WHO'S DOING YOUR LAUNDRY? MAC-GRAY

STOCK OF THE WEEK

Midnight, musty college dorm basement, dirty laundry, not enough quarters and no empty machines! Sound familiar? I wish Mac-Gray had been around during my college days. Mac-Gray offers payment of laundry through college ID cards, allows one to schedule a machine online and the washer will send an email when the load is done!

Years ago, when one of my high school friends needed spending money, he would asked his Dad for the keys to the apartment laundry. In those days, when a gallon of gas was 27 cents and a burger at McDonald's cost 17 cents (15 cents for fries), the quarters from the laundry came in handy. Years latter, as owners of Myrtle Beach rental condos, Marilyn and I enjoyed hearing the stories about the condo operator who has three basement freezers full of quarters. One owner of a few apartment laundromats used to rent our highest priced condo for multiple summer weeks. There is money to be made in the "coin operated" laundry business.

However, the nature of the business is changing. There are still many "Mom and Pop" competitors but smart companies like Mac-Gray are gradually taking over. By replacing the quarter slots with card readers, these companies are eliminating much of the theft and vandalism that plagued the industry in years gone bye while making price adjustments easy, maximizing profit margins and increasing management efficiency.

Mac-Gray is North America’s premier laundry facilities contractor and a provider of other amenities to the multi-housing industry. Mac-Gray Macgray operates two primary businesses – Laundry Facilities Management and Product Sales. Trading on the NYSE under (TUC) since 1997, the company is the nation’s largest laundry facilities contractor for colleges and universities, operating on approximately 500 campuses.

The founder, H. Stewart Gray, sold Maytag wringer washers door-to-door from the back of his Ford truck. During the Great Depression, when most people could not afford their own appliances, he pioneered the “pay as you use” laundry service by installing coin boxes on washing machines. More about the "new" business later but first lets go over the numbers.

Mac-Gray reported record fourth-quarter revenue of $49.7 million, an increase of 23% from 2003 fourth-quarter. For the year ended December 31, 2004, the company reported record revenue of $182.7 million, an increase of 22% from revenue of $149.7 million for 2003.

"For the full year, our results reflect the combination of both record internal growth and record acquisition-related growth. Our core laundry facilities management business posted a 30% increase to $136.7 million in 2004 versus $104.8 million in 2003. The incremental acquisition revenue in 2004 was $28.3 million, in line with our stated projection of an annual run rate of $29 million, and 89% of the division's increase. The margin contribution also met our expectation, as has our success rate in retaining or renegotiating acquired contracts. The organic growth rate of 3%, or $3.6 million, in the division's revenue reflected a record number of net new contracts placed in service, selective vend price increases, and the conversion of coin-operated accounts to card-operation, which leads to higher revenue.” said Stewart MacDonald, Mac-Gray's chairman and chief executive officer.

"The outlook for Mac-Gray is stronger than at any point in recent history, in light of our 2004 results, our second significant asset acquisition, which closed in January 2005,* and our organic growth momentum. With this recent acquisition, which had 2004 revenue of $69.5 million, we extended our footprint to a national scale, augmented our position as the top provider to the college and university market and enhanced our strong, geographically diversified operating platform. In addition, we gained many more opportunities for leveraging our fixed costs through fill-in acquisitions that would increase our density and profitability in certain targeted markets."
"Additionally, apartment occupancy rates, which are a key driver of machine usage and laundry facilities revenue, improved in 2004 in most of our markets, reversing a three-year downturn. Mac-Gray is well positioned as it continues to lead the industry in technology innovation. Our Intelligent Laundry Systems(TM) product suite, led by LaundryView(TM) and PrecisionWash(TM), continues to increase our visibility in the academic community and differentiate us from the competition” concluded MacDonald.

*January 05 Mac-Gray announced its acquisition of the operations of Web Service Company in 13 western and southern states.

Mac-Gray contracts its laundry rooms under long-term leases on the lessor’s premises for a fixed term, generally 7 to 10 years with an extremely high renewal rate. In exchange for a negotiated portion of the revenue collected. This generates a stable revenue stream and an annuity-like cash flow. Mac-Gray’s laundry facilities business consists of approximately 45,000 multi-housing laundry rooms located in 40 states and the District of Columbia. Their largest competitor is Coinmach Laundry (NASDAQ: WDRY).

Through its MicroFridge® division, Mac-Gray sells its proprietary MicroFridge® line of products, which are combination refrigerators/freezers/microwave ovens utilizing patented Safe Plug™ circuitry. The products are marketed throughout the United States to colleges, the federal government for military housing, hotels and motels, and assisted living facilities. MicroFridge® has also entered into agreements with Maytag Corporation to market Maytag’s Magic Chef®, Amana® and Maytag® lines of home appliances throughout the United States. MicroFridge® products bear the ENERGY STAR® designation.

Mac-Gray enjoys many competitive advantages; one of the most important of which is their innovative use of proprietary technology. In the 1990s, the company introduced Smart Card technology to their industry, giving consumers the largest cashless washer and dryer system in North America. This innovation led to their Intelligent Laundry Systems™ suite of services, which is designed to simplify and modernize doing laundry, both from the point of view of the resident and the property manager or owner. Thousands of people are being notified via computer, cell phone or PDA that their laundry is done, or, for administrators, that service is required. In addition to distinguishing Mac-Gray from its competition, these innovations have created opportunities to enhance their service, reduce their operating expenses and generate incremental revenue for their shareholders.

Their Intelligent Laundry Solutions™ offer amenities to your residents and your property that can bring unparalleled efficiencies to the laundry process.

LaundryView™ is a web-based system that lets residents check the availability of washers and dryers from their PC. They can receive notification via computer, cell phone or PDA when their cycle has completed.

LaundryLinx™ provides property administrators with a direct link to service dispatch via the Internet for faster response time.

TechLinx™ sends service requests directly to the nearest technician’s phone where ever they are via a instant message in seconds.

VentSnake™ a revolutionary technology that cleans more efficiently than brushes and allows cleaning of vents from the outside, while dryers are working.

With the exception of the fourth quarter in 1999, Mac-Gray has been profitable in every quarter of its very long history. The national housing market (estimated to include 3.4 million laundry machines, $2 billion in revenues) is highly fragmented: Mac-Gray and its two largest competitors account for only 1/3 of total laundry facilities management revenues, providing growth and consolidation opportunities. Closing at $ 8.69 on May 2nd (+.13) Mac-Gray’s is changing the way people view their laundry.

Many a old timer from Merrill Lynch will recognize this as a "Jack Fields" stock pick. Jack made his money by buying solid stocks in fragmented industries. His thesis was simple, the high growth glamor stocks are up against other pros. The fragmented industries can grow by gradually taking "Mom and Pop" out of the picture. And please don't cry for "Mom and Pop", they sell to Mac-Gray because the price is right.

Soon you will be able to go onto a Google map on your cell phone, find a Mac-Gray machine and schedule it for use, wherever you happen to be. Technology is helping improve our lives and Mac-Gray has taken advantage of technology to help customers and shareholders.

Important Note: The writers of this blog are amateurs. We invest and write for personal enjoyment. We do not recommend stocks. We offer free consultation but you must be responsible for your own investment decisions!

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