January 23, 2013, 7:13 pm

SXCP - Suncoke Energy Partners

Wow, did not realize hadn't put anything new on this board since July. I do analyze every ipo for subscribers at tradingipos.com(and have for 7 1/2 year now), however stopped marketing advertising the site as we've already a great core group of traders. Will try and add a few more of these pieces here in 2013 than I did in 2012 though.

SXCP - SunCoke Energy Partners

SXCP - SunCoke Energy Partners plans on offering 14.4 million units at a range of $19-$21. Barclays, BofA Merrill Lynch, Citi, Credit Suisse and JP Morgan are leading the deal, four firms co-managing. Post-ipo SXCP will have 32 million units outstanding for a market cap of $640 million.

Note that ipo proceeds and an additional $150 million debt offering will go to repay debt with 10% also going to parent company SXC.
SunCoke Energy(SXC) will own all non-floated units and the general partnership. SXC was spun off from Sunoco in 2011 and is the largest independent producer of coke in the Americas. SXC owns and operates five cokemaking facilities in the US(including the two in this deal).
SXC is structuring part of their coke production into this partnership structure to help the balance sheet.
Distributions - SXCP plans on distributing $0.4125 per quarter to unitholders. On an annualized $1.65, SXCP would yield 8.25% on a pricing of $20.
From the prospectus:
' We have been recently formed to acquire, at the closing of this offering, an interest in each of two entities that own our sponsor’s Haverhill and Middletown cokemaking facilities and related assets, which will result in us owning a 65% interest in each of these entities.'
65% interest in two cokemaking facilities. The two facilities are among the youngest cokemaking facilities in the US having been in operation at current capacity since 2008 and 2011 respectively. Each are expected to be in operation at least 30 years.
Coke is the principal raw material in the blast furnace steelmaking process.
300 combined cokemaking ovens at the two facilities. 1.7 million tons capacity a year. Operates at full capacity and expects to sell 1.7 million tons in 2013 to AK Steel and ArcelorMittal.
Agreements with two customers have remaining average term left of 13 years. Take or pay agreements. Agreements also include the pass through costs of coal procurement, operating and maintenance costs, transportation costs, taxes and regulation costs. In other words, SXCP has a guaranteed margin in their agreements which should help in forecasting consistent cash flows something you like to see in partnership structures.
Coke demand in the US/Canada was 19.5 million tons in 2011. Slow growth sector, expecting 1%-2% annual growth over the next five years. Approximately 24% of US/Canada capacity comes from facilities that are over 40 years old.
Future dropdowns - SXCP has been granted preferential rights to SXC growth projects and/or acquisitions. Currently SXC is seeking permits for a new facility with 660,000 tons of cokemaking capacity in Kentucky. Project at earliest is a few years away from potential start up operations.
Balance sheet here is not too bad. $129 million in cash on hand, which will help fund environmental remediation and accrued sales discounts. In addition SXCP will have $150 million in debt. All in all, not bad.
Coming just 1.1 X's book value.
Twelve months ending 9/30/12 - $694 million in revenue. Pretty solid operating margins of 10%. Pro forma interest expense ate up just 12% of operating profits. EPS of $2.00 per unit.
2013 projections - $657 million in revenues a decrease of 5% from 2012. Forecasting strong 13.6% net margins after interest expense(again 12% of operating profits). Note that a chunk of those improved net margins are due to sales discounts not included. Adjusted 2013 earnings should match 2012's $2.00 which factors in the 35% of net earnings that SXC will retain.
SXCP is forecasting 115% distribution coverage. That does include $37 million cash on hand used for environmental remediation and accrued sales discount expenses. SXCP is planning on using cash to pay for capital expenditures.
Conclusion - solid 8.25% annual yield(on a pricing of $20). SXC is setting this up to work out well mid-term+ here by not loading up the SXCP balance sheet with debt. In fact SXC is allowing SXCP to utilize 90% of the ipo proceeds to reduce debt. Would not expect much here short term, deal looks pretty solid overall though. Slight recommend here due to solid cash flows. Parent company has substantial debt, so not something to get too excited about.

July 29, 2012, 9:49 am

DFRG - Del Frisco's

DFRG - Del Frisco's

DFRG - Del Frisco's plans on offering 8.1 million shares at a range of $14-$16. Insiders are selling 3.7 million shares in the deal. Deutsche, Piper Jaffray and Wells Fargo are leading the deal, Cowen and Raymond James co-managing. Post-ipo DFRG will have 22.3 million shares outstanding for a market cap of $335 million on a pricing of $15. Ipo proceeds will go towards wiping out most of DFRG's debt.

Lone Star Funds(the main selling shareholder) will own 65% of DFRG post-ipo.
From the prospectus:
'We develop, own and operate three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steak House, or Del Frisco’s, Sullivan’s Steakhouse, or Sullivan’s, and Del Frisco’s Grille, or the Grille.'
High end steakhouse chain. Have never been to a Del Frisco's, but have been to Sullivan's in Denver numerous times when I lived there. Good spot.
Texas based(always good for a steakhouse group) with 32 restaurants in 18 states.
2011 same store sales growth of 11.2%. 6.7% same store sales growth in the first quarter of 2012 with 4% in the second quarter. 9 consecutive quarters of same store sales growth through the second quarter of 2012.
Del Frisco's Double Eagle Steak House - 10 locations. USDA Prime steaks hand cut at time of order. Also serving prime rib, prime lamb and seafood. Extensive wine list. Seating for 300 people. $12.5 million in revenues per restaurant in 2011 with the average check of $100.
Sullivan's Steakhouse - Open kitchen, live music and focus on the bar area. 19 locations with seating for 250 people. $4.4 million in annual revenues per restaurant with average check of $59.
Del Frisco's Grille - Smaller size, lower build out cost than the other two. More diverse menu. Prime steaks, extensive wine menu but also pizza, sandwiches and salads. Less formal than the namesake steakhouse. First Grille opened in 8/11 in Manhattan with three more since in Phoenix, Dallas and DC. Seating for 200 average revenue target is $4.5 - $6 million with check of $50.
***The 'Grille' concept will be the growth driver here going forward.
The New York Del Frisco Steakhouse was the highest grossing restaurant in the steakhouse industry in 2010 and 2011. The New york locations alone accounted for 18% of 2011 revenues.
Growth - 3 restaurants in 2011 including two Grille locations. Thus far in 2012 there have been two Grille openings.
66% food, 34% alcohol revenues.
DFRG believes that each of their concepts can co-exist in a geographic market. Currently six markets have multiple DFRG concepts.
DFRG believes the can open approximately three to five new restaurants total annually.
Private group dining was 14% of 2011 revenues. These are generally corporate events.
Store opening costs - $8 million for a new Del Frisco's Steakhouse, $4 million for each of the other two.
Risk - Economic weakness in the US. DFRG's restaurants rely on robust business and discretionary spending. Same store sales dropped 10%+ in 2009 and really didn't recover until mid-way through 2010. If a recession hits, DFRG's stock price would be impacted...you could say that about most stocks though.
Competition - Plenty in this space, possibly too much for all to thrive. Flemings, Capital Grille, Smith & Wollensky, The Palm, Ruth's Chris and Morton's are the national chain competitors.
$15 million in both cash and debt post-ipo.
4th quarter is strongest seasonally.
2011 - $201.6 million in revenues and increase of 22% from 2010. As mentioned above a strong year of growth with same store sales increasing double digits from a sluggish 2010. Solid 13.2% operating margins. Plugging in minimal debt servicing and full taxes, net margins of 8.3% EPS of $0.75.
2012 - On track for 18% revenue growth in 2012 to $240 million. Operating margins have been ticking up in recent quarters and should hit 15%. Net margins of 9.3%. EPS of $1.00. On a pricing of $15, DFRG would trade 15 X's 2012 estimates.
Closest public comparable is RUTH. Multiple is comparable with the two however RUTH's growth is sluggish single digits at best in 2011, 2012 and forecast for 2013 while DFRG is double to triple that on a growth basis.
Conclusion - Well managed with nine strong quarters of same store sales growth. Ipo allows for the clean up of the balance sheet. Very good looking high end dining ipo. As long as the US economy continues to chug along and avoid a slowdown, DFRG has room to appreciate.

April 12, 2012, 1:48 pm

CSTE - Caesarstone

Note: long CSTE from ipo and expecting similar performance as recent highlighted ipo EPAM.

CSTE - Caesarstone

CSTE - Caesarstone Sdot-Yam plans on offering 7.66 million shares at a range of $14-$16. Insiders will be selling 2 million shares in the deal. JP Morgan, Barclays and Credit Suisse are leading the deal, Baird and Stifel co-managing. Post-ipo CSTE will have 32.37 million shares outstanding for a market cap of $486 million on a pricing of $15. 1/3 of the ipo proceeds will go to pay a dividend to insiders, the remainder to complete distributor acquisition, expand production lines and general corporate purposes.

Kibbutz Sdot-Yam(KSY) will own 53% of CSTE post-ipo. KSY is an Israeli commune established in 1940. KSY founded CSTE in 1987.
From the prospectus:
'We are a leading manufacturer of high quality engineered quartz surfaces sold under our premium Caesarstone brand.'
Engineered quartz slabes primarily for kitchen countertops in the renovation and remodeling end markets. Other end products include vanity tops, wall panels, back splashes, floor tiles, staris and other interior surfaces.
Apparently the use of quartz is relatively new and the fastest growing material in the countertop industry. Between 1999 and 2010, quartz sales to end-consumers have grown 16.4% annually compared to 4.4% total worldwide countertop growth.
In 2011 quartz received the highest overall score among countertop materials from Consumer Reports Magazine.
As of 2010, engineered quartz had just a 4.3% penetration of the global countertop market. In the US penetration is just 5%, however penetration in Australia is 32% and in Israel 82%. The growth opportunity here would appear to be the US as 1) it is an underpenetrated quartz counterop market and 2)Quartz countertop sales are growing and reviews appear to be strong.
Sold in 42 countries via direct sales and distributors. Australia accounted for 34%, US 23% and Israel 15% of 2011 revenues.
***Solid 13% market share in global engineered quartz selling volume in 2010. Leading position in Australia, the US, Israel and Canada.
CSTE has displays in over 8,000 locations in the US.
Sector - Global countertop industry generated $68 billion in end consumer sales and installations in 2010. US accounts for 20% of global countertop sales to end-consumers. Not the best sector to be in 2008 and 2009 as demand is driven by reneovation/remodeling of existing homes and the construction of new homes. A future downturn would undoubtedly hurt CSTE's share price.
***Global countertop market has been flat at best since 2007 while CSTE has shown an 18.7% compoud annual growth rate.
Legal - Since 2008 there have been 14 lawsuits filed against CSTE alleging silicosis through exposure while cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting quartz tabletops. All but one of the suits is in a preliminary stage. One settlement has been settled for $71,970 with CSTE's liability being $2,617.
34% of revenues in Australian dollars, 25% in US dollars and 15% in Euros.
76% of CSTE's quartzite is sourced in Turkey.
$1.50 per share in cash post-ipo, $23 million of debt. Net cash per share is right around $1.
Seasonality - Third quarter tends to be the strongest of the year. First quarter slowest, impacted by slowdown in new construction and renovation in the winter months(and public holidays in Australia).
Revenues dipped slightly in 2009, but have rebounded strongly since. CSTE has outperformed the worldwide countertop sector since the 2008 economic recession.
CSTE remained profitable through the 2008 and 2009 worldwide economic slowdown. Impressive considering CSTE's end market housing renovation and new builds were hardest hit in the slowdown and have really yet to recover.
***In 3/11 CSTE acquired full ownership of their US distributor. Accounting wise this market 2011 revenues appearas if they've grown much stronger than they actually have. We've accounted for this below.
2011 - $282 million in total revenues, an 'apples to apples' increase of approximately 10% from 2010. 40% gross margins. 14.6% operating margins. 15% tax rate plus minimal debt servicing expense puts net margins at 12%. EPS of $1.05.
2012 - Plugging in 8%-10% growth in 2012 puts us at $305 million. Very mature market in Australia, the US should be driving this growth in 2012. Again, keep in mind 2011 and the quarterlies look far stronger than anything CSTE had done before. This is a direct result of an accounting change when CSTE purchased their US distributor and began recognizing gross revenues and not just net. We are going to read how CSTE grew massively in 2011, but that just isn't true. They grew, but much of the perceived growth was just an accounting change.
$305 million in 2012 revenues. 40% gross margins, 15% operating margins. It appears once public, CSTE will maintain a 15% tax rate due to favorable status in Israel. Net margins of 12.3%. EPS of $1.16. On a pricing of $15, CSTE would trade a lightly taxed 13 X's 2012 estimates.
Nice growth is what has been a stagnant end market. Plenty of room to continue to gain market share in the US, CSTE appears to be positioned well. Over the years at times Israeli ipos have had trouble generating a strong multiple. Even so this looks like an attractive sleeper ipo in a sector left for dead the past few years. If CSTE can continue to outperform their end market competitors(as they have done since 2007), this should be a nice mid-term play. wouldn't expect much in the short term, but mid-term+ recommend based on strong track record and opportunity for growth in the US.

