Here's the portion of the Barron's piece re:WDRY
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It is in this environment that Coinmach Laundry, a Nasdaq-traded operator of laundry rooms for apartment buildings, was able last month to sell 4.6 million new shares, including 1.9 million by insiders, and then see the stock price jump by more than 20% in the following two weeks.
The company has as its modish advantage a business strategy that fits into the vaunted "consolidator" or "roll-up" template, with which investment bankers and analysts are currently quite taken. This means it is a big fish in its very-fragmented industry and is busy gobbling up little competitors, gaining market share and, if all goes well, exploiting economies of scale. In the past three years Coinmach, based in Roslyn, New York, has grown its base to 420,000 laundry machines from 54,000, almost entirely via acquisitions. Market share has vaulted to 12% from 2% in that time. It is by all evidence a well-run company, the low-cost competitor and an effective cost-cutter.
But there are several ways in which Coinmach strays from the model of adored consolidators such as Wayne Huizenga's Republic Industries, Bernard Ebbers' WorldCom and Jonathan Ledecky's U.S. Office Products. These companies have perfected the use of stock to buy smaller outfits. Overvalued stock, many have charged, but all the better for the acquirer to pay for a real, earning asset with an inflated currency.
Coinmach, whose debt-to-equity ratio is an unwieldy 5.75-to-1 owing to its creation by way of a leveraged buyout, uses cash -- borrowed cash, for the most part -- to make its acquisitions -- a leveraged buyout, in other words, executing a string of leveraged buyouts as a business plan. And the great thing about the steady, noncyclical nature of Coinmach's revenue stream? According to its recent offering prospectus, it is that such steady cash flow can continue to create more borrowing capacity and insure access to the ready-and-willing bank and junk-bond markets.
The stock is being flogged only by the analysts employed by the crowded group of five underwriters who handled the latest stock sale. One, Perry Boyle of lead manager BT Alex. Brown, says the stock deserves to fetch 30, calculated by placing a multiple of seven on projected calendar-year 1998 cash flow (earnings before interest, taxes, depreciation and amortization) of $111 million. EBITDA has its uses in tracking the basic progress of a business. But this is a highly leveraged, acquisitive company in a capital-intensive industry, essentially a perpetual-motion machine for generating interest costs, amortization and depreciation. So EBITDA misses part of the picture. In the six months ended in September, for example, EBITDA surged 62% over the year-earlier period on a 59% jump in revenue and a 62% rise in operating income. But is it not important at all that interest expense soared 74% and net losses ballooned by 124%?
Boyle sees no reason to believe a real profit will show up for at least three years. And it should be remembered that this isn't a management failure: The company is being run to maximize EBITDA without regard for earnings, or for paying down much debt.
Still, not long after the company's July 1996 initial offering (at $14 a share), an analyst for one of the IPO underwriters was predicting Coinmach could be in the black sometime in the fiscal year ending this March, a virtual impossibility now. But what does the market care? That analyst's opinion, after all, is moot now that his firm was cut from the roster of Coinmach underwriters. |
