New Buy Recommendation


EV Environmental

Back to April-May 1997 Newsletter


Our Phone Service investors were informed to purchase EVEN @ $ 13/32 on April 2, 1997. Our 900# investors were urged to buy EVEN on April 3, 1997.

EVEN specializes in the design, engineering, manufacturing and contracting of sewage and waste treatment plants. 1997 revenue estimated at $17 million (conservative - could actually reach $22 million) and net of at least $1 million or 15¢/share (based upon $6.7 million shares outstanding).

Huge NOL, book valued around 40¢ - reduced overhead by at least $1 million, around 100 employees. During 1996 successfully raised $2 million. Super attractive PE, PSR, CF and P/B.

EVEN belongs in every micro-mini cap portfolio geared toward short and long term growth. We think that this investment opportunity is a rising star! EV Environmental, Inc. (EVEN - NASDAQ) was incorporated in Delaware in 1990 and is engaged in the manufacture, distribution and engineering of products used to treat water and wastewater. The company's business strategy is based on expansion of its participation in the growing water and wastewater treatment market in the United States and Canada. The company intends to pursue a business strategy of expansion through the growth of the existing business, introduction of new products and through acquisition.

The company's marketing strategy is to offer to targeted industries a full solutions approach to the customer's wastewater discharge problems. Since such problems are similar throughout an industry, the company has targeted certain industries which it has penetrated for expansion of its customer base. Currently, these industries are food processing, pulp and paper, textiles, contract operations or municipal treatment plants, and, on a regional basis in the Midwest, municipal wastewater engineering services. Other target industries will be added as the Company identifies opportunities, and will be addressed by developing capabilities, hiring key individuals, and adding to technologies with a presence in a target industry.

The Company believes that its systems and operating capabilities provide positive returns on investment for many of its customers. Positive returns from using the Company's systems arise a number of ways, including reductions in the surcharges which customers are assessed for discharges which can be alleviated by treatment; decrease in the use of energy; decrease in chemical and maintenance costs; recovery of saleable or reusable materials from the waste stream; and providing water suitable for reuse in the customer's processes. As freshwater resources are stretched by growth in many regions, the Company believes that reuse of wastewater will become the most economically viable source of additional water. In regions where freshwater use is restricted, it is possible for a customer to expand operations by recycling wastewater or alternatively, to sell water rights to other users. Coupled with reduced operating costs and sewage surcharges, investment in the Company's systems can be economically attractive.

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Products and Services

Although the Company's products are water treatment systems, the Company believes that its solutions-oriented service approach to its customers is a key factor in obtaining business. In many instances, the Company is the single supplier for the complete treatment system. In such situations, the Company is able to control all facets of the system, which minimizes the customer's burden of compliance with its discharge requirements.

The Company's principal products are wastewater treatment systems designed to meet customers' specific treatment needs. These systems are varied in size (based upon the volume to be treated) and complexity (based upon the contaminants to be treated). In some instances, the Company sells components rather than complete systems, both to its competitors and directly to customers or their consultants.

Federal government deficits have decreased the amount of funding available to local sewage treatment authorities to expand existing treatment facilities. Because many facilities are operating at or near capacity, local governments have been forced to enforce wastewater discharge requirements as a means of reducing the volume to be treated by their facilities. The result is that most industries with significant waste streams must install or improve their own pretreatment facilities to reduce the amount of wastes discharged. Management of the Company expects this trend to continue as the phase-in requirements for the level of treatment of wastes become more stringent in both the U.S. and Canada.

Management of the Company believes additional impetus to reduce the contaminant level of waste streams will occur in localities where ample freshwater is not available. Treated water from the discharge stream can be reused to reduce freshwater requirements.

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PRICE 13/32
Box A
Year ended Dec 31
1994A 1995A 1996E 1997E 1998E
Revenues 9.75mil 13mil 14.5mil 17mil -22mil NA
Net Income (Loss) (375K) (3.1mil) 165K 1,000,000 -1,914,000 NA
Net Income (Loss) (.19) (1.50) (.03) .15 - .29 NA
Shares outstanding 2mil 2076000 5.5 mil 6.7mil* 6.7mil
Quarterly revenue and earnings estimate 1997
1st Quarter E 2nd Quarter E 3rd Quarter E 4th Quarter E
Revenue 3.1 mil 4.1 mil 5.3 4.5
Net Income 67K 268K 402K 268K
Income per share .01 .04 .06 .04
A=actual; E=estimate; *=results from the conversion of 3 reg offerings - netted the company around $1.75 million; **=the company has outstanding $1.9 million of its 9% Convertible Subordinated Debenture, due October 31, 1999. The Debentures are convertible at a conversion price of $2.50/share - conversion rate of 400shares/$1000 Debenture.

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Box B Fundamental Comparison of
Related Companies
Symbol	Price		Earnings E for		Earnings E for

			1997 & PE est		1998 & PE est 

EVEN	  .375	 	.15 (Dec)		(Dec)

FLR	59 1/2		3.51 (Oct) 17x		4.09 (Oct) 14.5x

FWC	39		2.53 (Dec) 15.4x	2.91 (Dec) 13.4x

JEC	25 3/4		1.77 (Sep) 14.5x	2.03 (Sept) 12.7x

	Average PE		15.6x			13.5x

Companies: EV Environmental Inc. (EVEN), FLUOR (FLR), Foster Wheeling (FWC), Jacobs (JEC)
FLUOR, FOSTER WHEELING and JACOBS are global giants that provide engineering, design, consulting and contracting for opportunities in markets driven by the need for more power, more energy, transportation and infrastructure upgrades.

