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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Hank who wrote (5526)	3/25/1998 4:21:00 PM
From: put2rich	Read Replies (1) \| Respond to of 18691

fyi: Will EarthShell biodegrade? Questions surround packaging company's plan, valuation By Darren Chervitz, CBS MarketWatch Wed Mar 25 16:10:32 1998 NEW YORK (CBS.MW) -- What's the value of a company that has lost over $74 million developing a disposable packaging material for the food service industry, but doesn't plan to generate any revenue until the first quarter of 1999? According to Wall Street, such a company is worth about $2.1 billion. At least that's the value being placed on EarthShell Container Corp. (ERTH), which went public Tuesday at $21 a share, the top end of the expected range, in a 13.2 million share deal handled by Salomon Smith Barney and CS First Boston. The company's shares, which have traded as high as 24 3/16, fell Wednesday 11 percent to 20 31/32. With more than 100 million shares outstanding, EarthShell is still valued near the same level of Bemis Corp. (BMS), a competitor which had more than $1.8 billion in sales last year. Sound crazy? Some analysts seem to agree. "This one tough's to defend, tough to justify," said Ryan Jacob, research director at IPO Value Monitor. "Investors buying at these levels are taking substantial risk." At one of the EarthShell's roadshow presentations, which are closed-door sessions intended to drum up interest in the IPO, one of the money managers in attendance sarcastically asked the company executives why they decided on a $2 billion valuation instead of $5 billion or $10 billion, drawing laughter from others in the audience. Not that the company's plans don't sound appealing. EarthShell has concocted a proprietary recipe -- a mixture of limestone, natural potato, corn and other ingredients protected by nearly 80 patents -- to create inexpensive, environment-friendly food packaging that it hopes will capture a sizeable portion of the $8.3 billion U.S. market, most of which is currently spent on styrofoam products. McDonalds Corp.'s (MCD) main supply purchaser has agreed to buy at least 1.8 million EarthShell containers for the fast food restaurant's Big Mac sandwich over the next three years. EarthShell licensee Sweetheart Cup Company has agreed to manufacture the containers, giving EarthShell 20 percent of total revenue. However, the agreement with McDonald's is non-binding and can be canceled at any time. The containers will not start shipping until 1999, and EarthShell warns that delays are possible since it "has not yet produced its products on a fully integrated production line." The McDonald's deal has actually been in the works since 1991, but numerous technical problems and other issues have held back a massive rollout of the product. EarthShell chairman Essam Khashoggi and EKI, another Khashoggi-controlled company that actually developed the packaging material, own more than 70 percent of the newly public entity. EKI has licensed the technology to EarthShell, which can only use it to create disposable food service products, meaning single-use containers for food or beverages intended for quick consumption. That license limits EarthShell to a worldwide market that totaled about about $13 billion in 1997. In its roadshow, EarthShell hinted that other deals aside from McDonald's were in the works, but declined to be more specific, said Dan Dykens, analyst at the Greenwich, Conn.-based IPO research firm Renaissance Capital. But if the McDonald's deal does go through as planned, the mega-chain will have first claim on any other disposable product EarthShell develops. Under certain circumstances not explained in the prospectus, McDonald's will also have the right to forbid EarthShell to sell such products to other fast food restaurants until its own demand has been completely filled. Other publicly traded package companies, such as Bemis and Sonneco (SON), are trading at about 1 1/2 times trailing sales, according to Dykens. At current prices, EarthShell "should have had sales of $1.1 billion last year, just to get in the ballpark," he said. According to estimates obtained at the company's roadshow, EarthShow isn't expected to reach a billion dollar in sales until 2002. Competitors are developing environment-friendlier packaging as well, and EarthShell warns in its prospectus that such products "could render the Company's technology obsolete." The proceeds from the IPO are being used to develop manufacturing capacity for the EarthShell products (which doesn't currently exist), research and development, advertising, and to repay debt owed to EKI and the company's bank.

To: Hank who wrote (5526)	3/25/1998 4:22:00 PM
From: Lazlo Pierce	Read Replies (2) \| Respond to of 18691

<<Looks like somebody is taking the opportunity to sell on the news today. The move to 24 occurred on 175K volume but the volume is now up over 800K and the price has been steadily moving down all day since it peaked at 24. Looks like some big shareholders are dumping all they can.>> ***************** Except it closed at the high of the day. Man, one day..... Dave