February 13, 2012, 1:44 pm

EPAM - EPAM Systems

EPAM - EPAM Systems

EPAM - EPAM Systems plans on offering 8.5 million shares at $16-$18. Insiders will be selling 5.9 million shares in the deal. Citi, UBS, Barclays and RenCap are leading the deal, Stifel and Cowen co-managing. Post-ipo EPAM will have 41.8 million shares outstanding for a market cap of $711 million on a pricing of $17. Ipo proceeds will be used for general corporate purposes.

Russia Partners will own 40% of EPAM post-ipo. Russia Partners is a Russian based private equity firm focusing on Russian and eastern European investments.
From the prospectus:
'We are a leading global IT services provider focused on complex software product development services, software engineering and vertically-oriented custom development solutions.'
IT outsourcing operations focused on software product development. Located in Belarus, Ukraine, Russia, Hungary, Kazakhstan and Poland.
Full lifecycle software development services which includes design and prototyping, product development and testing, component design and integration, product deployment, performance tuning, porting and cross-platform migration.
Top 30 clients include Barclays, Citigroup, The Coca-Cola Company, Expedia, Google, InterContinental Hotels Group, Kingfisher, MTV Networks, Oracle, Renaissance Capital, SAP, Sberbank, Thomson Reuters, UBS and Wolters Kluwer.
Reuters accounts for 10%+ of annual revenues.
53% of revenues from North America, 26% from Western Europe and 19% from Russia and Eastern Europe.
Longterm relationships as 93% of 2010 revenues were derived from clients of 2+ years.
Industry - worldwide offshore R&D/software development services spending is expected to grow 10%+ annually through 2014.
***Pretty easy to understand business model here: Offshore IT outsourcing based in Russia and Eastern Europe.
Sector is a low margin people intensive business. As of 9/11, EPAM had 6,554 IT employees. High attrition rate of 10% annually.
Competitors include offshore IT outsourcing companies in India and China.
Software development accounted for 65% of revenues, testing services 20%.
$2 per share in cash post-ipo, no debt.
Tax rate appears to be in the 20% range post-ipo.
2011 - Strong growth here past 1 1/2 years as EPAM has grown revenues nicely from existing customers. $325 million in revenues, 47% growth from 2010. 39% gross margins inline with prior periods. Operating margins of 17 1/4%. 13 1/4% net margins. EPS of $1.
2012 - EPAM does not break down numbers quarterly, plus we've yet to see the 4th Q 2011 results. If we plug in solid 15% 2012 revenue growth run we shouldn't see operating metrics change all that much. $375 million in revenues, 17 1/2% operating margins, 13 1/2% net margins. EPS of $1.20. On a pricing of $17, EPAM would trade 14 X's 2012 estimates.
Conclusion - Definitely not a high multiple sector here. I'd submit a PE of 20+ regardless of growth rate means the sector/stock has gotten ahead of itself. EPAM is on the more sophisticated services end of the outsourcing sector here. This is not a customer service outsourcing operation, EPAM is focused on software development and testing.
EPAM has shown very nice growth the 15 months prior to ipo. Margins are solid and multiple at 14 is reasonable. If priced right, the ipo should work short and mid-term. Generally not a fan of this sector, looks though that EPAM coming public quite reasonable. Not one to pay up for, but in range looks solid.

February 2, 2012, 10:22 am

GWAY - Greenway Medical Technologies

GWAY - Greenway Medical Technologies

GWAY - Greenway Medical Technologies plans on offering 7.7 million shares at a range of $11-$13. Insiders will be selling 1.3 million shares in the deal. JP Morgan, Morgan Stanley, and Blair are leading the deal, Piper Jaffray and Raymond James are co-managing. Post-ipo GWAY will have 28.54 million shares outstanding for a market cap of $342 million on a pricing of $12. 1/3 of ipo proceeds will go to preferred shareholders, the remainder to build new facilities and general corporate purposes.

Investor AB will own 25% of GWAY post-ipo.
From the prospectus:
'We are a leading provider of integrated information technology solutions and managed business services to ambulatory healthcare providers throughout the United States.'
Electronic healthcare records(EHR) company. Cloud based and/or location based. Core end markets include independent physician practices, multi-specialty group practices, hospital-affiliated and hospital-owned clinics and practices, retail clinics, employer clinics, university and academic health centers, federally-qualified health centers and community health centers.
GWAY's product(PrimeSUITE) integrates clinical, financial and administrative data in a single database to enable comprehensive views of the patient record. All solutions are based on a single integrated database that contains clinical, financial and administrative data and supports exceptional interoperability, data analytics and reporting.
In addition to EHR product, GWAY also offers managed services including including clinically-driven revenue cycle management ("RCM";) and EHR-enabled research services. 33,000 providers utilize GWAY's services. Providers include physicians, nurses, nurse poractitioners, physician assistants and other clinical staff.
***Very strong 95% customer retention rate.
Health sector has been a bit slow in converting systems to integrated electronic records. Reasons include providers’ resistance to making the required investment and concerns that creating and managing electronic records may disrupt clinical and administrative workflows. Government initiatives have recently provided financial incentive to converting from paper to all integrated electronic records. Recent legislation provides more than $19 billion of provider incentives through Medicare and Medicaid programs to encourage the adoption of certified EHR solutions. An eligible professional that qualifies for incentives can receive up to an aggregate of $44,000 from Medicare or $63,750 from Medicaid.
End market - GWAY believes total end market to be approximately $35 million with a potential customer base of 638,000 physicians at over 230,000 practices. GWAY's core market potential is $10 billion.
Recently finalized a software licensing agreement with Walgreens to utilize GWAY's EHR technology in all of their stores. Pretty significant deal and not yet reflected in revenues. Competition includes Allscripts(MDRX), AthenaHealth(ATHN), Cerner(CERN), eClinicalWorks, GE, Epic, and Vitera.
$1.50 per share cash post-ipo, no debt.
Fiscal year ends 6/30 annually. FY '12 will end 6/30/12.
Seasonality - the 4th quarter of the fiscal year(6/30) is by far the strongest. This is due to timing of 6/30 fiscal year for Medicare/Medicaid and most medical operations.
Note that support and consulting services outpace actual systems sales annually. Not ideal here as the margins are much lower on support and consulting services than they are on the automated systems revenues. Gross margins here are much smaller than one would expect from an electronic records business plan. Gross margins in FY '11 were 55%, definitely not software or cloud type gross margins.
FY '11(ended 6/30/11) - $89.8 million in revenues, solid increase of 39% from FY '10. 55% gross margins, would like to see those higher. Operating expense ratio high at 51%. GWAY spent heavily on sales and marketing to grow the business. Operating expense ratio was 52% in FY '10 so only minimal improvement there. If GWAY plans on being a longer term successful public company that is the ratio that needs improvement. 4% operating margins 3% net margins. EPS of $0.09.
FY '12 - ****While GWAY did not see much margin improvement in FY '11, they did enjoy two very strong quarters pre-ipo. The 4th quarter of FY '11 say year over year revenues grow 45% while he 9/30/11 quarter grew 55% year over year. Those two back to back quarters pre-ipo are enough to give this one at least a 'speculative recommend' in range. We always like to see growth accelerating and we've that here in back to back quarters heading into ipo.
GWAY attributes this recent revenue surge to 'increased market share in a growing market'. If one simply owned ipos that were displaying this, one would do very well over the long run.
FY '12 revenue should grow 40%-45% based on the past two quarters. $130 million in revenues.
Margins are still the issue here. Nice growth, but still slim operating margins in FY '12, albeit with a bit more improvement over FY '11 Gross margins should remain around 55%. Operating expense ratio looks to decline to 47%(from 51% in FY '11) for 8% operating margins. Net margins of 5 1/4%. EPS of $0.24. On a pricing of $12, GWAY would trade 50 X's FY '12 eps.
Direct competitor ATHN has been one of the more successful overall ipos of the past decade. Ipo'ing at $18 in 9/07 right near the market top, ATHN has never been below ipo price. Recent close was $58.52.
ATHN. Note that heading into ipo, ATHN was showing very similar revenue acceleration, customer retention and gross & operating margins as GWAY. Almost a carbon copy actually. Currently ATHN has a $2.07 billion market cap trades 59 X's 2012 estimates with a 31% 2011/2012 combined revenue growth rate.
Conclusion - Margins have yet to catch up to recent revenue surge, so we can't get too excited here. However back to back 45% and 55% year over year quarterly revenue growth make this a 'recommend' in range. Market cap here is reasonable given the recent revenue surge. To be a successful public company, GWAY will have to keep revenue surging while also improving margins and the bottom line. Good niche and strong recent growth here, could be a nice sleeper ipo.

December 15, 2011, 4:28 pm

RRMS - Rose Rock Midstream

RRMS - Rose Rock Midstream

RRMS - Rose Rock Midstream plans on offering 8.05 million units at a range of $19-$21. Barclays, Citi and Deutsche Bank are leading the deal eight firms are co-managing. Post-ipo RRMS will have 17.12 total units outstanding for a market cap of $342 million on a pricing of $20. Parent SemGroup(SEMG) will receive all ipo proceeds in consideration for intial assets. SEMG will use the ipo proceeds to repay debt.

