Playing Blowout Earnings (Again) with EnviroStar, Inc.

Sometimes the market provides investors with gifts—great entry points for stocks of up-and-coming companies which are flat-out performing and profitable. Right now, I believe that’s the case with EnviroStar, Inc., a “low-floater” that just reported blowout earnings, and whose share price should be in line for some nice gains ahead if you’re patient enough to stay the course.

EnviroStar, Inc., through its wholly-owned subsidiary, Steiner-Atlantic Corp., distributes commercial and industrial laundry and dry cleaning equipment and steam and hot waters boilers manufactured by others, supplies replacement parts and accessories and provides maintenance services to its customers, and designs and plans laundry, dry cleaning and boiler systems to meet the layout, volume and budget needs of its diversified institutional, retail, industrial and commercial customers. The company, through its DRYCLEAN USA License Corp. wholly-owned indirect subsidiary, owns the global rights to the name DRYCLEAN USA, which the company franchises and licenses to retail drycleaners in the United States, the Caribbean and Latin America.

I first put EnviroStar on my radar screen last September after the company issued a nice fiscal year earnings report, complete with a solid outlook going forward.  Revenues for fiscal 2013 were $36,226,584, an increase of 61.3% over the prior year’s revenues of $22,457,089. Net earnings increased by 214.1% to $1,607,238, or $0.23 per share, compared to $511,689, or $.07 per share in fiscal 2012.

In that release, Venerando J. Indelicato, the company’s Chief Financial Officer, stated: “As previously reported, we received a number of large orders for delivery in fiscal 2013, which we successfully delivered during the year. We are beginning fiscal 2014 with a solid backlog containing a few large orders, and while comparisons will be difficult when comparing fiscal 2014 with our recent banner year, we still expect fiscal 2014 to be a very successful year.”

As it turns out—at least so far—Indelicato’s projection was prophetic.  On February 14, the company reported improved operating results for the six and three month periods ended December 31, 2013. For the first six months of fiscal 2014, revenues increased by 41.4% to $18,328,643 from $12,958,823 for the same period of fiscal 2013. Net earnings increased by 226.0% to $903,077 or $.13 per share compared to net income of $276,994 or $.04 per share for the same period of fiscal 2013.

For the second quarter of fiscal 2014, revenues increased by 52.6% to $9,835,413 from $6,445,709 in the comparable period of fiscal 2013. Net earnings for the period increased by 281.4% to $477,306 or $.07 per share compared to $125,155 or $.02 per share for the second quarter of fiscal 2013.

Once again, Chief Financial Officer Indelicato weighed in with some bullish comments on those results and EnviroStar’s future performance. “We are pleased with the company’s performance for the six and three month periods of fiscal 2014. As already reported, we began the year with a solid backlog and we projected fiscal 2014 to be a successful year. At this point in time these projections are on track, although individual quarters may differ depending on future scheduling.”

As you might expect, market participants responded with enthusiasm to the mid-session release of EVI’s earnings numbers, initially driving the share price up to an intraday high of $4.27 after the stock opened for trading at $3.43 per share. Trading volume on the day of 253,000 was particularly impressive, as the stock has an annual daily average of about 44,000 shares. It also features a micro-thin float of 2.45 million shares—an added plus when considering how much traders like to circle their wagons around issues like this, especially during bull market times.

EVI chart

Interestingly, as fate and market vagaries sometimes conspire to do, selling took hold in the issue within days of the earnings release, with buyers unsuccessfully trying to hold the bid at around $3.65 per share. Wednesday’s choppy market action, which especially pressured a host of small-cap names, led to EVI trading down to a day low of $3.31—a somewhat surprising level given the glowing earnings report and company outlook.

From where I sit, EVI shares at this price are a bargain, and appear to have some solid support at the $3 level should the selling continue. Given the stock’s razor thin float, it may be only a matter of time before both buy-and-hold investors and the momentum crowd takes a shine to these shares, as long as supportive market conditions prevail. And arguably, the nature of the company’s business should also be far less susceptible to any economic downturns as well, offering the non risk-averse investor the potential to “clean up” on EVI when buying sentiment in the stock returns.

Warren Gates
Senior Analyst
Normandy Research

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