Tuesday, 08 June 2010 00:47

Hey Friend, Would You Like a Dollar for Fifty Cents: Enter EVI

I would like to draw attention to BoomBustBlogger Shaunsnoll and his write up on Envirostar titled, "A dollar for fifty cents: EVI"

EVI is a well run company with 60%+ of shares owned by management that has an absurd amount of cash on the balance sheet, no debt, and trades at a ridiculous valuation with a few likely catalysts.

EVI primarily distributes commercial and industrial laundry and dry cleaning equipment including a proprietary line of dry cleaning machines (98% of revenue) with a focus on environmentally friendly dry cleaning methods and equipment. There is even a “green” angle here for you environmentalists! Overall prospects for this business are not great but not terrible. Much of their dry cleaning products sales goes into hotels, hospitals etc, which is obviously very weak. They do have some good growth into international and latin America though, which is ~20% of their sales and growing. Not exactly the most “sexy” industry but keep reading!

Valuation for this company is ridiculous given ROE, ROIC, cash flow and balance sheet and there are some clear catalysts that could unlock value in the next year. Company has ~80% of market cap in cash, no debt, is fcf positive, insiders own >60% of shares, and company has respectable ROE, ROIC and EPS growth over last few years.

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Summary: So you essentially have 25% downside and 70%+ upside using relatively conservative estimates, for a 2.5x return/risk ratio with very little risk of permanent loss of capital. Impossible to know exactly what could happen but it seems under almost any scenario the company is under valued. Stock could do anything in the short term but over the next year or two I have a hard time coming up with any scenario that has less than a 40% return. Given market environment and limited downside this looks pretty compelling to me. I am a buyer at anything <$1.20. If the company starts having multiple quarters of negative net income indicating likely extended cash burn or if management shows me reason not to trust them, then I will likely exit the investment.

To read the full write-up as well as ability to download an accompanying word.doc, visit Shaunsnoll's microblog on the BoomBust by clicking here. Neither I, nor BoomBustBlog necessarily endorse this work, nor have we verified the contents, for it is independent and research and opinion posted by Shaunsnoll but I do encourage all readers to investigate, comment and share.

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Last modified on Tuesday, 08 June 2010 08:50

2 comments

  • Comment Link shaunsnoll Tuesday, 08 June 2010 19:45 posted by shaunsnoll

    thanks for the comment overthetop, devils advocate is how we stress test investment ideas.

    agree with you entirely, ultimately though the changes in working capital are not what the fundamental cash flows of the company are and eventually AR should normalize, plus growing AR implies growing revenue as well, which is a good sign. I think they should still be fcf positive even with declining ar. you have a point but I don't think slightly lower fcf is material to the investment idea although worth noting. I actually hope they have a huge surge in working capital, which sucks up cash (although implies strong rev growth) but scares the many simple investors holding this thing, so I can scoop up more. If this thing trades down to $0.85 or something, i'm selling kidneys to buy more.

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  • Comment Link overthetop Tuesday, 08 June 2010 18:29 posted by overthetop

    my guess is AR will continue to climb. If you look at the last few years the declining AR is the cause for the big discrepancy between NI and FCFF. So my guess is that reverses in the next year or two and you will see FCFF become smaller than NI in the near future. Could potentially cuase divs to be a bit lower than you expect.

    not trying to be a downer, just playing devils advocate. Clearly the big idea behind this play is a return of excess cash to shareholders.

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