Description

Hi, guys –

Executive Summary

https://www.youtube.com/watch?v=um2e_ox6eGE

Having gotten that out of my system …. Envirostar (or EVI Industries, as it's now called; the old name I guess didn't work anymore, so they called themselves after their own ticker symbol, which says something about something) is one of the craziest things I've seen in 20 years of messing around with stocks. It's trading at 100x earnings, 6x book, infinity times tangible book, based on the premise that they will … Disrupt the automobile industry? Bring cannabis to the masses? Rent temporary office space? Sell a lot of chicken wings, which, I'll note, you need to grow a whole chicken to make two of, so how many chicken wings could you ever actually sell? No, the pitch is that they're going to roll up the commercial laundry equipment distribution business.

These valuation levels reflect an extraordinary degree of confidence in the business plan, but this isn't just a valuation short. I think the bulls misunderstand the size of the opportunity, the market dynamics and the competitive threats, and that their misunderstandings will become evident over the next 12-18 months, or sooner if I or a like thinker point this out in a more public forum. The value-add to this piece isn’t just pointing out that the bulls are wrong about the size of the market, the achievable margins, how much of the business EVI could acquire, at what cost and over what period of time. Manufacturers have recently started bringing distribution in house, completely undercutting a bullish thesis based on near-limitless growth through acquisition.

I'm not 100% comfortable with this write-up, because I'm pretty much accusing people of being deluded and not having done their homework while I don't have all the answers myself. I hope you'll read with charity and love, and understand that, although I enjoy saying mean things, I would never want to hurt anyone's feelings, and know that I'm often wrong.

From here on I'm just going to ramble and hopefully go back and clean things up if I have time. If the prior sentence is still in the writeup, I didn't have time.

Bull Thesis

Not sure if this authorized, but via Valuewalk, here is ADW Capital Management, LLC’s case for investment:

‘https://drive.google.com/file/d/1h0GVebCIhN_Vj_nV6EknVR1rQV55xhl8/view

History

EVI had been kicking around Valueland forever as a decent small business with an underappreciated balance sheet. I'm surprised and disappointed that I never owned it, because it checked all the micro-cap value investor boxes. Back then, EVI was just Steiner-Atlantic, a large and well-run distributor with an attractive focus (big projects) in a growing market (Florida). It was a $1 stock in 2013. But that was before Henry Nahmad, who is very importantly the nephew of Albert Nahmad, long-time CEO of Watsco, a leading HVAC distributor, put up $6MM in 2015 to take control of the company and implement his “buy and build” strategy leading to the 40-bagger over the last 4-5 years. I’m disappointed because … I know I’d have bailed before the 40x gain, but might have held on for 20x.

Some Numbers

Here's 5 years of selected 4th calendar quarter financial data, annualized when appropriate and in millions when appropriate:

Using quarterly #s adds a lot of lumpiness, but is more convenient for me and the lumpiness is part of the point. I think this an astonishing financial exhibit. The impact of the equity-issuance driving “buy-and-build” (still waiting on the build part) strategy is evident starting in 2016.

Here, tediously, is 15 years of revenue and margin history, most of which predates the buy-and-build era, going back to before the financial crisis, back to when EVI was filing 10KSBs:

I’m dragging us back in time so we can get some idea of the economics of commercial laundry equipment distribution. EVI is the only publicly traded one. Coinmach and Mac-Gray, big time route operators (that means, run laundry rooms in apartment buildings and dorms) had equipment distribution subsidiaries. Disclosure was limited, but I’m willing to believe that Steiner-Atlantic is best in class, albeit burdened by public company expenses, because the Coinmach & Mac-Gray distributors had awful numbers. EVI is probably as good it gets, which is important to know when thinking about the impact of further acquisitions.

Industry Background.

There are four end-markets for commercial laundry equipment:

-- Route, which are the washers & dryers in apartment buildings and dorms. These are called “route”, because, back in the day, somebody would actually have to stop by from time to time to collect the coins, which is obviously a route business. The machines look like, but are a cut above, home laundry equipment.

-- Laundromats. We all know what these are; the machines are visibly not something you’d have at home. They’re a step above the route machines.

-- On-Premise.  These are machines intended for use in hotels, restaurants, jails, hospitals. They’re another step above, something you might consider running 24 hours a day.

-- Industrial. The equipment here runs from gigantic and heavy duty but recognizable washer & dryers to continuous batch washers, which get delivered by flatbed trucks with “Wide load” and “Slow moving vehicle” signs, and a state trooper in front and in back of the truck.

Each end-market is reasonably oligopolistic, like 3-5 main manufacturers in each segment, although the lines are getting increasingly blurred as manufacturers try to move into adjacent segments.

