Envirostar Inc (EVI): What Greenhaven Road Capital Thinks About It

Greenhaven Road Capital is bullish on Envirostar Inc (NYSEAMERICAN:EVI), a $398-million market cap company that distributes commercial laundry, dry cleaning equipment, and industrial boilers. In its Q4 investor letter (you can download a copy here), Greenhaven, led by Scott Miller, discussed its investment thesis on Envirostar and other companies – we’ve already covered Fiat Chrysler Automobiles NV. In this article, we’re going to take a look at the fund’s comments on Envirostar.

Talking about Envirostar, which is the only publicly-traded distributor of commercial, industrial, vended laundry products and industrial boilers in the U.S. laundry industry, Miller said:

In the last letter, I discussed the shortcomings of a short report released on EnviroStar and postulated that we might one day thank the author of the report for creating a buying opportunity. That has in fact turned out to be the case thus far because the share price has recovered from below $25 to above $35. In December, I had the opportunity to go down to Florida to attend the EVI annual meeting, where I met the CEOs of companies EnviroStar has acquired. EnviroStar has been executing a “Buy and Build” strategy, buying successful operators in the commercial laundry distribution space and paying for the companies with a combination of cash and stock.

The CEOs typically stay on to run their companies as divisions of EnviroStar. This roll-up strategy does not rely on synergies through cuts or integration. Rather, the belief is that EnviroStar can help build these acquired companies. Quite frankly, if you can use stock trading at 15X+ to buy companies at 5X, the build part does not need to work for the financial model to work, but the returns and quality of the underlying company are much better if it does – and spending time with the underlying CEOs increased my conviction that it can. Each CEO is pursuing strategies that either were not viable for the previously smaller entity or are directly borrowed from another EnviroStar company. More important than these individual strategies was the quality of the executives themselves.

These were CEOs running growing and profitable businesses; they did not have to sell to EnviroStar. Each CEO had a slightly different rationale for selling, but the themes were: wanting to be part of something larger, expecting their business to prosper through the relationship, and believing that EVI is the future in their industry. Teams matter, culture matters, incentives matter. EnviroStar has a really interesting combination. Obviously, the annual meeting is a dog and pony show and only a small window into a company, so all of the data collected is taken with more than a grain of salt, but I continue to believe that Henry Nahmad has a real shot at continuing to buy and build his way to a substantial business.

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Envirostar Inc (NYSEAMERICAN:EVI) distributes commercial, industrial and vended laundry and dry cleaning equipment and steam and hot water boilers as well as provides installation and maintenance services to its customers. The company also designs laundry, dry cleaning and boiler systems for its customers, which include institutional, retail, industrial and commercial customers.

Shares of the company are down nearly 8% so far this year. However, 2017 was a good year for Envirostar as the stock gained a whopping 175% in the last calendar year. Over the past 12 months, EVI moved up more than 50%.

For the three months ended December 31, 2017, EnviroStar reported net income of $1.51 million, or $0.13 earnings per share, versus net income of $1.32 million, or $0.13 per share, for the same period of 2016. Revenue were $36.1 million for the quarter, versus $33.4 million for the same period in the year before.