Best Ideas Conf 2017 (Greenhaven Road Capital) – Envirostar, Limbach, and Watsco Case Study

Smart Money

Best Ideas Conference 2017 – Greenhaven Road Capital, January 10-11, 2017


Watsco Case Study (not a pitch):

  • Distributes air conditioning, heating, and refrigeration equipment, and related parts and supplies in the US, Canada, Mexico, and Puerto Rico (boring enough?)
  • Ingredients of the success:
    • Buy and build strategy: rollup with an emphasis on buying and growing complimentary businesses
    • Strong CEO with aligned incentives: CEO and senior management have options that vest when they are 62 years old; there has been one CEO since inception
    • Cyclicality muted by replacement business: “machines don’t care” – they don’t decide to break down based on what is going on with GDP growth, consumer sentiment, or elections
    • Use mix of cash and stock to grow accretively: stock serves as a currency; they issue shares at 15x EBITDA and buy companies at 4-6x EBITDA
  • Buy and build strategy grew free cash flow by 50x while only growing debt and shares outstanding by 6x since 1990

watsco metric

Idea #1 Envirostar (EVI):

  • $14.45/share (1/6/17); market cap of $148M; 52-week low/high of $4 / $17
  • Through its subsidiary, Steiner-Atlantic, distributes commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers manufactured by others; supplies replacement parts and accessories, and provides maintenance services; designs and plans turn-key laundry, dry cleaning and boiler systems for its customers
  • This could be a Watsco in the first inning
  • CEO – Henry Nahmad: 8 years at Watsco (he is the nephew of the CEO); after leaving Watsco, became CEO of a private chemical distribution and services business; has purchased (not been granted) millions of dollars of shares through Symmetric Capital I and II
  • Commercial laundry distribution and service (not coin): customer base consists of ~1,600 customers in the US, Caribbean, LatAm; commercial and industrial laundry equipment and boilers are sold primarily to laundry plants, hotels, motels, cruise lines, hospitals, nursing homes, government institutions, distributors, and specialized users
    • Oligopoly: five primary suppliers
    • Limited competition within geography
    • Stable demand / built in replacement (not dependent on new home starts or GDP)
    • Possibility for expansion into adjacent markets/services
  • Valuation (not going to screen well)
    • If the company executes, the price is attractive; cheap relative to the opportunity
    • Trading at roughly 12-13x 2017E EBIT
    • Estimate EVI should trade at ~20x 2017E EBIT of $12M or $24/share today; predicated on the belief that EVI can most likely double EBIT with minimal dilution in 2017 with material organic/inorganic growth
  • Risks (rollups can be derailed in many ways)
    • Currency (stock) collapses: stock trading at depressed multiples
    • Buy and build does not work
    • Consolidation among manufacturers impacts distribution model
    • Private equity attempts to enter and bids up companies
  • Ingredients in place for large long-term returns
    • No PE sponsored acquirer in the space
    • Strong pipeline
    • Underfollowed
    • Asset light
    • Short-term economics should be positive for shareholders and acquired companies

Idea #2 Limbach (LMB):

  • $13.70/share (1/6/17); market cap of $103M; 52-wk low/high: $6.75/$16.20
  • National provider of mechanical design, engineering, installation, and maintenance services; offering single-source, innovative and technologically sophisticated solution for the design, installation, service, maintenance, repair, retrofit and energy optimization of non-residential mechanical, electrical, plumbing and HVAC
  • CEO – Charlie Bacon; joined Bovis construction management out of college with fewer than 50 employees – rose to CEO and $4B in sales when it was sold; endured great recession and private equity ownership; owns 5% of the company and is in process of awarding approximately 10% of the company to senior managers
  • High-end (less price-sensitive) customer base with a focus on education, health care, amusement, and transportation
    • Scale is an advantage
    • Price is one factor
    • Reasonable visibility (projects last 6-36 months)
    • Renovation is 45% of construction business
    • Possibility for expansion into adjacent markets/services
    • Asset light
  • Began a service initiative in Philadelphia and goal is to service both Limbach-installed systems and those not installed by Limbach
    • Higher margins: service margins are nearly double construction margins
    • More stable: not subject to the whims of new construction / cyclical forces
  • Growth initiatives – build first:
    • Gain market share in core (organic growth)
    • Offer integrated services to expand wallet share (M&A)
    • Geographic expansion (M&A and organic)
  • Valuation:
    • Discount to peers: 6.8x forward vs 9.3x forward for comps
    • Guidance is likely conservative: accounting for large projects maybe conservative; margins should improve as they are selective on new project builds; assumes no acquisition
  • Ingredients in place for long-term returns:
    • Organic growth; geographic expansion; margin expansion; multiple expansion; acquisitions
  • How to invest:
    • Warrants are long-dated vehicle with significant upside
    • Common stock: post-secondary offering, there is reasonable volume
    • Warrants have greater upside and downside: warrants expire in 2021; $21 stock would be 50% return on the common and almost 100% on the warrants; if shares trade below $11.50, warrants are worthless
    • Warrants can have indiscriminate sellers: warrants are given to each purchaser of the SPAC at inception; many funds purchase SPAC because they can be guaranteed to get their money back if they vote the deal down; tends to be short-term oriented investors who are not fundamentally driven
  • Risks:
    • Missing guidance
    • Commercial building recession
    • Poor acquisition
    • Inside selling

Last Year’s Recommendations:

  • Fortress Investment Group (FIG): recommended at $4.65/share; over course of year, paid 46 cents in dividends and closed at $5.37 (1/6/17) for a total return of 25%; still a top 5 holding
  • Associated Capital Group: recommended at $29.69/share for limited downside given $40 in cash and investments; closed at $34 (1/6/17) and paid a 10 cent dividend; total return of 15% and still a holding in the fund

About Greenhaven Road:

  • Long-biased hedge fund; concentrated and patient capital
  • Pursue quality companies and special situations
  • PM with operating background and traditional finance background (PE, L/S hedge fund)
  • Fundamentals matter, balance sheets matter, cash flow matters, management matters, and incentives matter
  • Investment committee of one is the perfect size
  • Situations attracted to:
    • High insider ownership
    • Limited analyst coverage
    • Asymmetric
    • Recurring revenue / manageable business
    • Significant value proposition
Image Source: Greenhaven Road Capital Best Ideas Conference 2017 Presentation



Leave a Reply

Your email address will not be published.