equity. The result is a conservative estimated intrinsic value of $1.34/share, which is 29% higher than the current price.
Using revenue figures closer to what we have seen prevailing throughout the recession, the expected upside easily reaches into the 40% and higher range.
Remember, these are no-growth scenarios, assuming the company continues as a perpetuity at the current operating levels.
Author Disclosure: At the time of publication, the author DOES have a position in securities of this company.
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