Dry Clean USA: Deep Value in this Micro Cap

Dry Clean USA (DCU) is completely neglected, ignored, unloved and illiquid but is still one of the deepest of deep value micro cap stocks, in my opinion. Dry Clean USA closed at $1.00 this past Friday 09/23/09 and qualifies as a candidate to discuss on Seeking Alpha. I thought it may interest some Seeking Alpha nano cap investors. My first mention of DCU was on my blog September 2008 at 0.75.

Not quite a jaw dropping returns or suited for almost all institutional investors but in comparison to the returns generated by DFSCX (DFA US Micro Cap I) which was down 21% over the same period, its fundamental performance as a company and to a much lesser extent its stock performance makes the idea interesting to some investors.

DCU is a leading distributors of industrial laundry, dry cleaning, steam boiler equipment and replacement parts. They service the hotels, hospitals, cruise ships and independent dry cleaners. The Company also sells into the highly fragmented dry clean retail operations by selling individual and area franchises under the DRYCLEAN USA name and develops new turn-key dry cleaning establishments for resale to third parties. The Company primarily sells to customers located in the United States, the Caribbean and Latin America.

Year over year annual revenues posted a +2% growth rate .However, net earnings for the year fell 12.5 percent, to $526,863, or 7 cents a share, from $601,852, or 9 cents a share, in fiscal 2008. According to the CFO “the financial crisis will have a greater affect on the company’s operations at the start of fiscal 2010,” CFO Venerando J. Indelicato said in a news release. “However, it is anticipated that the economy will improve during the year, releasing pent-up demand that presently awaits financing.” This was taken from the 10k recently filed, 09/23/09.

Valuation

Market cap is $6,693,466 with and enterprise value of 4,570,705. DCU has posted impressive return on invested capital (ROIC) with a pre tax average rate of 18.52% over the past 5 years. The current earnings yield (owners earnings) based on FCF is 22.54% (FCF/EV) or 17.02% based on OI/EV. SGA/Revenue which I refer to as a management greed factor is only 19.8%. Couple this with a stable share count over the past few years and a clean capital structure. This will set the stage for building value and a strong tendency to regress to the mean in terms of fair valuation.

Per Share Data:

• Price = .99
• EV(.65)/MC(.99) = .65
• EV = .65
• Sales = 3.25
• OI = .116
• Total Liabilities = .436
• Cash (.776) – Total Liabilities (.43) = .34
• GP = .7131
• FCF = .223
• Cash = .77

RATIOS based on the period ending 06/30/09 the most recent 10k filed 09/23/09

• EV/Sales = .20
• GP(.713)/EV (.65) = 110%
• SGA/Revenues = .198
• FCF / EV = 22.54%
• FCF average past two years (.1028)/EV (.65) = 15.82%
• OI (.1106)/EV (.65) = 17.02%

No dilution as shares outstanding has remained constant over the past several years.

• Shares outstanding = 7,033,804
• 74% below 5 year high
• YTD return = 12.10%

Risk:

Closely held with CEO M Steiner owning 64% of the company. Also management made a ridiculous low ball offer of .85 cents about a year ago. The offer was quickly removed as I’m sure the minority shareholders would have rejected.

Catalyst:

The market’s recognition of the huge discount to fair value. A special one time dividend or reinstatement of a regular dividend. CEO Steiner owns 64% and would benefit from the tax treatment of this form of distribution of the company’s value.

Disclosure: Long DCU

Comments

[el duderino:]

Nice analysis. Just out of curiosity, how did you derive that enterprise value number?

Sep 29 10:54 AM

[John DiStan...:]

Hi el duderino

My enterprise calculation was as follows;

I used the 10k filed on 09/23/09 for the 06/09 year end results.

Price = 1

Shares outstanding = 7,033,804 (10k)

Cash balance = 5,560,954 = .776 per share

Total Liabilities = 3,068,193 = .4362

EV = 1-.776+.436= .66 or .66 ( 7,033,804) = 4.642,311 (rounding)

Market cap of 7,033804 – Cash of 5,560,954 +total liabilities of 3,068,193 = EV of $4,451,043

Note: customer deposits are $1,847,822 and were included in the total liabilities of 3,068,193

Sep 29 01:34 PM

[rpl:]

I like the valuation and steadiness of the company, but have no confidence in the management. They clearly tried to take advantage of outside shareholders last year, unless you have some clear indication that management is going to do something minority shareholder friendly I would stay away.

Sep 30 01:58 PM

[Oscar Sahlberg:]

Hi John,

Just out of curiosity, have you ever tried to get in touch with the company? Having called the IR department, I was somehow passed onto M. Steiner who, upon my request to ask couple questions on the company flatly refused to even talk saying that SEC does not allow the company to talk to anybody (which of course is completely untrue - there is no ban towards ). Either the management has somehow been burnt before or are secretive to the level of paranoia.

Oct 19 03:14 PM

[John DiStan...:]

I never tried to call management but have sent them emails after their attempt to go private at .80 cents. All my attempts at contact were ignored. But the minority shareholders still have a voice to stop a low ball offer.

Thanks for that insight into management! So disappointing that management would behave in such a hostile manner.

Nov 12 09:23 PM