SemGroup(SEMG) will own all non-floated units as well the general partnership. Note that the former CEO of SEMG bankrupted the company in 2008 by essentially gambling in the oil futures market. The RRMS assets were also part of the assets that the former SemGroup ipo'd in 2007 as SemGroup Energy Partners. Somehow the former CEO of SemGroup has never been charged with a criminal act and settled with the SEC for just a $250,000 fine. Civil suits are due to begin trial in 2012. ****The assets of RRMS are protected post-bankruptcy from any civil damages. SEMG set aside money for additional claims and believes that reserve is sufficient as most claims have been settled either by cash or a stake in the post-BK SEMG. SEMG's financial footing is pretty solid here heading into 2012 with just $200- $250 million in total debt once RRMS ipo proceeds are booked.
The takeaway - While SEMG(and RRMS assets) went into bankruptcy in 2008, it had nothing to do with the assets or the business. The former CEO gambled that oil prices would fall, by leveraging the assets of the two public entities. He was early and BK'd the company. SEMG is now run by a different team post BK. In my opinion the former CEO should be in jail for failing to disclose that he was leveraging the public companies in his futures trading, Apparently a $250,000 fine was all he received for bankrupting shareholders of two solid public companies.
**RRMS is in a similar business to 2011 ipos TLLP/OILT. As of this writing each of those is among the strongest of the 2011 ipos performance wise making new highs the Friday before this piece was written. Those two both have strong parents and minimal debtload, we shall see below how RRMS compares. This has been a strong niche in 2011, and really over the past decade as well.
Distribution - RRMS plans on distributing $0.3625 quarterly, $1.45 annually. On an annualized basis RRMS would yield 7.25% on a $20 pricing.
Quick look at similar public companies. Note that all are at or near 52 week highs currently. Again, this has been a very good spot to be in 2011. All the media attention has been focused on the online ipos in 2011, while TLLP/OILT have quietly made investors money while paying a healthy yield as well.
SXL - 4.8% yield. $2.85 billion market cap, $1.2 billion debt.
TLLP - 4.7% yield, good balance sheet.
PAA - 6.10% yield, lot of debt.
HEP - 6.5% yield, average debt.
OILT - 4.7% yield at $20, below average debt for group
Assuming the balance sheet is solid and cash are sufficient to pay yield and capex, RRMS at a 7.25% yield in a strong performing sector is a strong recommend. A 'no brainer' recommend actually as the two similar ipos this year pay roughly the same distribution as planned by RRMS and now yield much lower thanks to price appreciation.
***Note also that Plains All American Pipeline(PAA) made an unsolicited bid for SEMG in 10/11 at $24 a share. That bid includes the assets of RRMS. SEMG rejected the bid as 'under market'. SEMG currently trades at $26 a share.
This is about as under the radar 'hot sector' as you can get right now.
From the prospectus:
'We are a growth-oriented Delaware limited partnership recently formed by SemGroup to own, operate, develop and acquire a diversified portfolio of midstream energy assets.'
100% oil focused. Oil gathering, transportation, storage and marketing in Colorado, Kansas, Montana, North Dakota, Oklahoma and Texas.
Involved in the Bakken Shale in ND/MT, the Rocky Mountain Region and the Granite Wash and Mississippian formations in TX/OK/KS
Cushing storage. Storage terminal in Cushing with 5 million barrels of oil storage capacity. 95% is committed under long term contracts. RRMS is currently constructing additional facilities for 1.95 in additional storage capacity which will come online in 2012. Note that Cushing is the designated point of delivery specified in all NYMEX crude oil futures contracts and is one of the largest crude oil marketing hubs in the United States.
KS/OK Pipelines and storage - 640 mile pipeline system and 670,000 storage capacity. Pipelines deliver to RRMS Cushing storage facility.
Bakken Shale - Gathering, storage and transportation business in ND/MT. Small, 6,200 barrels per day.
Platteville - Truck unloading facility in CO. 31,600 barrels per day throughput in 2011.
***Note that 75% of RRMS adjusted gross margins come from fee based/fixed margin transactions which means minimal oil price risk 3/4 of operations. Of some concern here is that 25% of gross margins come from oil marketing activities. All well and good assuming RRMS does not get carried away and get in trouble heavily long or short oil contracts at the wrong time.
Growth - The Cushing addition of 1.95 barrel capacity will grow RRMS operations there by 40%. In addition RRMS has plans to increase capacity in their other operations as well. Expect a dropdown or two from parent SEMG too.
Customers include Sunoco(25% of revenues), Gavilon, and Parnon.
RRMS plans on borrowing to fund their storage expansion in Cushing and elsewhere. At the end of 2012, RRMS will have approximately $35 million in debt solid balance sheet overall.
2011 - $400 million in revenues. 5% operating margins, $1.16 EPS.
Cash flows are all that matter with these type deals. RRMS forecasts for the 12 months ending 12/31/12:
Revenues of $427 million. Note that normally we like to see cash flows sufficient to pay distributions as well as maintenance and expansion capex. In this case the balance sheet on ipo is clean and expansion capex is going directly to grow the Cushing storage capacity by 40%. In effect it is akin to borrowing the fund an acquisition and even so RRMS will have a solid balance sheet by end of 2012. If we roll out the $33 million in expansion capex, RRMS is forecasting coverage of 110% for the 12 months ending 12/31/12. This includes all maintenance capex as well.
At the end of 2012, the additional 40% expansion in Cushing should be online and paid for by the $33 million in expected 2012 borrowings. All in all pretty solid. Keep an eye on 2013 expected expansion capex as it should be relatively small compared to 2012. with the additional capacity, 2013 should see sufficient cash flows to pay distributions and all capex.
Conclusion - Solid deal in an under the radar 'hot sector'. Balance sheet is pristine on ipo which allows RRMS to add some debt to grow capacity and revenues by the end of 2012. 7.25% yield in a strong sector is very attractive. May be a sleeper due to stigma of a bankruptcy just three years prior. That bankruptcy though had nothing to do with the performance of these assets and everything to do with gambling in the future market of a previous CEO. Easy recommend here.
Not as strong as OILT/TLLP. Those two have much better parents and their business is embedded into a strong parent operation. However at 7 1/4% annual yield compared to 4.7% for OILT/TLLP there is plenty room here for appreciation from $20 to still be valued in-line with those two. Should pay a higher yield than OILT/TLLP but not this large a spread.

November 19, 2011, 1:08 pm

ANGI - Angie's List

ANGI - Angie's List

ANGI - Angie's List plans on offering 10.1 million shares at a range of $11-$13. Insiders will be selling 2.54 million shares in the deal. BofA Merrill Lynch is leading the deal, Allen, Stifel, RBC, Janney, Oppenheimer, ThinkEquity, and CODE co-managing. Post-ipo ANGI will have 57.3 million shares outstanding for a market cap of $688 million on a pricing of $12. Ipo proceeds will be funneled into advertising to drive membership growth.

3 venture funds will separately own 43% of ANGI post-ipo.
From the prospectus:
'We operate a consumer-driven solution for our members to research, hire, rate and review local professionals for critical needs, such as home, health care and automotive services.'
sort of a 'yelp' for services. Yes I know yelp has service reviews, however it much more entertainment/food focused. Note that big difference is members are the only ones permitted to write AND read the reviews on ANGI. No anonymous reviews, must be a paid member to read and/or write reviews.
1 million paid memberships. Typical member: 35-64 years old, owns a home, college educated with household income of $100k+.
Between 900-1000 most visited website in the US.
In 2010, 11.4 unique searches per member and 37% of members wrote at least one service provider review.
Local service providers who are highly rated on ANGI are encouraged to advertise discounts and promotions to members.
Unlike a lot of the Groupon and Zipcar verbiage in their prospectus, I do like this from ANGI sums up the business: 'We help consumers purchase "high cost of failure" services in an extremely fragmented local marketplace.'
Services include: home remodeling, plumbing, roof repair, health care and automobile repair.
ANGI offers service in 175 local markets in the US. I'm not a member so could not check and see how many reviews there were in the secondary markets. 2.6 million total reviews in database or about 15,000 per market. Again I am assuming larger markets have more reviews.
ANGI believes membership growth has been driven by a national advertising strategy, something a lot of other recent online ipos have eschewed for a more internet ad approach.
Cost - Annual membership plans range from $29 - $46. Pretty reasonable if it saves someone money. Keep in mind though, this is a site in which all content is member generated so the fee is essentially one for access. There is no professional content other than a magazine that comes with the membership.
70% renewal rate for first year members in 2010. 51% of advertisers in 2008 were still active advertisers with ANGI in 2011. Both solid numbers.
Market - good idea here originally by ANGI as household and professional services have always been a tough one. Word of mouth has usually been the best indicator of quality.
Growth strategy - obviously, continue penetrating their market bases.
62% of revenues are actually derived from advertising.
Approximately $1 per share in net cash post-ipo. Expect ANGI to burn through this cash before the end of 2012 and be back for a dilutive secondary. Immediately below will explain why.
ANGI is attempting a very aggressive valuation on ipo. I suppose spurred on by LNKD and GRPN, ANGI is attempting to come pretty richly valued across any metric. Currently internet ipos are being judged by different metrics apparently.
Growth has been solid but not really spectacular. Definitely not the growth curve of either LNKD of GRPN. Revenues increased 35% in 2009, 29% in 2010 and poised to grow 48% in 2011.
****Growth not really organic unfortunately: Selling and marketing expenses increased a whopping 66% in 2010 and look to grow another 85%+ in 2011.
****This is a massive red flag here. Normally I am uneasy if an operation is increasing revenues at just a 1:1 rate to sales/marketing expenditures. Here? ANGI is increasing sales/markets costs FASTER than their revenue growth. They are spending more than $1 in sales/marketing to garner $1 of revenue growth. That indicates a failed business model and strategy if going on for any length of time and here this has been happening since the beginning of 2010. Through the first nine months of 2011 ANGI has increased sales and marketing expenses $33 million over first 9 months of 2010. Revenues however have increased just $19.5 million. In 2010 similar story: revenues increased $13.4 million while sales/marketing expenses increased $17.5 million.
How is this a sound business strategy? I've not seen something like this since 1999, there doesn't appear to be a fundamentally sound strategy other than to burn up all cash on hand to grow the subscriber base and not remotely caring that you have spend 7 quarters spending $1.50 in direct sales/marketing costs for every $1 of new revenues. That is not sustainable, hence the plan is to funnel new ipo monies into the EXACT SAME strategy.
Losses have increased with revenues growth. Losses in '09 were $0.15, 2010 $0.40 and in 2011 should be $0.88 Again, as noted above, ANGI has implemented a business strategy that is not financially sustainable. Yes there has been growth, but the cost of that growth has been awfully high.
As 62% of revenues are derived from advertising it appears the business plan is to spend massively on subscriber growth with the goal being for ANGI to be able to go to advertisers and charge more for more 'eyeballs'. I guess that's it.
2011 - $88 million in revenues, a 49% increase over 2010. Massive loss of $0.88 per share.
2012 - Ipo cash will fuel sales/marketing spending which should continue to grow revenues...albeit at a slower pace than the spending. Expect $120 million in revenues a 35% increase from 2011. Losses should be in the $1 range once again.
Conclusion - Until ANGI stops burning cash at a 1999 internet start-up pace, you just can't own this. Will they stop burning cash down the line? At this point one cannot discern the answer. The plan appears to be to spend whatever it takes to grow the subscriber base to a point in which ANGI can combine ad rates and membership revenues to reach a point of positive cash flows. Right now they aren't close. Also I've just never been a big fan of websites that are 'exclusive' charging subscribers fees and then turn around and generate most of their revenues via advertising. That is what ANGI is doing. Based on the business plan of the past two years and the mounting losses, no interest here. Will keep an eye on it to see if things change, but this market cap is dangerously high for the cash burn rate. Party like it is 1999???? Was all well and good until 2001 hit and the cash burn overtook many and zeroed them out.

