Monday, May 12, 1997

Eastern Environmental Services Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EESI)") else Response.Write("(Nasdaq: EESI)") end if %>
Phone: 609-235-6009
Price (5/12/97): $14 5/8

HOW DID IT DOUBLE?

Eastern Environmental Services is collecting more garbage than ever and has begun to turn it into gold. This company is taking advantage of the wave of consolidation in the garbage business that has resulted from more stringent landfill regulation and environmental laws. Many smaller operators are anxious to sell and Eastern Environmental is quite willing to buy.

In the process of buying up solid waste collection and landfill companies, Eastern Environmental has tripled revenues. Prior to the last two quarters, this was no great advantage as the company's bottom line looked like it was headed for the landfill. A new board of directors and management team, however, appears to have turned the situation around, and for the company has posted positive earnings numbers for the past two quarters.

Industry consolidation, new management, and improved earnings have resulted in the share price doubling in the past 5 months and increasing nearly fivefold over the past year.

BUSINESS DESCRIPTION

Eastern Environmental Services is into garbage, plain and simple. It focuses on the eastern U.S. where solid waste management services are in demand. In addition to the collection of non-hazardous waste, the company operates landfills in West Virginia, Kentucky, South Carolina and Illinois.

The company has been very active in acquisitions and over the six months, and has recently contracted for waste hauling services for Cherry Hill township in New Jersey.

It is the company's goal to become a regionally integrated solid waste disposal company. With a new management team in place, the company appears to be on the way to filling up its landfills.

FINANCIAL FACTS

Income Statement

      12 month sales: $25.4 million
      12 month income: ($4.2 million)
      12 month EPS: ($0.69)
      Profit Margin: N/A
      Market Cap: $188.7 million

      Balance Sheet
      Cash: $5.1 million
      Current Assets: $14.8 million
      Current Liabilities: $14.1 million
      Long Term Debt: $18.4 million

      Ratios
      Price-to-earnings: N/A
      Price-to-sales 7.4

HOW COULD YOU HAVE FOUND THIS DOUBLE?

If an investor had an interest in the garbage business or was interested in sifting through stocks that looked like garbage, Eastern Environmental might have been noticed. The only factors that might have led an investor to take a chance on these stubs were the new management team installed early last summer, the knowlege that the garbage industry is consolidating, and taking some notice of insider buying activity. At the exact lows of late December, three insiders bought shares, a bullish sign.

Looking at the stock from a Foolish standpoint, there was little about these shares to attract interest. Let's face it, one look at the past performance of this company would have kept most investors away. But, from the standpoint of bottom feeding, turnaround-type investing, it might have sparked interest.

WHERE TO FROM HERE?

The negative earnings over the past year make it impossible to calculate a PEG. Two analysts that follow the company provide a mean earnings estimate of $0.62 per share for fiscal year 1998, meaning that the company is trading at almost 25 times earnings a year and a half away. The average growth in the solid waste industry is 12% per year according to First Call estimates. Eastern Environmental would have to grow at twice the industry average to justify the current price.

However, this company is growing sales at a prodigious rate because of acquisitions. The problem for the investor is to wade through the details of each acquisition to see if it adds to the bottom line in an amount incremental to the increase in sales. As has been previously noted with these "consolidators," they are a moving target for analysis. Just about the time you get a handle on prospects based on current financial statements, the company buys another entity and the process starts over again.

In this Fool's opinion it will take a whole lot of dumpsters to make for another double in this stock. Over the past 6 months, Eastern Environmental has turned garbage into gold, but I wonder, is it fool's gold?

-Mark Weaver, MD ([email protected])

WE DELIVER - Get The Daily Double delivered
straight to your e-mailbox every evening!