Brief Business Description
Envela Corporation (NYSE:ELA) is a holding company for two related recommerce businesses.
Dallas Gold and Silver Exchange, LLC (DGSE): a recommerce business engaged in buying and selling of metals including jewelry, diamonds, fine watches, rare coins, precious metals and bullion, collectibles, scrap metal, and other valuables. It also engages in the restoration of these items.
Echo Consolidated Holdings Group, LLC (ECHG): an e-recycling business engaged in the processing, recycling, and resale or disposal of electronic waste, hardware components, and IT hardware/assets. ECHG provides transportation, tracking, and end-of-life recycling to extend useful life of electronic devices through recommerce when possible.
Investment Thesis
1. Aftermarket products and second-hand goods are recession-proof; certain goods within these defined baskets witness increased demand during recessions. We define these products as the closest comparables to Envela’s Dallas Gold & Silver Exchange division.
2. Growing demand and acceptance of secondhand goods as whole goods.
3. Precious metals prices eclipsed all time highs in 2020 and will end the year up more than 22% from one year ago.
4. E-waste and IT asset disposition are externalities of the IoT, cloud software, and datacenter ecosystem. E-waste management and IT asset disposition are young, growing markets with environmental, administrative, institutional, federal, and municipal catalysts.
Catalysts
• DGSE: Breakout Q3 2020 revenue will sustain in Q4
• ECHG: E-Waste Management and IT Asset Disposition markets anticipate multi-decade growth.
• ECHG: segment growth will drive consolidated margin expansion.
Q3 2020
In November 2020, Envela Corporation reported consolidated revenue of $39 million, up 69% YoY. Net profit for the quarter eclipsed net profit for all fiscal 2019, up 188% YoY.
• DGSE segment revenues were $28 million, up 69% YoY.
• ECHG segment revenues were $11 million, up 72% YoY.
Following the announcement, shares hit an intraday high of $5.30, up 22% from previous close, but ended the day only 7% up, down to $4.67 a share. We feel the business is substantially undervalued today.
Valuation
We price Envela Corporation at $11.77 a share, delineating 135% upside. The ECHG segment is a growth asset; but based on Q3 cash flow, Envela is undervalued even in our zero-growth model. We delineate in our discussion why we believe Q3 is not an anomaly and further deduce a two stage model is viable.
