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EVI- A low risk play for a rocky market

|Includes: EnviroStar, Inc. (EVI)
Thesis

Envirostar is currently selling for about the value of its net current assets. Most of the assets are very liquid (mainly cash); in addition, the company has a relatively recession resistant and modestly profitable business. While this company is never going to experience tremendous growth, an investor at today’s prices has very little downside risk and significant upside potential.

What do they do?

Envirostar sells commercial and industrial dry cleaning equipment in the United States, the Carribean, and Latin America. The company’s primary domestic market is in the state of Florida. The company’s products range in price from $5,000 to $400,000.

Do they have a moat?

No, this is a completely average company. What is nice is they are relatively recession resistant. While their earnings have declined during the past two years, they have remained consistently profitable throughout the crisis.

Risks

Quick note- I thought it was funny the company listed “Not Applicable” under risks factors on their annual report.

While I don’t quite agree with that there are no risks, I don’t see too many risks to this business. The biggest risks would be a competitor coming in and aggressively trying to take market share with predatory like pricing, but the business is such a commodity business and so fragmented that I don’t see a real risk of that happening.

The biggest risk to an investor today is the company is dominated by the Steiner family. They act as the chairmen and CEO of the company, and own 62% of the voting shares. They could take the company in any direction, including some shareholder value destroying ones, without shareholders being able to put up much of a fight. However, investors can take solace in the fact the company has been slowly building up their cash balance for years and I have seen no indications that they have any plans on foolishly spending their cash.

Another risk is that the company is very quiet. While they do make all the proper disclosures, they tend to make the bare minimum. They don’t make presentations or go out promoting their stock or the business. While I like non-promotional management, it is difficult to get much information on the company.

Valuation

The company is currently trading for around $1.05. By my calculations, they have excess cash (cash minus debt minus (CL – CA if CL>CA) of $0.81 per share, so they trade for about $0.24 per share after stripping out excess cash. On a TTM basis, they’ve earned $0.03 per share. That gives them a P/E of less than 8 after stripping out excess cash. However, their earnings have been depressed by the slowing economy. For the seven fiscal years 2003-2009, they earned between $0.07 and $0.13 per share each year with an average ROE just under 11% (after stripping out excess cash, their average ROE was just under 17%).

Catalysts

I don’t see any catalysts on the horizon. Management could begin a share buyback program or a dividend policy to help unlock value. Alternatively, they could perform a management buyout to purchase the 1/3 of the company they don’t already own. Given their small size and rather limited liquidity, they could also delist the company, which would save a substantial amount of auditing and compliance costs but would further decrease liquidity. However, I don’t view any of these as likely. An investor today will likely just have to wait for the market to realize EVI’s value.

Price Target

I have a price target of $1.51 on EVI. I arrived at this number by applying a multiple of ten to $0.07, the lowest amount they earned over the past seven years, and adding the $0.81 of excess cash they have. What I like about this investment is the very limited downside given the large cash balance and relatively recession resistant business.



Disclosure: No position- however, I may purchase shares at any time