Book Profit in This Small-Cap Specialty Retail Stock – ELA

Mar 03, 2022 12:00 AM PST | Team Kalkine
Book Profit in This Small-Cap Specialty Retail Stock – ELA


Envela Corporation

Envela Corporation (NYSE: ELA) and its subsidiaries are involved in several recommerce-related businesses, including the recommercialization of luxury assets (jewelry, diamonds, fine watches, and so on), asset recycling, IT asset management services, and providing services to industrial and commercial businesses. Its subsidiaries are 1) DGSE, LLC, which specializes in the recommercialization of hard luxury assets through the Dallas Gold & Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands; and 2) ECHG, LLC, which refurbishes and resells consumer electronics and IT equipment.

Why Should Investors Book Profit?

  • Margin Stress: The company reported gross margins of 21.5% in Q3FY21 (ended September 30, 2021) compared to the industry Median of 41.5%, indicating significant stress on the topline performance. ELA reported an EBITDA margin of 7.6% in the period under consideration, lower than the 8.5% reported in the same period of the corresponding previous financial year.
  • Leveraged Balance Sheet: The company is more exposed to balance sheet risk than its peers, with a Debt/Equity ratio of 0.61x as of September 30, 2021, compared to the industry norm of 0.42x. Furthermore, its long-term debt-to-total-capital ratio was 36.5%, compared to the industry average of 16.1% for the same period. These leveraged financials put the corporation at risk of huge swings due to the slightest adjustment in interest rates.
  • Voting Concentration Risk: N10TR, LLC and Eduro Holdings, LLC, two entities controlled by ELA's CEO, owned 47.7% and 23.7% of its common stock, respectively, as of December 31, 2020, gaining substantial control over the company's operations and limiting the ability of other shareholders to influence corporate decisions.

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

ELA's share price has declined 4.24% in the past six months and is currently trading close to the mid-band of the 52-week range of USD 3.51 to USD 6.31. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 3.75.

Considering the company's increasing debt, weak margins, current valuation and associated risks, we recommend a "Sell" rating on the stock at the closing price of USD 4.18, up 1.95% as of March 02, 2022.             

Three-Year Technical Price Chart (as of March 02, 2022). Source: REFINITIV, Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.