EnviroStar exhibits an attractive earnings yield of 18.9%. P/E multiples do not give credit to the substantial amounts of cash on hand. Also, given that FY 2013 was a record year for the company, we presented three-year averages for revenues, EBITDA, and EBIT to demonstrate that mid-cycle multiples remain compelling.
Historical trading multiples
Over the past five years, valuation multiples have expanded significantly. However, there are three important points to mention. First, valuations for all assets were low post–the 2009 Financial Crisis. Second, the market is in the early phrases of giving credit to EnviroStar’s strong growth characteristics, which were proven with FY 2013 and FY 1Q14 results. Therefore, a 5.3x EV/LTM EBITDA multiple for this type of business remains a sensible entry point.
Return on tangible capital
EnviroStar has a track record of generating attractive returns on tangible capital. For purposes of this calculation, we use the formula EBIT/(net working capital [ex. cash] + tangible assets). Companies with a high return on tangible capital tend to have higher barriers to entry. Otherwise, over the long term, competition would enter the market and thereby drive down returns.
In FY 2013, the company had negative net working capital. Because of the company’s long-standing relationship with its manufacturers, the company is able to adjust orders and delivery schedules rapidly and efficiently to reflect any change in customer demands. This allows for effective management of inventories and reduces current assets. Therefore, we believe the negative working capital experienced in FY 2013 is a positive for the company.
Cash conversion analysis
EnviroStar has a track record of generating positive free cash flow both in environments of declining and accelerating growth. In the case of larger orders, the company purchases the equipment sold by it after its receipt of the orders from its customers. Also, sales of products are generally recorded as they are shipped. Lastly, the company has a long-standing relationship with its manufacturers. This allows the company to adjust orders and delivery schedules rapidly and efficiently to reflect any change in customer demands. These business processes ensure that cash is received as sales are booked.
The Market Realist Take
According to the Coin Laundry Association website, coin laundries thrive in periods of both growth and recession. During recessions, when home ownership decreases, the self-service laundry market expands as more people are unable to afford to repair, replace, or purchase new washers and dryers, or as they move to apartment housing with inadequate or non-existent laundry facilities. The market size grows proportionately to the increase in population. Coin laundries can range in market value from $50,000 to more than $1 million, and can generate cash flow between $15,000 and $200,000 per year.
The 2013 report by Research and Markets states that the U.S. laundry facilities and dry-cleaning services industry includes about 30,000 companies with combined annual revenue of about $10 billion. The industry includes about 20,000 companies that provide retail laundry and dry-cleaning services and account for about 70% of industry revenue and about 10,000 companies that provide coin-operated laundromats and account for the remaining 30% of revenue.