November 19, 2011, 1:06 pm

LRE - LRR Energy

LRE - LRR Energy

LRE - LRR Energy plans on offering 10.8 million units at a range of $19-$21. Wells Fargo, Raymond James, Citi, and RBC are leading the deal, Baird, Oppenheimer and Stifel co-managing. Post-ipo, LRE will have 22.4 million total units outstanding for a market cap of $448 million on a pricing of $20.

Lime Rock will own all non-floated units including the General Partnership. Lime Rock manages $3.9 billion of private capital for investment in the energy industry.
***All ipo proceeds will go to parent Lime Rock as consideration for the LRE's properties. Nothing out of the norm with that. However in addition to ipo proceeds, LRE will also go into $156 million debt to pay of Lime Rock. I've always stressed that the MLP structure is not ideal for E&P's. Why? Well the E&P business required hefty capital expenditures to replace production, including new exploration and acquisitions. In addition to capex, the MLP also needs to yield large enough to entice buyers. To be successful and E&P MLP must have very strong and consistent cash flows to cover both the yield and capex. Debt on the books on ipo is a hindrance that I do not like to see as not only does the operation need cash flows to cover capex and yield, now they need to service debt as well. . The stronger E&P mlp's have come public with clean balance sheets. Not the case here though as Lime Rock has opted to suck out $156 million and place that debt on the back of the public LRE.
From the prospectus:
'Formed in April 2011 by affiliates of Lime Rock Resources to operate, acquire, exploit and develop producing oil and natural gas properties in North America with long-lived, predictable production profiles.'
Initial properties located in the Permian Basin in West Texas, Mid-Continent region in Oklahoma/East Texas and the Gulf Coast region of Texas.
30.3 MMBoe proved reserves, with 84% proved developed. 691 net producing wells as of 3/31/11.
57% of revenues from oil/NGL's, 43% natural gas.
Note that LRE does operate 93% of their proved reserves.
13.5 years reserve-to-production lifespan. As is common in this sector, LRE will need to acquire and/or discover additional reserves as they deplete current proved reserves.
55% of total reserves are in the Permian Basin.
Hedges - LRE plans on hedging 65%-85% of annual production 3-5 years out on a rolling basis.
Issue - LRE had a lackluster 3rd quarter with daily average production 8% lower than the first 6 months of 2011. LRE blames both a greater than expected nitrogen presence in a gas field as well as gas plant mechanical failure.
Largest customers include ConocoPhillips, Seminole Energy and Sunoco.
$156 million in debt. Debt went into parent's pocket.
***Yield - LRE plans to distribute $0.475 per unit to holders quarterly. At an annualized $1.90, LRE would yield 9.5% annually on a pricing of $20.
Forecast - 12 months ending 9/30/12. $106 million in revenues with sequential drops each quarter. Expect Lime Rock to offer LRE a dropdown acquisition sometime before 2013 to be paid for either via more debt, a share offering or a combination of both. $18 million in capex expected. ***Note that LRE is forecasting a 117% coverage ratio the first 4 quarter public. Even with the debt on the books and declining production, cash flows should be strong enough to pay distribution and expected capex.
Note that LRE has 52% of oil production through 6/12 hedged strongly at $105.37 per barrel. In addition 52% of natural gas production is hedged at $6.46, well above current prices. Once these hedges drop off, expect the coverage ratio to decline from the 117% above.
The natural gas hedges alone are strong enough that without them, LRE would not have enough cash available to pay the full distribution through 9/30/12.
Quick look at LRE and a few other MLP E&P's.
LRE - Pricing of $20 would yield 9.5% with $156 million in debt.
LINE - 7.5% yield, pretty debt laden.
BBEP - 9.6% yield, debt on the books.
PSE - 7.4% yield, excellent balance sheet.
VNR - 8%, has loaded up on debt to grow post-ipo.
QRE - 9.3%, some debt on books.
LGCY - 7.3%, some debt.
ENP - 8.7%, pretty solid balance sheet.
Simply on yield and balance sheet, ENP and PSE would be the two most attractive. LRE is a pretty average looking deal in this space. Should get done around range due to attractive yield(9.5% on a $20 pricing). Keep in mind a chunk of that yield is due to very strong natural gas hedges and it remains to be seen if LRE can fund full distributions once those fall off. In addition, the 9/30 quarter was a disappointment. Slight recommend due to strong yield, nothing to get too excited about.

November 19, 2011, 1:03 pm

DLPH - Delphi Automotive

DLPH - Delphi Automotive

DLPH - Delphi Automotive plans on offering 27.7 million shares at a range of $22-$24. Note that insiders will be selling all shares in this ipo. Goldman Sachs, JP Morgan, BofA Merrill Lynch, Barclays, Citi, Deutsche Bank, and Morgan Stanley are leading the deal, a slew of others co-managing. Post-ipo DLPH will have 328.25 million shares outstanding for a market cap of $7.55 billion on a pricing of $23.

DLPH will receive no proceeds from the ipo, therefore there will be no use of proceeds.
Paulson & Co will own 15% of DLPH post-ipo. Paulson is the main seller here, letting go 20+ million shares on ipo.
Delphi filed for Chapter 11 in 10/05. In 2009 Paulson & Co and a number of other participants scooped up the majority of Delphi's historical business. Since the 2005 Chapter 11, DLPH has reduced product lines from 119 to 33, exited 11 businesses and closed over 70 sites decreasing global headcount by 23%. Currently 91% of hourly workforce is located in low cost developing countries. 30% of hourly workforce are temporary employees. In other words, DLPH used the Chapter 11 to shift from a union based North American/Europe workforce into cheap, Mexican, Eastern European, Brazilian and Chinese labor – therefore offering fewer benefits to temporary employees. DLPH has no US pension or post-retirements healthcare obligations, however there appears to be $618 million in foreign liabilities.
From the prospectus:
'We are a leading global vehicle components manufacturer and provide electrical and electronic, powertrain, safety and thermal technology solutions to the global automotive and commercial vehicle markets.'
One of world's largest vehicle component manufacturers, customers include the 25 largest auto manufacturers in the world. ***A direct play here on the health and growth of the worldwide new auto market.
110 manufacturing facilities with a presence in 30 countries including China.
DLPH stresses how they've shifted their product portfolio to meet and exceed increased worldwide safety, fuel efficiency and 'green' standards. DLPH refers to these as 'megatrends' in the worldwide auto industry.
24% of revenues derived from emerging markets.
Products in 17 of the 20 top-selling vehicle models in the United States, in all of the 20 top-selling vehicle models in Europe and in 13 of the 20 top-selling vehicle models in China.
***43% of revenues in Europe. As we've noticed, Europe is a bit of a mess lately, going forwards we'll need to keep an eye on the European business here.
GM is 21% of revenues, Ford 9%.
  4 segments:
Electrical/Electronic Architecture - Electrical/electronic backbone for autos. Connectors, wiring assemblies and harnesses, electrical centers and hybrid power distribution systems. 41% of revenues.
Powertrain - Full end-to-end gasoline and diesel engine management systems. Fuel injection, combustion, electronic controls. 30% of revenues.
Safety - body controls, reception systems, audio/video/navigation systems, hybrid vehicle power electronics, displays and mechatronics. 19% of revenues.
Thermal - HVAC systems. 10% of revenues.
#1 or #2 products worldwide in 70% of net sales.
Supplier to every major automotive OEM in China.
Sector - Demand for DLPH's products is driven by the number of vehicles produced worldwide. Global vehicle production is expected to increase annually 6.5% through 2015. That growth is being driven by developing markets notably China. DLPH believes over 1/2 of their growth will come from developing markets.
***Drivers here are the lean and low cost structure of DLPH geared towards supplying the auto manufacturers in developing markets. All well and good, however keep in mind the US and Europe still make up a significant amount of DLPH's revenue base.
Risks are rather obvious as they usually are - As we witnessed in 2008/2009, the global automotive sector is quite cyclical. Even though DLPH has no legacy costs after their 2006 Chapter 11, there is still significant debt on the books. Does appear to be a well run operation heading into ipo, so while the risk of a repeat bankruptcy appear small, an economic downturn would quickly lead to DLPH missing quarterly/annual estimates.
$1.345 billion in cash in this cash intensive business. Note that DLPH still owes some of this cash to previous owners and underfunded foreign pension benefits. Not a bad balance sheet here with $2.173 billion in debt. Not ideal, but manageable.
2011 - solid year for DLPH through the first nine months. On pace for approximately $16.5 billion in revenues, growth of 20%. Gross margins of 16.5%, operating margins of 10.1%. Debt servicing will eat up 9% of operating profits. As noted above, not ideal but not a dealbreaker either. 4% net after tax margins. EPS of $2. On a pricing of $23, DLPH would trade 11 1/2 X's 2011 estimates.
2012 - Growth should slow here as DLPH's strong 2011 % wise was in part due to a few years of stagnant revenues in the worldwide auto market. Expect 7%-8% revenue growth to $17.75 billion. The business is so large here and management has done about a good a job pushing margins as much as possible...therefore I'd expect margins to remain in the same ballpark, with net margins improving slightly due to lowered debt servicing costs. Gross margins of 16.5%, operating margins of 10.2% with 4.2% net margins. EPS of $2.27. On a pricing of $23, DLPH would trade 10 X's 2012 earnings.
I'd be higher on this deal if the GM ipo would have performed better since debut. DLPH at 10 X's 2012 estimates would trade at a hefty premium to their largest customer GM's 5 X's 2012 estimates. That's a concern. Other than that though, this deal looks solid. Debt is not eating up too much of operating profits, management has done a nice job of growing margins in a space historically difficult to achieve margin growth.
Some near term headwinds here as well with GM's recent lackluster report (21% of DLPH's revenues) and Europe's government debt issues. I like this deal, other than the quite large P/E disparity here between supplier and largest customer. That may present an issue.

November 19, 2011, 1:02 pm

DDMG - Digital Domain Media Group

DDMG - Digital Domain Media Group

DDMG - Digital Domain Media Group plans on offering 6.325 million shares at a range of $10-$12. Roth Capital and Morgan Joseph are leading the deal. Post-ipo DDMG will have 47 million shares outstanding for a market cap of $517 million on a pricing of $11. Ipo proceeds will be used for working capital(ie, to fund losses).

PBC will own 40% of DDMG post-ipo.
From the prospectus:
'We are an award-winning digital production company.'
CGI and digital visual effects for motion pictures and advertising. 3 academy awards and 4 awards for Scientific and Technical Achievement in motion pictures.
DDMG has done CGI and/or effects work on 80 major motion pictures including Apollo 13, Titanic, and Curious Case of Benjamin Button.
Sector - Increasing consumer demand led by increase in 3D content as well as the trend towards more cost effecting on screen effects via computer generated effects. Total visual effects market was $1.4 billion in 2010 for feature films and $214 million for advertising. Both segments enjoyed double digit growth in 2010, although fairly low ad comps with 2009.
Note that DDMG plans to use ipo monies to begin producing their own large scale live-action films. I'm never a proponent of investing in a start-up motion picture production companies. The risk reward is rarely favorable to outside investors. DDMG's first co-production(with Oddlot Entertainment) is for a film to be titled 'Ender's Game'. DDMG will be a primary investor in the film and will lead the digital production.
In addition to live action, DDMG plans on getting into animated film production.
Note that DDMG has no experience leading production on films pre-ipo.
Also DDMG is apparently getting into the for-profit education sector. Aligned with Florida State University, they are launching the Digital Domain Institute offering a fully accredited four-year BFA degree. Classes commence in the spring of 2012.
Ambitious branching out by DDMG. Unfortunately for ipo investors, DDMG has been funneling all traditional effects revenues into the projects above leaving a very ugly earnings statement in their wake.
13 active feature film project work as of 11/1/11. Revenues for these projects should be $100+ million.
$1.50 per share in case, assuming an $11 pricing.
2011 - Really shaky 3rd quarter. Bad enough that the company noted outright in the prospectus it was a light quarter. Full year revenues should be in the $105 million range. Gross margins here are ultra-slim. Much too slim for a company that has been around for nearly 20 years. Even back in 2008(before embarking on new lines of business), gross margins were weak. Gross margins should be in the 15%-20% range. Losses staggering as 1)gross margins eat most of revenues and 2)DDMG has been spending heavily on their primary production and education plans. Losses should be in the $1.50+ range. I cannot own a company burning through this much cash. Period, end of store.
2012 - Losses should continue to be staggering. DDMG will need a major hit with their first film to make this ipo look even average in range.
Successful visual effects company that is un-investable due to ugly earnings statements. By all accounts DDMG is quite good at what they do: visual effects for the motion picture industry and advertising. Lot of risk here as DDMG embarks on feature film primary production responsibilities(with the implied financial risks) as well as a for-profit educational center. DDMG couldn't put money on the bottom line for years before embarking on these plans. Now? Losses of $1.50+ per share. Not interested.