The distribution channel, which is what we’re concerned with here,is very fragmented. There are a lot of these guys, and they tend to represent different manufacturers, → which may have been OK when the delineation between segments was cleaner <-- . This is a really important point Continental Girbau, for instance, the American presence of the Girbau, the Spanish manufacturer, used to focus solely on the high end. Then they made a deal with the LG chaebol to be kind of like their master distributor in the US and are now placing LG machines in laundromats.

The route operators buy direct rather than going through distributors. I’m not clear on how much industrial business is direct; I know that Aramark has used Steiner-Atlantic and Loomis Brothers for a couple of their new builds.

But Does Anyone Really Care?

Eh, I have to make dinner and go to bed,more than willing to get into it in the comments of anyone’s interested.

1: EVI’s grossly overvalued. They’ve been buying companies for 0.5x sales funded with 50% stock and 50% debt (and no money down). Assuming a 7% operating margin (see the 15 year table above for why that’s reasonable), $40 share price and 4% interest, if they were able quadruple their revenues overnight they’d be at a ~17x PE assuming no further dis-synergies. (Henry says, and the bulls believe him, that the ballooning SG&A expense, which is not out of line with historical #s, is investment in the platform to support the massive growth coming down the pike.) They might be attractive at that scale and that price.

2: But they can’t do anything like that, the acquisition pace of the last 4 years is more like, $70MM-$80MM/year. You can’t buy something someone doesn’t want to sell. Honestly, the idea that anyone in this environment would sell a decent business of any scale for 6x EBITDA and → then go to work for the acquiror ← is also ludicrous.

3: And I think that's as big as they'll ever get, at least in the commercial laundry equipment distribution business. Good numbers on the market size are really hard to come by. I don't think Adam's $6B # is ridiculous, just that it's a real stretch. My best guess is a lot lower, but I don't have tons of confidence. Due to industry dynamics, I don't see how they ever ever get more than 20-25% of the pie.

3: One of the bull pitches here is that EVI gets to buy these distributors cheap because there’s no PE competition. That’s .. not quite true, and not quit true in a way that’s worse than there being no PE competition. The manufacturers are buying their own distributors:

https://planetlaundry.com/alliance-laundry-systems-to-acquire-commercial-coin-laundry-equipment-co/

https://planetlaundry.com/laundrylux-annouces-acquisition-of-cesco/

https://planetlaundry.com/laundrylux-annouces-acquisition-of-cesco/

I’d note that Alliance is PE backed (via Ontario Teachers & umm, I forget who), and that Super Landry, the distributor sub of Coinmach & Mac-Gray (now combined as the PE backed CSC ServiceWorks) could also enter the mix if they ever thought it a good idea (to date, they haven’t). LaundryLux is the US presence of the Swedish Electrolux. The dude who founded it got knighted by Sweden for his contributions to Swedish industry, here’s a quote about the deceased:

““I’m convinced that a ray of light from the heavens illuminated the stainless steel Swedish washers at that moment, and little cherubs with wings fluttered around Bernie’s ears, whispering, ‘This is your opportunity, Bernie, seize it!’ says Neal Milch, “and seize it he did.””

In addition, Alliance is stopping shipments to EVI companies. I can walk you through this if you’re interested. EVI has been replacing Alliance with Continental Girbau. Alliance is way bigger than Continental Girbau. They have no presence in the industrial segment, but are the largest player (combined) in segments 1-3. This raises the possibility that EVI might have to write down some good-wll and intangibles, which would obviously be disastrous for the stock price. This is especially a risk for their Martin-Ray, which was Speed-Queen’s (an Alliance brand) 2017 distributor of the year.

Because I enjoy being mean, here’s an EVI sub that XXX-ed out their loss of Alliance representation:

https://www.ilsorlando.com/

Like, they somehow or another for whatever reason just pasted XXXX over the name on the JPEG. This may speak to the great deal of autonomy that partners have to pursue their own destinies beneath the EVI Industries umbrella.

I think that manufacturers are moving to control their distributition chains for reasons alluded to above. One of the reasons to have a distributor is to sell your f*cking product, and only your f*cking product. You can root around the web and see a high degree of distributor promiscuity. I think manufacturers want to put the chastity belt on.

I could go on about this forever, I’ve developed an unhealthy interest in the commercial laundry industry, and look forward to stimulating discussions with like-minded enthusiasts.

There’s already long conversation on VIC about EVI, mostly me talking to myself:

https://www.valueinvestorsclub.com/message/EVI/138664/142609

The manufacturers buying the distributors bit is what made me write it up.

Yours,

Bowd

Catalyst

Time, or someone publicizing broadly available industry news.