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Fundamental Analysis

First and foremost, EV Environmental is a NASDAQ small cap that is in good standing. Upon review of Box A, it is easy to conclude that EVEN has had consistent revenue growth during the past three years - earnings on the other hand have been relatively disappointing, but it is in our opinion as well as discussions with management that an earnings turnaround is definitely in place (Note: during 1996 EVEN reduced G & A by over $1 million and in addition raised $2 million via equity financing).

Upon examination of estimated numbers presented in Box A, a very compelling investment opportunity in our opinion emerges. The minimum growth rate in revenues according to management is 17% on the low side and 52% on the high side. Earnings/share is equally impressive; that is, on the low side earnings during 1997 are estimated at 15¢ and on the high side 29¢. These numbers should make shareholders extremely pleased. When one considers that EVEN is currently trading around 37¢ - 41¢, with estimated earnings of 15¢, a very attractive PE multiple jumps out - that is 2.5x 1997 estimated earnings.

Why is this stock trading at such ridiculous multiples? Answer: under-followed, obscure, recent equity financing and past history of earning losses. This is the past. We are buying EVEN for the future!

Let us examine what this stock should really be trading at when all variables are considered. If we assign a PE valuation based upon the low end of revenue growth; that is 17%, and assign a PE of 17 to EVEN, then our share price would come in at $2.55, a value that is 521% above the current price. If we were to assign a PE value of 16 (which is where the S & P 500 is currently trading at), then our share price would be $2.40. If we were to assign a super conservative PE of 10 to EVEN based upon its estimated earnings of 15¢, then our share price would be $1.50.

If we take in account book value (EVEN has a stated book of around 40¢) and assume conservatively that it should and could trade at 2x to 3x book, then our share valuation could approach 80¢ - $1.20. When we take in account PSR (price to sales), EVEN currently sports an estimated PSR of .16, that is 16% of sales. If we were to assign a PSR of .5 or 1/2 sales or even 1 times sales, which are values that indicate cheap and under valuedness, then our share price equals $1.25 and $2.50, respectively, or 3 and 6 times the current price.

Upon review of CF/share (cashflow=income and D&A), it is estimated that EVEN will earn on the low side $1 million. If we assume D&A will equal around $500K, upon combining both values and dividing by the total number of shares outstanding, a value of 22¢/share emerges. With the current price of 41¢, EVEN trades at an estimated 2x cash flow, once again a value that is way too low. The group of companies located in Box B are, of course, much larger than EVEN, but conduct similar business activities. For the most part, these companies are trading between 10 and 11 times cash flow. If we were to assign a share price based upon these variables, then EVEN could trade at $2.20 and $2.42, respectively, or 5.3x to 6x EVEN's current share price.

Finally, upon review of Box B where we developed an average PE value based upon 1997 earning estimates for these peer companies, namely FLR, FWC and JEC, a resulting average PE equals 15.6 for the group. If we were to assign this value to EVEN, then our share valuation would equal $2.34, again 5.7x the current price.

Bottom Line: Every fundamental variable discussed, that is PE, PSR, CF/P, book value, indicates an investment opportunity with extremely low downside risk and super huge upside potential during the next 12 months.

You have to own this opportunity.

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EV Environmental, Inc. should not be overlooked. The real risk is not owning EVEN at current level.

  1. The businesses of water treatment and wastewater treatment have substantially benefitted from federal, state, provincial and local regulation of environmental and water quality matters. The two principal US federal statutes which substantially affect the company's business are the Revised Clean Water Act of 1987 and the Revised Safe Drinking Water Act of 1980. Many states and provinces regulate and enforce water and wastewater treatment as well. These regulatory and enforcement efforts have created a strong demand for the company products. Very Bullish.
  2. Fundamental variables, namely, PE, PSR, CF and P/B, indicate extremes in an undervalued investment opportunity. Super Super Bullish.
  3. EV Environmental, Inc. trades as a small cap on NASDAQ system and can be monitored daily (symbol EVEN) in all major newspapers. Bullish.
  4. Successfully raised $2 million during 1996, used for working capital and debt reduction. Bullish.
  5. Reduced G&A by more than $1 million during 1996. Very Bullish.
  6. Revenue growth during 1997 anticipated to exceed 17% over 1996. Earnings are anticipated to skyrocket by 1700% over estimated loss of (.03) for 1996 versus net income of 15¢/share of 1997. Extremely Bullish.
  7. NOL (net operating loss) for EVEN equals approximately $5.1 million at the end of December 1995. NOL begins to expire in 2007. EVEN won't be paying any taxes for many years. Very Bullish.
  8. Company presently employs 100+. It is the small company that grows America. Bullish.
  9. EVEN is under owned, under-followed and severely undervalued. Very Bullish.
  10. Capital spending in the US alone during 1996 was around $600 - $700 billion. Bodes well for EVEN to grow dramatically due to huge market size. Very Bullish.
  11. When compared to peer companies, EVEN looks very cheap. Fundamentally Bullish.
  12. Growing backlog, G&A reduced dramatically and LTD reduced. Bullish.
  13. When we averaged all values generated from fundamental analysis, we generate a share price of $1.84 (taken into account all calculations from assumptions with respect to PE, PSR, P/B, CF/P), roughly 4.5x the current price. Bullish with a cherry on top! We will be monitoring 30,000 shares of EVEN in our $100K master portfolio for percentage gain performance. In addition, we will monitor EVEN in our 900# section for percentage gain performance. Broker contact: Greg Nelson at 1-800-453-9408; Mike Chesler at 1-800-331-1355. EVEN Corporate Number: 203-256-9596 (Mr. Cox).

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Copyright © 1997 S.A. Advisory