November 16, 2011, 8:42 am

INVN - InvenSense

INVN - InvenSense

INVN - InvenSense plans on offering 11.5 million shares at a range of $7-8.50 Insiders will be selling all of the over-allotments 1.5 million shares. Goldman and Morgan Stanley are leading the deal, Oppenheimer, Piper, Baird and ThinkEquity co-managing. Post-ipo INVN will have 79.7 million shares outstanding for a market cap of $618 on a pricing of $7.75. Ipo proceeds will be used for general corporate purposes.

Three venture firms will separately own 45% of INVN post-ipo. Qualcomm will own just over 5%.
From the prospectus:
'We are the pioneer and a global market leader in intelligent motion processing solutions.'
Motion processing - The ability to detect, measure, synthesize, analyze and digitize an object’s motion in three-dimensional space.
INVN pioneered the world's first integrated MotionProcessing solution. Fabless model, INVN does not manufacture their own processors.
Primary end market is consumer electronics. End products include console and portable video gaming devices, smartphones, tablet devices, digital still and video cameras, smart TVs, 3D mice, navigation devices, toys, and health and fitness accessories.
Primary uses to date have been motion-based video games and user interfaces for smartphones. Bulk of revenues have been derived from placement in Wii MotionPlus and Wii Remote Plus controller. Recently INVN has begun seeing substantial revenues from handset makers as well.
INVN has shipped 157 million units as of 10/2/11.
INVN lists their advantages: Patented integrated platform that simplify access to complex functionality demanded by end customers. Enhanced performance and reliability with a smaller form factor and lower cost saves customers time and expense.
***Lot of techhead stuff in the prospectus. For our purposes, INVN pioneered digital motion processors and relies heavily on Nintendo's WII for revenues. Nintendo's Wii controllers/motion pad accounted for 85% of 2010 revenues and 80% of 2009 revenues. An awful lot of risk in a tech ipo relying so heavily on one product for bulk of revenues. To work longer term INVN must expand their revenue, especially at a market cap that is approaching $1 billion by the time all the options eventually exercise. We've seen a few that have been able to do that, we've seen a number that crash and burn though when they've been unable to expand those revenues to other sources.
Risk - as noted above, loss of Nintendo or not being able to add handset makers to help drive revenues. In the S-1 INVN notes: 'Nintendo reduced its orders for our products below levels we had anticipated during fiscal years 2011 and 2010, which negatively impacted our net revenue.'
Sales of Nintendo's WII were 20.5 million units for the 12 months ending 3/31/10, 15 million in the 3/31/11 year and are expected to be 13 million in the 3/31/12 year.
***Note that INVN's processor's are not incorporated into the Xbox or Playstation.
Primary competitor is STMicroelectronics(STM). STM is a larger more diverse operation, so not a pure comparable.
$1.75 per share in cash post-ipo.
Fiscal year ends 3/31 annually. FY '11 ended 3/31/11.
FY '11(ending 3/31/11) After rapid growth in 2010, growth slowed in 2011. $96.5 million in revenues, just a 20% increase from FY '10. FY '10 did not see INVN increase their revenue base much past Nintendo. When you've got a $757 billion market cap of $96.5 revenue base, you better plan on growing those revenues swiftly. This is a potential big issue for INVN as the next generation Wii platform is not scheduled for launch for at least another year. Gross margins of 55% not overly impressive for a fabless processor operation. Operating margins of 22%. Plugging in taxes, net margins of 14%. EPS of $0.17.
FY '12(ending 3/31/12) - Very strong first half for INVN. ***Most importantly while they grew revenues 73%+ year over year in the first half of the fiscal year, only 30% of those revenue were derived from Nintendo(down from 70%+). Promising sign here.
$170 million in revenues, a strong 75% increase over a lackluster FY '11. Gross margins look to improve to 56%. Operating margin improvement to 33%. Can't stress enough how strong the first half of INVN's fiscal year has been. Due to tax loss carryforwards, tax rate should be 25%. 25% net margins. EPS of $0.53. On a pricing of $7.75, INVN would trade 15 X's FY 2012 EPS.
Conclusion - Mid-term success of this ipo will be dependent on INVN's ability to attain new customer wins that result in significant revenues. Specifically INVN is targeting the handheld/tablet market. Some promising signs of this with the first half of FY '12.
***Note that it appears INVN is making strong inroads into the handheld and tablet market. Samsung, LG and HTC combined have acounted for 35% of revenues. Through the first half of FY '12 at least, INVN has done a very sweet job of broadening their end market from 'just the Wii' and into handhelds. Promising tech ipo with technology that could make it a nice long term winner. Could. Lot of risk here as noted, however INVN is showing nice signs of broadening customer base. First hald of FY '12 has been as strong as we've seen from a tech ipo in awhile. INVN followed a very strong first quarter with an even better 2nd fiscal Q. Coming just 15 X's FY '12 estimates with a 75% revenue growth rate, INVN is too cheap in range here. Strong recommend off blistering first half of FY '12.

November 13, 2011, 8:02 pm

CHKR - Chesapeake Granite Wash Trust

CHKR - Chesapeake Granite Wash Trust

CHKR - Chesapeake Granite Wash Trust plans on offering 26.9 million units at a range of $19-$21. Morgan Stanley and Raymond James are leading the deal, Deutchse Bank, Goldman and Wells Fargo co-managing. Post-ipo CHKR will have 46.7 million units outstanding for a market cap of $934 million on a pricing of $20.

Ipo proceeds will go to parent company Chesapeake Energy(CHK).
CHK will own all non-floated units, including subordinated units, 42% of CHKR post-ipo. CHK is the 2nd largest producer of natural gas and is the most active driller of new oil and natural gas in the US.
Growth energy Trust structured quite similar to recent ipos SDT and PER. Expected payouts and yield % follow, assuming a pricing of $20.
CHKR will make initial distribution of $0.54 to unitholders fairly quickly post-ipo at the end of December 2011.
Targeted distribution by year:
2012 - $3.13, 15.7%
2013 - $3.48, 17.4%
2014 - $3.41, 17.05%
2015 - $3.18, 15.9%
Distributions will drop off quickly after 2015. 2016 distributions should be $2.28 or 11.4%. Expect distributions to drop below $2 annually beginning in 2017. Even so the first full five years public, CHKR's target distributions will equal $15.48 or 77% of mid-range pricing of $20. Assuming everything else checks out, this deal is an easy recommend in range based on the strong parent and the hefty payout the first full years public.
First full five years public with targeted distributions
PER: $13.90
SDT: $14.97
CHKR: $15.48
From the prospectus:
'Chesapeake Granite Wash Trust is a Delaware statutory trust formed in June 2011 to own (a) royalty interests to be conveyed to the trust by Chesapeake in 69 existing horizontal wells in the Colony Granite Wash play located in Washita County in western Oklahoma (the "Producing Wells";), and (b) royalty interests in 118 horizontal development wells.'
These growth Trusts have gotten popular recently as a vehicle for aggressive E&P operations to raise money from mature fields to fund capex/pay down debt. As long as they continue to be structured for the unitholder as favorably as this one and SDT/PER, they should continue to work out well.
Colony Granite Wash Formation - 45,500 gross acres(28,700) held by CHK located in the Anadarko Basin in western Oklahoma. 44.3 mmboe, consisting of 18.6 mmboe in the developed wells and 25.7 mmboe in the development wells. 19% oil, 31% natural gas liquids and 50% natural gas located at 11,500-13,000 feet.
***Note that unlike SDT/PER, natural gas will make up a higher % of production here than oil. Oil will make up 35%-40% of revenues.
CHK plans on drilling the 118 development wells in proved undeveloped locations by 6/30/15.
Royalty Interest - 90% of the net proceeds in the 69 existing horizontal wells and 50% of the net proceeds from the 118 planned development wells.
CHK owns a 47% net revenue interest in the producing properties and 53% net revenue interest in the development properties. As such the Trust will have a 42% net revenue interest in the producing properties and a 26% net revenue interest in the development wells.
Hedges - 37% of expected revenues to be hedged through 9/30/15. Oil is hedged at an average of $87.42 per barrel through 9/30/15. Note that natural gas production is unhedged.
Trust lifespan to be 20 years, although as we've noted, distributions will begin decreasing annually from 2015 with distributions under $2 annually beginning 2017.
CHK will operate 94% of all the wells. CHK began drilling horizontal wells in the Colony Granite Wash in 2007 and is currently the largest leaseholder in the area with 61,100 net acres. CHK has drilled 133 of the 173 horizontal wells in the formation since 2007. 9 rigs drilling for CHK in the formation.
Risk - Two here as hedges here are not as strong on a % of production as either SDT or PER. A significant dip in the price of oil, natural gas and natural gas liquids would have a negative impact on CHKR's yield. The other very real risk here is CHK fails to effectively execute the drilling plan. If anything delays the drilling plan in a given quarter or two, expect CHKR to dip.
CHKR expects to receive approximately $36 million each quarter the first half of 2012.
Note that CHKR has been conservative in forecasting oil and natural gas prices through mid 2014 with natural gas topping around $5 and oil at $93.
Conclusion - Another good energy Trust structured in range to raise cash for CHK and provide strong returns for unitholders. CHK has a strong track record in this formation, as long as they execute the drilling plan this one should be a winner. Easy recommend here, expect this to trade to $25-$30 sooner than later.

November 6, 2011, 1:59 pm

RNF - Rentech Nitrogen Partners

RNF - Rentech Nitrogen Partners

RNF - Rentech Nitrogen Partners plans on offering 17.25 million units at a range of $19-$21. Morgan Stanley and Credit Suisse are leading the deal, Citi, RBC, Imperial, Brean Murray, Dahlman Rose and Chardan are co-managing. Post-ipo RNF will have 38.25 million units outstanding for a market cap of $765 million on a pricing of $20. Ipo proceeds will go to parent Rentech(RTK), the majority of which will go to repay debt.

