Description

Enodis plc is the leading player in a long-term growth industry, has an outstanding financial track record, has a high dividend yield, and trades at massive discount to intrinsic value and to recent private market transactions. Enodis trades on the London stock exchange as well as on the NYSE as an ADR (4 to 1).

Enodis is the leading global manufacturer and supplier of foodservice equipment to quickservice restaurants, hospitals, caterers, and independent restaurants. It makes ice machines, fryers, ovens, institutional freezers and refrigerators, as well as other products. (It also has a small UK based building products distribution business, but it's not really significant.) Its customers range from supermarkets, McDonald's, Burger King, hospital chains, and independent restaurants. It has only about 5% of the market, but is the only player in the industry with a full range of hot and cold side equipment and a global presence. Globally, growth is driven by the trend to eat more and more away from home. While the industry hasn't been very cyclical in the past, a global macro shock would impact the Company. But the long-term trend is certainly up.

Enodis has an outstanding financial track record. Since 1995 sales have grown 100% and EBITA has grown 150%. EPS growth has averaged more than 25% per year. Growth has been organic and acquisitive (this is very much a consolidating industry), but acquisitions have been enhancing to returns. Real ROE (adjusted for Goodwill write-offs) was 19.5% this last year. The Company generates tons of free cash flow. Over the past five years, net income has been converted into free cash flow at the rate of 70% a year on average, outstanding considering the growth. Dividends are up fourteen fold since 1994.

Growth in the future will come from 3-5% organic growth as well as acquisitions. They made a fairly large acquisition about 18 months ago, and the margins there are about 35% below the margins of the rest of the business. Bringing these margins up to average, and assuming no revenue growth, would increast EBITA by more than 15%.

The current valuation is very attractive. At today's price, the stock trades for 5.8x last year's EPS and 5-5.5x my current year estimate. The Company does have a very low tax rate due to acquired tax losses (probably be about 15-20% tax rate this year); adjusting for a normal 30% tax rate, the stock is at 7.5x this year's eps. Dividend yield is 7.2% for this year. In addition to the tax losses, the Company has excess real estate that it is selling off at the rate of 5-10m per year over the next three years. The interesting thing is that there is a long list of private market transactions in this rapidly consolidating industry, and the buyers are very well respected Companies. Specialty Equipment Corporation (one of the leading players) was just acquired by United Technologies at 10x EBITA. Premark was acquired last year by Illinois Tool Works Corp at a higher multiple. On average, transactions have been in the range of 8-11x EBITDA or 10-13x EBITA.

Using a 10x EBITA multiple on this year's EBITA estimate of 141m (last year they made 131m, so 141m would conservatively imply the slowest growth for the Company in its history), subtracting out an estimated 410m of net debt (430m as of last year) gets me a market value of 1,000m, divided by 247m shares outstanding, yields a per share value 405p +91% from the current price. This gives no value to the tax losses or the real estate. Insiders agree that the valuation is attractive and have been buying the shares.

Catalyst

Hard to guess at catalysts. The Company could very easily be bought out. Perhaps another positive earnings announcement would spur interest in the stock. But with such a high quality business, at such a low PE and with such a high dividend yield, I'm perfectly happy to wait.