The environment is "hot" these days. Environmental stocks are booming. And environmental companies are rushing to market to sell stock to enthusiastic investors. While nobody knows how many decades it will take to purify our air and water, one thing is clear: The folks who are in the cleanup business already are cleaning up in the stock market.
The recent wave of new stock offerings, followed by rising prices, has been prompted by President Bush's clear desire to end pollution and by Congress's apparent willingness to stiffen the requirements of the Clean Air Act.
The administration recently estimated that the Senate version of the bill could require U.S. businesses to spend as much as $21.5 billion annually by the year 2005 -- when the measure would be fully in effect. Those numbers are mouth-watering to any business executive operating a fleet of garbage trucks or selling air scrubbers or water purifiers.
Joining the list of companies that have climbed on the stock sale bandwagon is Environmental Elements Corp. of Baltimore, a company with an unprofitable past and an uncertain future. Like many companies in the antipollution business, Environmental Elements may find the big bucks are somewhere off in the future.
Environmental Elements is offering 2.3 million shares at a price range of $14 to $16 a share. At a mid-price of $15, the offering would raise $34.5 million before expenses.
Only a portion of that would go to the company, which is selling 1.6 million shares worth $24 million while current shareholders are selling 700,000 shares worth $10.5 million. The underwriters are Kidder, Peabody & Co., of New York and Legg Mason Wood Walker Inc. of Baltimore.
One of the unusual features of the offering is that Legg Mason owns 13.6 percent of the stock of the present company and Raymond A. "Chip" Mason owns 6.6 percent of the stock. Mason is the chairman of Legg Mason, a major regional brokerage firm, and from 1983 to 1988 was chairman of Environmental Elements.
Because of this situation, Kidder, Peabody will be the lead underwriter and will be solely responsible for the pricing of the deal when it comes to market.
"Chip" Mason and his firm got into the Environmental Elements business in 1983 when the firm was a division of the Koppers Company Inc. of Pittsburgh. The managers of Environmental Elements did a management buyout of their division and Legg Mason served as their investment banker. Legg Mason accepted stock in the new company in lieu of part of its fee.
In the new stock offering, Mason will sell 55,888 shares, worth $838,320, while Legg Mason will sell 139,721 shares worth $2.1 million.
Chairman Richard E. Hug, who has recently given up the title of chief executive officer, will sell 279,441 shares worth $4.1 million. President F. Bradford Smith, who took on the CEOs title, will sell 55,888 shares worth $838,320.
At any rate, after all the shares are sold, company insiders still will control 59 percent of the company.
Investors who may be interested in the Environmental Elements deal will need to read the offering prospectus carefully.
For one thing, relatively few companies come to market showing four straight years of losses and a single year of profit. For another thing, few companies come to market with negative net worth.
In the case of Environmental Elements, as of March 31, the company had a negative tangible net worth of $7.1 million, along with a working capital deficit of $3.5 million.
Clearly, as the company notes, red ink will magically turn to black ink when the stock offering is completed and brings in an estimated $24 million.
When the 1983 management buyout took place, Environmental Elements was engaged many kinds of antipollution work, including water and wastewater treatment, industrial waste incineration and noise pollution.
The company doesn't say what happened to those activities, but over the last three years the officials got rid of the firm's non-air pollution control business and its manufacturing operations.
During the three years ending March 31, 1989, the company lost $10 million from continuing operations, of which $7 million was the cost of its manufacturing operations, including the cost getting rid of them.
And that effort, the company seems to hope, but naturally can't guarantee, should put it on the road to profitability. Indeed, the firm showed a $1 million profit from continuing operations for fiscal 1990, which ended March 31.
Also on the plus side, the company says, its backlog of work grew to $102.8 million in fiscal 1990, up 91 percent. And its sales moved up to $57.8 million, up 25 percent.
Environmental Elements specializes in large, custom-engineered air pollution systems and its principal customers are in three areas: electric utilities, pulp and paper producers, and garbage incinerators operated by municipalities.
As of March 31, the company was getting 34 percent of its contracts from electric generation customers, (up from 16 percent the year before); 55 percent from pulp and paper production (down from 80 percent); and 10 percent from municipal incinerators (from none the year before); 1 percent from other sources (down from 4 percent).
A key feature of future business, the company believes, will be the need of many companies to replace older systems.
And so, having been through a management buyout and a restructuring, the company is lean and presumably means to be a vigorous competitor in the highly competitive air-pollution control business where virtually all of the company's contracts are subject to competitive bidding.
But in the end, Environmental Elements's future business will depend, in large measure, on the government forcing industries to comply with its air-quality standards, which will soon get much tougher. Indeed, the company is banking on it.
"The company believes that currently proposed amendments to the federal Clean Air Act, if enacted, will further increase demand for its systems and technologies by imposing more stringent air pollution standards," the prospectus declares.
The question for would-be shareholders, therefore, is where Environmental Elements goes from here. It doesn't seem to matter quite so much where the company has been because both the company and its business are changing dramatically.
But the bonanza, if there is one, may not be just around the corner. It's probably quite far down the road, which means that it could take several years before investors in Environmental Elements see some truly blue skies.
Hechinger Co., long one of Washington's premier stocks, has sagged badly in the last year as profit margins have come under pressure for reasons relating to everything from the weather to the company's expansion. And when Hechinger recently reported quarterly earnings of 23 cents a share, compared with 21 cents a year earlier, analyst Wayne Hood at Prudential-Bache Securities in New York was clearly disappointed.
It was, Hood said, below his estimate of 27 cents and compared unfavorably with the performance of two rivals, Lowe's, which reported a 50 percent gain, and Home Depot, which showed a 45 percent increase.
So Hood lowered his fiscal 1991 earnings estimate to $1 from $1.20 and his estimate for the following year to $1.35 from $1.50. And then, Hood said, "We continue to rate Hechinger a 'sell.' On any strength in the stock," he added, "we would swap into Home Depot." Ouch!
The Laurel Federal Savings Bank, based in Laurel, Md., has created a holding company, Laurel Bancorp. Inc., and sold 864,000 shares out of a projected 1 million share offer. The price was $7 a share, raising about $6 million before expenses. The thrift institution has a long history. It first was incorporated in 1869 as Laurel Building Association of Prince George's County. Today, the institution has assets of $96.7 million. The shares will be traded in the Nasdaq over-the-counter market under the symbol LAUR. endquad