RTK will own all non-floated units as well as the general partnership management of RNF. At first glance, appears to be a bit of a head scratcher here. RTK's ownership interest in RNF would be valued at $420 million which is more than RTK's current market cap of $360 million. RTK will be able to clean up their debt as well on this ipo. The reason appears to be that A)RTK itself has been relying on RNF's core business as their revenue driver as they evolve their clean energy segment. Post RNF ipo, RTK's main revenue driver will be their stake in RNF as they continue to attempt to turn their clean fuels segment towards commercialization.
***Should note here that RNF's parent operation is an unusually weak parent for limited partnership structure. This ipo is being modeled after the CVI spin-off of UAN. CVI has a core refining operation, while here RTK doesn't appear to have much else. I am skeptical of this deal here because of the weak parent company whose track record is spotty at best. This deal feels a bit like a shaky company attempting to take advantage of a strong fertilizer pricing environment.
From the prospectus:
'We are a Delaware limited partnership formed in July 2011 by Rentech, a publicly traded provider of clean energy solutions and nitrogen fertilizer, to own, operate and grow our nitrogen fertilizer business.'
Nitrogen fertilizer facility is located in East Dubuque, IL. Ammonia and UAN with natural gas as primary feedstock. Much like UAN, TNH and CF substantially all products are nitrogen based.
**Structured as a pass through partnership similar to UAN and TNH. RNF will distribute to unitholders all cash available each quarter.
Location right in the middle of the 'corn belt' IL/IA/WI. Core market is 200 mile radius from facility. RNF estimates the ammonia consumed in these states is 4 X's the amount produced and the UAN used is 1.4 X's the amount produced.
RNF does not maintain a fleet of trucks or rail cars. They sell their fertilizers at their plant with customers responsible for shipping. RNF believes this helps lower their fixed costs and allows higher margins than larger competitors.
Post-ipo, 66% of ammonia production capacity produced by public companies.
Capacity of 830 tons of ammonia per day with the capacity to upgrade up to 450 tons of ammonia to produce 1,100 ton of UAN per day.
***Note that RNF plans to spend $100 million to upgrade capacity. Without the cash on hand post-ipo, expect either an equity, debt or combination offering sometime within first year public.
Sector - Much like the UAN ipo, RNF is coming public due to a strong pricing environment for domestic nitrogen based fertilizer. Nitrogen, phosphate and potassium are the three essential nutrients plants need to grow for which there are no substitutes. Global demand is driven by population growth, dietary changes and consumption of bio-fuels. Global fertilizer demand is projected to increase by 45% between 2005 and 2030, or just shade under 2% annually. UAN fertilizer has grown 8.5% over the past decade. Why? Unlike ammonia, UAN can be applied throughout the growing season. UAN fertilizer is costly to transport, locking out foreign competition.
Corn - Corn crops consume more nitrogen fertilizer than any other domestic crop. Iowa and Illinois are largest nitrogen fertilizer consuming states in the US. Mid corn belt Ammonia prices have tripled over the past 10 years while UAN prices have quadrupled. Ammonia use has increased 18% in core corn markets the past five years.
Sales prices - Due to lack of transportation and storage costs, RNF claims the highest sales price per ton compared to the two pure play comparables TNH and UAN.
Natural gas, RNF's prime feedstock, represents 80% of cost to produce ammonia.
Capacity utilization rate averaged 92% over last three fiscal years.
Note that historically this has been a very cyclical market with the past 3-4 years representing the strongest cycle run in 30 years.
Risks - Plentiful here as RNF is coming public in the mdist of a long and strong pricing cycle. Nitrogen fertilizer being driven by ethanol production. If ethanol production declines, corn volumes may decline as well. In addition, a rise in the price of natural gas can negatively impact margins. This is a deal in which projections are more tenuous than the average midstream MLP ipo.
$1 per unit in cash post-ipo, no debt.
Fiscal year ends 9/30 annually. FY '11 ended 9/30/11. 273 tons of ammonia produced in FY '11, 312 tons of UAN.
Seasonality - Most deliveries made in the 6/30 and 12/31 quarters during spring planting and fall harvest.
FY '11 - $179 million in revenues. 42% gross margins, 39% operating margins. As a pass through, tax burden will be on unit holders. $1.83 in EPS.
FY '12 - Really all that matters here is projected cash available for distribution. $204 million in revenues with $2.31 in net EPS.
***RNF is forecasting $2.34 per unit in distributions for FY '12. Approximately $0.20 of that is technically cash from the ipo. On a pricing of $20, RNF would yield 11.7% annually. Strong yield here.
Lets look at RNF and two pure comparables TNH and UAN.
RNF - 11.7% projected yield with strong balance sheet. ***Note that based on FY '11 numbers yield would be 9%. RNF is projecting a stronger cash flow(and yield increase in FY '12 than either of their two pure play competitors. If they can pull it off, deal should work mid-term.
UAN - $1.84 billion market cap, some debt on the books. Yielding 8.9% currently.
TNH - $3.07 billion market cap, good balance sheet. Yielding 9% currently.
conclusion - Yield wise based on 2011 coming public right at payout ratio of two pure comparables UAN and TNH. RNF is the weaker of the three however, smaller output/facility and a much weaker parent. RNF is forecasting a pretty aggressive increase in yield in FY '12, much stronger than either UAN or TNH. The key to whether this deal works mid-term from $19-$21 pricing depends on whether they can execute. As it looks right now, pretty fairly valued on recent quarter here $19-$21.

July 29, 2011, 7:23 am

CJES - C&J Energy Services

CJES - C&J Energy Services

CJES - C&J Energy Services plans on offering 13.225 million shares at a range of $25-$28. Goldman Sachs, JP Morgan and Citi are leading the deal, Wells Fargo, Simmons and Tudor co-managing. Post-ipo CJES will have 52.35 million shares outstanding for a market cap of $1.387 billion on a pricing of $26.50. Ipo proceeds will be used to repay all outstanding debt as well as assisting to pay for hydraulic fracturing fleets.

Energy Spectrum Partners will own 7% of CJES post-ipo. Ownership roster here is quite varied with numerous entities owning between 2%-6% of CJES.
From the prospectus:
'We are a rapidly growing independent provider of premium hydraulic fracturing and coiled tubing services with a focus on complex, technically demanding well completions.'
Conventional and unconventional well completion, with unconventional pushing growth. CJES focuses on the most complex hydraulic fracturing projects. What does CJES mean by complex? Long lateral segments and multiple fracturing stages in high-pressure formations.
CJES sees themselves as a 'technical expertise' operation.
***Direct play here on the recent increase in horizontal drilling, thanks to recent technical advances. These advances have lowered recovery costs and made harder to reach deposits more viable in potential long term profits. Essentially CJES has the expertise and equipment to complete these difficult to drill wells. 57% of US drilling rigs are now horizontal rigs, up from less than 20% in 2007.
Fracturing - The fracturing process consists of pumping a fluid into a cased well at sufficient pressure to fracture the producing formation. Highly technical process, and in addition to equipment, CJES services also include determining the proper fluid, proppant and injection specifications to maximize production.
Hydraulic fracturing fleets - CJES operates 4 modern, 15,000 psi pressure rated hydraulic fracturing fleets with 142,000 aggregate horsepower. ***Of note - CJES has four more fleets on order, and this will increase aggregate horsepower to 270,000 by the end of 2012.
Hydraulic fracturing equipment is designed to handle well completions with long lateral segments and multiple fracturing stages in high-pressure formations.
In addition CJES also operates a fleet of 14 coiled tubing units, 16 double-pump pressure pumps and nine single-pump pressure pumps.
Operations concentrated in South Texas, East Texas/Louisiana and Western Oklahoma.
Customers include EOG Resources, EXCO Resources, Anadarko Petroleum, Plains Exploration, Penn Virginia, Petrohawk, El Paso, Apache and Chesapeake.
In the first quarter of 2011 CJES completed 633 fracturing stages and 638 coiled tubing projects.
Growth - Plan is to continue acquiring hydraulic fracturing fleets. CJES believes their coming four units will be in strong demand in their current geographical areas of operations.
Current fleet is under contract though - from mid-2012 to mid-2014.
Revenues are derived from monthly payments for fracturing fleets plus associated charges for handling fees for chemicals and proppants. In addition CJES derives market rates for coiled tubing, pressure pumping and other related well stimulation services, together with associated charges for stimulation fluids, nitrogen and coiled tubing materials.
Hydraulic fracturing accounts for 80% of revenues.
Acquisition - On 4/28/11 CJES acquired Total E&S a manufacturer of hydraulic fracturing, coiled tubing and pressure pumping. Total consideration was $33 million. While this purchase will not directly expand their fleet, CJES believes it will be cost effective in the long run to own the manufacturing capacity.
Risks - Obvious one here. CJES is growing like gangbusters and adding hydraulic fracturing fleets over the next year to nearly double capacity. Anything that negatively impacts horizontal drilling activity and equipment capacity utilization could easily erase CJES strong growth and cash flows. We've seen it before, companies expanding right at the peak of the sector. My feeling here as these fleets are very expensive and demand has been strong, that it would take something highly unusual for CJES to run into capacity utilization issues over the next year or so. Mid-term+ however there is a risk that the sector sees a glut of these fleets a few years from now. A glut would drive the revenue per month price down, possibly significantly.
Competition - Halliburton, Schlumberger, Baker Hughes, Weatherford International, RPC, Pumpco, an affiliate of Complete Production Services, and Frac Tech.
No significant cash on the books post-ipo as bulk of cash going to repay all debt. No debt post-ipo.
***Monthly revenue of $383 per unit of horsepower. Assuming CJES can sustain this rate, horsepower growth alone should account for an impressive $40 million in additional revenue in the 2nd half of 2011, $200 million in 2012 and $500 million in 2013.
2010 - $244 million in revenues, a 264% increase from 2009. The financial crisis and recession put a lot of new drills on hold, so 2009 was not an impressive year for CJES. However, they still managed a GAAP operational profit in 2009. Also additional fleets contributed to 2010 growth as well as much stronger pricing environment. Gross margins of 37%, operating margins of 29%. Strong operating margins here. Plugging in taxes, net margins of 18%. EPS of $0.83.
2011 - A ridiculously good start to 2011 for CJES. Looking at first half and plugging in new capacity, total revenues should grow to $650 million a stunningly strong 166% increase from 2010. This might be a bit conservative as well as CJES has put up $300 million in the first half of 2011 with new capacity coming online in August that should add $45 million on top of current capacity for the rest of 2011. That $650 million number is plugging in sequential declines from 2nd Q's blowout $180 million in revenues.
Gross margins look to improve to 40%. Operating margins of 33%. 22% net margins. EPS of $2.83. On a pricing of $26.50 CJES would trade 9 1/2 X's 2011 estimates.
Before we get too carried away, I would surmise that the 2nd quarter of 2011 represents pricing much closer to the top in this sector than the bottom. CJES cannot continue to see this strong a pricing environment without it eventually cutting a bit too deep into the drillers themselves. I attempted to be conservative with 2011's numbers in the back half of the year.
No pure play competitor as those public companies playing the hydraulic fracturing fleet space tend to be much larger and varied. They all tend to trade 15-22 X's 2011 estimates with a 30% or so growth rate. CJES is coming 11 1/2 X's 2011 estimates with a 165% growth rate.
Conclusion - When you see this type growth in what is historically a cyclical sector, the first thought is that the group must be near a cyclical top. That may be so, tops in cyclicals are much easier to see in hindsight. Regardless CJES looks to me to be a $50+ stock in the shorter run. Currently they have strong pricing power, full utilization with new capacity coming online nearly every quarter through the end of 2012. CJES does not even need to match their pricing from the first half of 2011 to increase earnings in 2012. Strong recommend here short term. Mid-term plus we'll have to follow the sector as this sort of massive growth usually means the beginning of a cyclical move or near the end of one. I wouldn't worry about that too much over the next 4 quarters though, CJES is poised to put up some impressive numbers over the next year.
Note - The blowout 2nd quarter results are tentative at this point and should be officially released shortly after the ipo. They are ridiculously good.

