Novice Investing - Time to Laundry Your Money

Date: Friday 05th 2008f September 2008 05:47:48 PM

Time to Laundry Your Money - 03/13/2007

By: Novice Investing Staff

Coinmach Service Corp. (DRA) is the largest independent laundry equipment service in the US. The company is in the business of leasing laundry rooms from building owners and property management companies, installing and servicing laundry equipment and collecting revenues generated from laundry machines. With annual report 2006 coming up, it is time to get a broader sense of the company.

About 90% of the laundry location is subject to long term annual contracts of five to ten years. The company has grown in this fragmented industry by acquisition and it has successfully grown revenue from 178.8 Million in fiscal year 1996 to $ 543.5 Million in fiscal year 2006. Despite that, Coinmach had experienced net losses from fiscal year 2000 through 2006.

Historically, Coinmach's business is pretty stable (think: long term contracts) and is resistant to change in economic cycles (think: we need to do laundry no matter what). Competition in the laundry equipment business is highly competitive (think: anyone can be a laundry coin operator), capital intensive (think: laundry machine that needs to be maintained) and requires reliable and quality service.

Looking into the income statement, Coinmach has always registered a loss of roughly $ 24 Million annually since 2002. While operating income is around $ 51 Million annually, interest expense for the period is $ 60.1 Million. This is as a result of $ 650 M long term debt that the company bear during the fiscal year. While laundry equipment business is a stable business, it is also difficult to grow its business beyond acquisitions. From 2002 until 2006, Coinmach's revenue has been relatively flat. To grow revenue, Coinmach needs to invest in new laundry machines at a good location, or buy out other competitors in different locations. This implies an added debt burden, which will not Coinmach's situation any better.

Cash on hand is roughly $ 60 Million, which is an equivalent of the cost of interest expense for one year. Furthermore, Coinmach incurred a lot of

goodwill as a result of its past acquisition. It has $ 206 Million of goodwill booked in the balance sheet in recent fiscal year. Total depreciable assets are calculated to be $ 458 Million. In one year, Coinmach depreciated $ 90 Million of its fixed assets, which implies a 5 years expected life span. Some laundries may be used for more than five years if maintained properly. Therefore, Coinmach is not using an aggressive accounting tricks here.

What is intriguing about Coinmach is this. The company operates laundry equipment business in apartments and several other public places. Thus, with recent talks about housing collapse (price had already collapsed from 2005 high) and recession, Coinmach is set to benefit as people with poor credit record will try to rent instead of buying their own homes. Higher occupancy rate will drive more revenue for Coinmach's laundry services. Overall however, this is the company that is struggling to make profits since 2000. Coupled with its relatively high debt load, we view Coinmach shares as an unattractive investment going forward.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Coinmach Service Corp. (DRA) or any other securities.

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