I got interested in Angelica (NYSE:AGL), the largest provider of outsourced linen-management services for the health-care industry, because it's recently been the target of activist hedge funds. Pirate Capital and Steel Partners are among those taking an interest; the latter group has two representatives on Angelica's board of directors. In a 13-D filing, Steel Partners expressed concern that Angelica's management was overly focused on making value-eroding acquisitions, urging that it needed to focus instead on profitability.

On Monday, Angelica reported third-quarter results that seem to indicate it's taking a small step in the right direction. Gross margins improved 330 basis points year over year, thanks to flat production expenses and pricing increases. Unfortunately, SG&A costs also increased 240 basis points year over year because of a couple items, such as higher expense accruals and some one-time expenses. Operating income showed a nice improvement, rising to $5.2 million from $2 million, but $2.4 million of that increase came from sales of real estate and settlement receipts. Excluding these non-recurring items, operating income was about flat.

Although these results aren't anything to write home about, they do indicate that Angelica is pointed in the right direction. In the earnings conference call, management stated that the company should see SG&A leverage continue to increase as many of the one-off items related to consulting fees go away. The company also seems to be focused on operational improvement, emphasizing customer retention, "delighting" the customer, and process improvement through things like route optimization.

I definitely think Angelica is worth a closer look. The $5.8 billion health-care linen-services industry is heavily fragmented, with Angelica's $386 million in sales in this market about twice that of the next closest competition. If management can make good on its plans for a 20% gross margin -- it currently stands at 16% -- then the additional 4% of gross margins on Angelica's $420 million in sales will equal $17 million in additional gross profit. That's not chump change for a company with a $200 million market cap. It also helps that Angelica shareholders have co-investors such as Pirate, which has helped unlock value at other companies such as CKE Restaurants (NYSE:CKR), Intrawest, and Pep Boys (NYSE:PBY).

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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates comments, concerns, and complaints. The Motley Fool has a disclosure policy.