July 26, 2011, 3:58 pm

DNKN - Dunkin' Brands

DNKN - Dunkin' Donuts

DNKN - Dunkin Brands plans on offering 25.6 million shares at a range of $16-$18. JP Morgan, Barclays, Morgan Stanley, BofA Merrill Lynch and Goldman Sachs are leading the deal, Baird, Blair, Raymond James and six others co-managing. Post-ipo DNKN will have 129.7 million shares outstanding for a market cap of $2.205 billion on a pricing of $17. Ipo proceeds will be used to help retire 9.58% senior debt notes.

3 private equity funds(Bain/Carlyle/Lee)will own a combined 75% of DNKN post-ipo. Those three took control of DNKN in a 2006 leveraged buyout. The buyout loaded up DNKN's balance sheet with a massive amount of debt. Even utilizing ipo proceeds on ipo to repay debt, DNKN will have a shade under $1.5 billion of debt on the balance sheet post-ipo. Way too much for this sort of business, most of it there to pad the pockets of the private equity manjority owners.
In addition, the controlling private equity entities paid themselves a $500 million dividend pre-ipo.
From the prospectus:
'We are one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream.'
***DNKN does not operate restaurants, they only franchise brands.
Two brands, Dunkin' Donuts and Baskin Robbin's. Dunkin Donuts is a market leader in New England and New York while Baskins Robbins has been a bit of a disaster performance wise in the US the past few years.
16,000+ franchised stores in 57 countries. 9,805 Dunkin' Donuts bringing in an average of $42,500 in annual franchise fees. 6,482 Basking Robbins bringing in an average of $20,700 in franchise fees annually.
Dunkin' Donuts has the #2 position in US coffee servings and breakfast sandwiches. Baskin Robbins is the #1 chain for hard serve ice cream.
Dunkin' Donuts accounts for 76% of revenues, Baskin Robbins 24%.
Revenues from Dunkin' Donuts are nearly all US based, Baskin Robbins however generates 1/3 of their revenues internationally.
Same Store Sales - Dunkin' Donuts was on a roll before the 2008 recession hit with 45 straight quarters of same store sales growth. 2 negative years in 2008/2009 rebounding with just a 2.3% same store increase in 2010. Coming off two negative years of same store sales, the 2.3% increase in 2010 is not that impressive. Great brand name, however it appears the recession may have permantly changed some of their customer's spending habits permantly. On a per store basis, DNKN is pretty much where they were in 2007 revenue wise.
Baskin Robbins though has been losing traction rapidly with three straight years of same store sales declines. 2008 saw a 2.2% decrease, followed by 6% in 2009 and an alarming 5.2% dip in 2010. A fading brand.
In the 2nd quarter of 2011 Dunkin' Donuts same store sales increased 4%, while Baskin Robbins decreased again 3.5%.
Dunkin' Donuts holds a whopping 52% 'quick service restaurant'(QSR) in New England. That is a stunning number. In addition they hold a 57% coffee QSR market share in New England.
Coffee represents 60% of Dunkin' Donuts sales overtaking donuts sometime in the '90's.
Dunkin' Donuts has over 1/2 their stores in New England and only 109 stores total in the western US. Focus going forward is to increase store count in eastern cities outside of New England.
39 new Dunkin' Donuts stores in the 2nd quarter of 2011.
Competitors include 7 Eleven, Burger King, Cold Stone Creamery, Dairy Queen, McDonald’s, Quick Trip, Starbucks, Subway, Tim Hortons, WaWa and Wendy’s.
$1.5 billion in debt. Huge issue here.
2010 - $577 million, a 7% increase over 2009. Solid 34% operating margins. Good margins here due to the pure franchise model. ***Debt servicing(taking into account debt paid on ipo) ate up 37% of revenues, simply way too much for a franchise business model that should have this extensive debt. Net margins of 15.5%, EPS of $0.70.
2011 - Revenues look to grow 10% in 2011, driven by Dunkin' Donuts same store sales growth and new franchised locations. Total revenues of $635 million. Operating margins and net margins in the same ballpark. Lets go with 16% net margins. At that run rate EPS would be $0.78. On a pricing of $17, DNKN would trade 22 X's 2011 earnings.
Quick look at THI and SBUX:
SBUX - $29.8 billion cap with a great balance sheet, $1.4 billion in net cash. Trades 27 X's 2011 estimates with an 8% growth rate.
THI - $7.96 billion market cap with a solid balance sheet of a shade over $100 million in net debt. Trades 20 X's 2011 estimates with an 8% growth rate.
DNKN - $2.2 billion cap at $18. Lousy private equity bloated balance sheet of $1.4 billion in net debt. Would trade 22 X's 2011 estimates with a 10% growth rate.
Conclusion - Great brand name here in Dunkin' Donuts. However a whopping $1.5 billion in debt, laid on to pad the pockets of private equity. Baskin Robbins appears to be a fading brand name, losing customers per location at a frightening clip.
We've seen strong brand name deals awash in debt work if priced correctly. Range here seems about right when one factors in the negatives. Nothing to get too excited about. Solid sector, great brand name and looks priced about right in range. Neutral to slight recommend due to the Dunkin' Donuts brand name in the northeast.

July 23, 2011, 10:09 am

SKUL - SkullCandy

Update - Priced and opened strongly. However been a dud early in the aftermarket dropping below pricing. I suspect this has quite a bit to do with the perceived losses in 2010, nearly all of which were non-operational and non-reappearing. Tradingipos.com has no position in SKUL currently, waiting for it to get back above pricing after being stopped on break.

SKUL - Skullcandy

SKUL - Skullcandy plans on offering 9.6 million shares at a range of $17-$19. Insiders plan on selling 5.4 million shares in the deal. BofA Merrill Lynch and Morgan Stanley are leading the deal, Jefferies, Piper Jaffray, KeyBanc and Raymond James are co-managing. Post-ipo SKUL will have 26.8 million shares outstanding for a market cap of $483 million on a pricing of $18. Ipo proceeds will be used to repay debt.

Founder and former CEO Rick Alden will own 26% of SKUL post-ipo. Note that in 3/11, Mr. Alden abruptly resigned as CEO without giving a concrete reason.
From the prospectus:
'Skullcandy is a leading audio brand that reflects the collision of the music, fashion and action sports lifestyles.'
Not that one could discern from that above sentence, but SKUL is the 2nd largest headphone seller in the US and #1 for earbuds . Sony is #1 in headphones. SKUL has positioned themselves as a trendy and cool action sports accessory maker utilizing snowboarders, skateboarders, NBA players and even Snoop Dogg to hawk their headphones.
Great name by the way. Target market is teens and young adults, using hip and trendy “pitch people”. SKUL has focused on distribution through specialty retail shops focusing on action sports and youth lifestyles. As they've grown, they have also since branched out into mainstream retailers such as Target and Best Buy. In fact Target and Best Buy were SKUL's largest customers over the past year each accounting for 10%+ of sales.
SKUL claims to have 'revolutionized' the headphone market by turning a commoditized product into a 'must own' for certain subgroups. While I like the name and growth has been solid, the margins here do not indicate a revolutionary product at all. Less hype, more information is the way to go with prospectus' in my opinion.
SKUL's success lies in branding, marketing and redefining the headphone market by using bold color schemes, loud patterns, unique materials and creative packaging with the latest audio technologies.
Price points appear to be roughly $20-$150 with majority $70 and under. SKUL believes their target market owns multiple sets of headphones and replaces them frequently.
Market - SKUL was an early mover in envisioning the increasingly mobile communication society. Headphones and earbuds have seen a resurgence this past decade with the increase of mobile media devices beginning with portable MP3 players such as the iPod, followed by smartphones and the iPad and other tablets.
Growth - SKUL plans to begin selling directly internationally as opposed to via 3rd party distributors. In addition SKUL is broadening product line by adding speaker docks and mobile phones cases in the summer of 2011.
Competitors include Sony, JVC and Bose. Recently Adidas and Nike have introduced headphones. Barrier to entry here is quite low.
International revenues account for 20% of total revenues.
Nearly all of SKUL's products are manufactured in China.
$1 per share in cash post-ipo with $11 million of debt also on the books.
Seasonality - As is par for the course with a retailer, back half of the year is seasonally strongest.
***In 2010, SKUL had substantial one-time compensation expenses. Some of these were cash expenses. However as these expenses will not repeat once SKUL is a public company, we folded them out to get a better look at operations. In addition, numbers for 2010/2011 below take into account the debt being paid down on ipo.
2010 - Revenues of $160.6 million, a solid 36% increase from 2009. Gross margins of 53%. 24% operating margins. Operating margins were relatively flat with 2009 and 2008. I would not expect a substantial increase in operating margins going forward here, bottom line growth will have to come from top line growth. Net debt servicing will only eat up 1% of operating profits, debt not an issue here at all post-ipo. Net margins of 15%, EPS of $0.90.
2011 - Strong first quarter in what is traditionally the weakest seasonally. Revenues should increase 31% to $210 million. Much of this number relies on the 4th quarter annually, business as usual for a retail related ipo. Looking at core operations the past few years, pretty safe assumption that gross and operating margins will be in 2009 and 2010's ballpark. Plugging 53% gross margins and 24% operating margins we get 15% net margins. EPS of $1.17. On a pricing of $18, SKUL would trade 15 X's 2011 estimates.
Good looking deal here, 'sneaky profitable' due to pre-ipo compensation charges that will not reappear. I would expect most to underestimate SKUL's 2011 bottom line due to the perceived loss in 2010.
A couple of issues here though. First, not ideal when the CEO/founder abruptly resigns a few months prior to ipo. Second, SKUL is another one of these trendy retail ipos and those sometimes do not end well. For every SODA there is a Healy's. One thing has remained consistent with these type deals though: They do tend to do very well the first year public. Some end up being long term winners such as UA, others fall by the wayside and/or get bought out down the road a la VLCM.
Based purely on growth, potential bottom line and valuation, SKUL is a recommend in range. Strong recommend in range actually. I can easily envision SKUL trading up to 30 X's 2011 earnings, which would be the mid $30's on stock

May 25, 2011, 9:11 am

YNDX - Yandex

YNDX - Yandex

YNDX - Yandex plans on offering 57.7 million shares at a range of $20-$22. Insiders will be selling 40 million shares in the deal. Morgan Stanley, Deutsche Bank, and Goldman Sachs are leading the deal, Piper Jaffray and Pacific Crest co-managing. Post-ipo YNDX will have 323.3 million shares outstanding for a market cap of $6.79 billion on a pricing of $21. Ipo proceeds will be used for general corporate purposes.

The two founders will own 49% of YNDX combined post-ipo. Each has agreed to a one year lock-up of their shares.

From the prospectus:

'We are the leading internet company in Russia, operating the most popular search engine and the most visited website.'

Russian search engine, largest internet company in the country.

64% of search traffic in Russia, Google is number 2 at 22%.

***YNDX share of the market is growing from 55% in 2008 to 57% in 2009 and to 64% in 2010 to 65% in the first 3 months of 2011.

In 3/11, YNDX website(yandex.ru) attracted 38.3 million unique visitors.

YNDX also operates in Ukraine, Kazajhstan and Belarus.

