9/27/2009

Deepest of deep value (DCU)

Dry Clean USA is completely neglected, ignored, unloved and illiquid but is still one of the deepest of deep value micro cap stocks, IMO. Dry Clean USA (DCU) closed at $1.00 this Friday 09/23/09 and qualifies as a candidate to discuss on Seeking Alpha. I thought it may interest some nano cap investors. My first mention of DCU on this blog was September 2008 at .75. Link

Not quite jaw dropping returns or suited for almost all institutional investors but in comparison to the returns generated by DFSCX (DFA US Micro Cap I) which was down 21% over the same period its fundamental performance as a company and to a much lesser extent its stock performance makes the idea interesting to some deep value investors.

DCU is a leading distributors of industrial laundry, dry cleaning, steam boiler equipment and replacement parts. They service the hotels, hospitals, cruise ships and independent dry cleaners. The Company also sells into the highly fragmented dry clean retail operations by selling individual and area franchises under the DRYCLEAN USA name and develops new turn-key dry cleaning establishments for resale to third parties. The Company primarily sells to customers located in the United States, the Caribbean and Latin America.

Year over year annual revenues posted a +2% growth rate .However, net earnings for the year fell 12.5 percent, to $526,863, or 7 cents a share, from $601,852, or 9 cents a share, in fiscal 2008. According to the CFO “the financial crisis will have a greater affect on the company’s operations at the start of fiscal 2010,” CFO Venerando J. Indelicato said in a news release. “However, it is anticipated that the economy will improve during the year, releasing pent-up demand that presently awaits financing.”

Valuation

Market cap = 6,693,466

EV = 4,570,705

Impressive average 5 Year (06/04 to 06/08) pre tax ROIC of 18.52% indicating a clear strong history of capital allocation.

Per Share Data:

Price = .99
EV(.65)/MC(.99) = .65
EV = .65
Sales = 3.25
OI = .116
Total Liabilities = .436
Cash (.776) – Total Liabilities (.43) = .34
GP = .7131
FCF = .223
Cash = .77

RATIOS based on the period ending 06/30/09,the most recent 10k filed 09/23/09
EV/Sales = .20

GP(.713)/EV (.65) = 110%

SGA/Revenues = .198

FCF / EV = 22.54%

FCF avg past two years (.1028)/EV (.65) = 15.82%

OI (.1106)/EV (.65) = 17.02%

No dilution as shares outstanding have remained constant over the past several years.

Shares outstanding = 7,033,804

74% below 5 year high

YTD return = 12.10%

Risk:

Closely held with CEO M Steiner owning 64% of the company. Also management made a ridiculous low ball offer of .85 cents about a year ago. The offer was quickly removed as I’m sure the minority shareholders would have rejected.

4 comments:

Anonymous said...

awesome man, thanks!! i love this blog, everytime i come by it inspires some serious thinking. thanks for your work :)

check out MTG too if you get a chance, a bit harder to value but looks to offer a good margin of safety to me....

shaunsnoll@yahoo.com

ShadowStock said...

Geez thanks!, glad I can get others to think about how they invest. I believe everyone has and should try to develop their own style to acheive long term success. There’s no one way to make money and what worked in the past may not work in the future or work for your portfolio or personality.

Walter Thatcher said...

Great pick. I've been following this stock for about a month. I would love for an activist investor to pressure them into letting go of a bit of that cash, but as you point out, the CEO owns nearly 2/3 of the stock. Keep up the great work with the blog. I try to read it weekly.

Freddy said...

Thanks of the post. I researched this company a few months ago as well, but didn't pull the trigger. I think DCU should worth around $2. The problem is I don't see too much up side (I wouldn't assign any growth value). Plus, too little float. In normal market I would happy to buy it, but these day, there are quite a few good company that is half price.