Dryclean USA Inc. (AMEX: DCU) has been added to our ValueHuntr Portfolio. The company operates a simple laundry and dry cleaning equipment business with a market value of approximately $6 million. According to the latest SEC filings, the company has $1.9 million in excess cash with a stable earnings stream and growing revenues. We estimate that the company is worth anywhere between $7 million to $9 million, which means that the company is trading at a 20 to 50 percent discount to its intrinsic value. Though undervalued, the company’s effective corporate governance is what really attracts our attention.

About

Together with its subsidiaries, DCU supplies commercial and industrial laundry and dry cleaning equipment, and steam boilers in the United States, the Caribbean, and Latin America. The company distributes commercial and industrial laundry and dry cleaning machines and steam boilers manufactured by others manufacturers. It also designs and plans laundry and/or dry cleaning systems to meet the layout, volume, and budget needs of various institutional and retail customers; and supplies replacement equipment and parts to its customers.

The commercial and industrial laundry equipment distributed by the company features washers and dryers, including coin-operated machines, boilers, water reuse and heat reclamation systems, flatwork ironers, automatic folders and feeders. The Company’s dry cleaning equipment includes commercial dry cleaning machines manufactured by others under the company’s Aero-Tech®, Multi-Jet® and Green-Jet® names, as well as garment presses, finishing equipment, sorting and storage conveyors and accessories distributed for others.

The Company currently employs 33 employees on a full-time basis, of whom 3 serve in executive management capacities, 13 are engaged in sales and marketing, 9 are administrative and clerical personnel, 3 are in service, and 5 serve as warehouse support. None of the Company’s employees are subject to a collective bargaining agreement.

Quick Valuation

We believe the company is a well-managed business selling for lower than our estimates for intrinsic value. The company is currently trading at a 10 multiple relative to FY 2008 earnings. However, the company holds nearly $1.9 million in excess cash, for a normalized earnings multiple of 7, or approximately 14 percent earnings yield. Our quick estimates indicate the company could be worth anywhere between $7 to $9.4 million, which correspond to a discount of 20 to 50 percent relative to today’s market value of approximately $6 million.

Off-Balance Sheet Arrangements

The company has no off-balance sheet arrangements.

Corporate Governance

We believe the company has excellent corporate governance principles because management interests are directly aligned with the interests of shareholders. Executives and Officers of DCU own approximately 67% of all outstanding shares.  As it should be, officers have an invested interest in enhancing shareholder value: they will never make money unless shareholders do.

Furthermore, DCU has no plans or arrangements with any Executive Officers which provide for the payment of retirement benefits, or benefits that would be paid primarily following retirement, other than the Company’s participatory Section 401(k) Profit Sharing Plan which is a deferred compensation plan under which the Company matches employee contributions up to 2% of an eligible employee’s yearly compensation.  

Also, the company has no contracts, agreements, plans or arrangements that provide for the payment in the future to any company executive following or in connection with his resignation, other termination of employment or a change in control of the company.

The company’s five directors each receive a fee of $5,000 per annum with the exception of the chairman, which receives $10,000 per annum for his services.

Finally, the Chairman role is occupied by an independent officer.

Possible Catalysts

Last December, DCU received a proposal from members of the Steiner family, the principal stockholders of the company, to acquire all of the outstanding shares of the company’s common stock for $0.85 per share. However, the Steiner family later withdrew the proposal without providing the reasons. We believe that the company will eventually merged with companies under the control of the Steiner family, but it is impossible to know just when.

Conclusion

We believe the company is a well-managed business selling for lower than our estimates for intrinsic value. Even if a merger with businesses under the Steiner family never occurs, we believe there is great value in DCU due to its superior management, stable earnings stream, and its low-risk operations (no leverage).

Disclosure: We own DCU shares.