In addition to broad search, YNDX offers local search results in more than 1,400 cities. Also specialized search resources including news, shopping, blogs, images and videos much like Google.

YNDX also offers an online payment system at yandex.money.

Revenues derived from online advertising. Currently bulk of revenues are from text based advertising, with display advertising making up a smaller amount. YNDX does not utilize any pop-up ads.

Much like Google, YNDX also serves ads on third party websites that make of the YNDX ad network. Third party site ads accounted for 12.5% of 2010 ad revenues.

In the first quarter of 2011, YNDX served ads from 127,000 advertisers.

Just 3% of revenues are from advertisers outside of Russia.

Much like the selling points for BIDU when it came public, YNDX notes that 1)the Russian economy is expected to grow faster than the global economic rate; 2)Russian internet penetration significantly lags developed countries and is expected to grow faster leading to the conclusion the Russian online/mobile advertising market looks poised to 'outgrow' more developed countries.

YNDX does serve ads on Facebook.

Lest we forget, Russia is not yet a free country. This little tidbit hit the newswires not too long after YNDX filed for this ipo:

'Yandex, which last week announced its intention to list on NASDAQ, says it has been forced by Russian authorities to hand over financial information about an anti-corruption blogger to Russia’s domestic security agency, the FSB.

Alexei Navalny, who operates the RosPil whistle-blower Website in Russia, had complained on his blog that some financial contributors were receiving threatening telephone calls over their support for the site. Contributions through Yandex to RosPil are made using "Yandex Money". Yandex has now confirmed that it provided information about both Navalny and his contributors after being approached by the FSB.'

A cozy relationship with the Russian government means that YNDX has(and one can infer will again) given the government personal information about people that have blogged anti-government rhetoric.

Inflation - Always an issue in Russia, the annual inflation rate has been 12% in 2008 and 9% in each of 1009 and 2010.  


$1.25 per share in cash post-ipo.

4th quarter is seasonally the strongest.

2010 - $440 million, a 43% increase over 2009. 79% gross margins. Strong 40% operating margins. Tax rate appears to be 25% of operating income. Net margins after interest income and taxes of 30%. EPS of $0.42.

2011 - Revenues are on pace to grow strongly yet again. $650 million in revenues, nearly 50% growth from 2010. Easy first quarter 2010 comparable are helping to accelerate the growth rate here. Operating margins look to improve slightly to 41%, net margins of 32%. EPS of $0.64. On a pricing of $21, YNDX would trade 33 X's 2011 estimates.

Way too cheap, 33 X's 2011 estimates with a 50% growth rate and dominant market position in a sector growing swiftly.

Quick look at BIDU and YNDX.

BIDU - $45 billion market cap. currently trading 22 X's 2011 revenues and 48 X's '11 estimates. $5 per share in cash on the books expected to grow revenues 65% in 2012.

YNDX - On a pricing of $21, $6.79 billion market cap. Would trade 10 X's 2011 revenues and 33 X's 2011 estimates. $1.25 per share in cash post-ipo with an anticipated 50% 2011 revenue growth rate.


Now this is what a foreign internet leader looks like. Strong sector leadership in what should continue to be a fast growing sector going forward. Notably taking market share away from competitors(which include Google) annually the past three years is very impressive. Strong margins and growth, easy recommend in range here. Dominant market leader, everything you look for in an ipo coming at a very reasonable multiple.

May 15, 2011, 5:38 pm

NGL - NGL Energy Partners

NGL - NGL Energy Partners

NGL - NGL Energy Partners plans on offering 4.025 million units at a range of $19-$21. Wells Faego and RBC are leading the deal Suntrust, BMO, Baird, BOSC and Janney co-managing. Post-ipo NGL will have 15 million total units outstanding for a market cap of $300 million on a pricing of $20.

Ipo proceeds will be used to repay debt.

NGL Energy will own all non-floated units, the General Partnership and the incentive distribution rights. NGL Energy is comprised of the assets of three propane companies: NGL Supply, Gifford and Hicks.

From the prospectus:

'We are a Delaware limited partnership formed in September 2010 to own and operate a vertically-integrated propane business with three operating segments: retail propane; wholesale supply and marketing; and midstream.'

Before we get into the details here lets quickly look at anticipated yield, competitors and cash flows.

Distributions - NGL plans on paying quarterly distributions of $0.3375 per unit. At an annualized $1.35 per unit NGL would yield 6 3/4% annually on a pricing of $20.

3 aspects make up a strong energy master limited partnership.

1 - Solid balance sheet to enable cash flow positive acquisitions down the line. NGL does have s nice balance sheet on ipo due to utilizing ipo monies to pay off debt. $25 million of debt on the balance sheet post-ipo.

2 - Strong parent company to facilitate dropdown acquisitions once public. Nope, not much there parent wise here.

****3 - Sufficient annual cash flows to pay not only anticipated distributions, but also to cover debt servicing and capex. NGL falls woefully short here. Pro forma(taking into effect ipo as if it occurred 1/1/10) NGL did not have sufficient cash flows to have covered all three of these. Now NGL did embark on an aggressive expansion capital expenditure plan in 2010, so possibly that was an aberration. However forecasts for the first 12 months public(ending 3/31/12), NGL anticipates having cash flows post capex and debt servicing to pay just 61% of the expected distributions. This is as short on a percentage basis as I've seen in one of the MLP energy ipos. Simply put, NGL should not be structured as a pass through entity as their cash flows are not sufficient to cover expenses and the distributions to holders. The plan is to borrow the monies to pay the full distributions. Looking at it another way, NGL is borrowing money to service debt, pay capex and pay unit holders. Not ideal borrowing money to service your debt, which is what is happening here after all.

Solid yield, however the underlying business is not generating sufficient cash flows to pay that yield to holders and service debt and fund capex. Of course NGL would not be able to garner this pricing/market cap if they were coming public with a 40% smaller distribution so they will borrow to cover everything. Not interested here at all with this lack of cash flow coverage.

Comparables are NRGY(7.4% yield), APU(6.3%), FGP(7.7%) and SPH(6.5%).

Quick look at the actual operation here:

Retail propane - 54,000 customers, the 12th largest retail propane distribution company in the US. Georgia, Illinois, Indiana and Kansas.

Wholesale - 68 million gallons of propane storage space for supply to third party sellers.

Midstream - Propane terminals for transfer to third party trucks. 3 terminals in IL, MO and Ontario with annual throughput capacity of 170 million gallons.


$25 million in debt post-ipo. Expect this number to increase as NGL plans on borrowing to cover expenses and to pay distributions to holders.

Forecasts for the 12 months ending 3/31/12 - $884 million in revenues. Gross margins here are very thin at 6.5%. Operating margins of 1.8%, net margins of 1.5%. As noted above, cash flows will NOT be sufficient to pay expected distributions as well as capex and debt servicing.

Conclusion - Weakly structured energy MLP. NGL has historically not had sufficient cash flows to cover all expenses and the expected $1.35 per unit distribution. In fact after expenses, capex and debt servicing, NGL anticipates only being able to pay 61% per unit to cover all distributions for the 12 months ending 3/31/11. They plan on borrowing to cover the rest. Not interested in range, cash flows simply not strong enough to cover the expected yield.

May 9, 2011, 6:09 pm

RENN - Renren

RENN - Renren

RENN - Renren plans on offering 61.1 million ADS (assuming overs) at a range of $9-$11. Insiders will be selling 10.2 million ADS in the deal. Morgan Stanley, Deutsche Bank, Credit Suisse, BofA Merrill Lynch and Jefferies are leading the deal, Pacific Crest and Oppenheimer are co-managing.

Note that concurrent with the ipo RENN will be selling 11 million ADS equivalent shares in a private placement. The placement will be at ipo price. Buyers include Alibaba Group, China Media Capital and CITIC Securities.

Post-ipo RENN will have 403 million ADS equivalent shares outstanding for a market cap of $4.03 billion on a pricing of $10.

Approximately 1/3 of the ipo proceeds will be used to invest in technology, 1/3 in expanding sales & marketing with the remainder for general corporate purposes.

Chairman and CEO Joseph Chen will own 22% of RENN post-ipo. Mr. Chen will retain voting control through a separate share class.

From the prospectus:

'We operate the leading real name social networking internet platform in China.'

Being touted as the 'Facebook of China'. As Facebook's last round of private funding valued the company north of $50 billion, that comparison alone will garner attention and interest for this deal.

Renren means 'everybody' in Chinese.

Note that Facebook and Twitter are banned in China. From web research it appears to me that there is a consensus that RENN does indeed censor topics/keywords/posts that are considered sensitive by the PRC. Common sense would indicate that would be the case, otherwise RENN would not be able to continue to stay in business. The PRC does have recent history (notably with Google) in attempting to censor content on the internet.

Real name social network site. Much like Facebook users connect and communicate with each other, share information and user-generated content, play online games, listen to music, shop for deals etc...

31 million monthly users in 3/31/11. This is an increase from 26 million in 12/10.

Platform includes renren.com, game.renren.com, nuomi.com (social commerce site) and jingwei.com (professional networking site). These sites combine to make RENN the largest real name social networking internet platform in China.

RENN did add approximately 6 million new users in the first quarter of 2011. Unique users spend an average of seven hours a month on their platform, producing a daily average of 40 million pieces of content including 3 million photos and 13 million status updates. Note that Facebook claims users generate a billion pieces of content a day, compared to RENN's 40 million.

Sector - As most are aware, social networking internet services provide users with interactive platforms to share and consume various forms of media content. The key to the rise of sites such as Facebook and RENN is the use of real names, eliminating the early internet mode of aliases and virtual identities. Usage of real names allow facilitation of personal communication and sharing among actual friends and benefits advertisers by facilitating word-of-mouth advertising among friends and offering targeted advertising based on user’s preferences, personal traits and online activities.

Revenues - Big difference between Renren and Facebook is that RENN derives substantial revenues from social networking games, with players purchasing virtual items. Farmville, the popular Facebook game, began on renren.com. Facebook derives most of it's revenues via advertising. RENN also derives revenues from advertising, however RENN currently (revenue-wise) would seem to have as much in common with the China online gaming stocks as with Facebook!

As noted above 42% of revenues are from advertising 45% from online games. The remainder from e-commerce, and other sources. One online multi-player game alone (Tianshu Qitan) accounted for 14% of 2010 revenues.

Seasonality - Advertising revenues tend to be lower in the first quarter annually.


$1.75 per ADS in cash post-ipo on a $10 pricing.  

***Revenues in 2010 were just $76.5 million. That is a hefty price to sales ratio for a $4+ billion market cap. One would expect massive year over year growth for that market cap. Indeed in 2009 revenues grew 238%. Note however growth slowed substantially in 2010. Revenues did grow strongly 64% to that $76.5 million number, however on a pure dollar number, the $30 million increase was less than 2009's $33 million increase. These are not weak growth numbers at all. Keep in mind though we are talking about a price to sales number of 50+ (assuming a $10 pricing). Taking that into account a 64% increase in revenues and a slower whole dollar growth in those revenues from year prior does not look so strong. This deal will be 'hot' and it will get done at a healthy price. Going forward though these growth numbers need to be watched closely as this is a potential yellow flag. Valuation in range (let alone actual pricing and open) will mean RENN will be priced to perfection on a pure financials/valuation level, slowing growth going forward will not be acceptable. Keep an eye on this as in 2010 growth was not all that impressive considering valuation. Not at all, I would consider it quite unimpressive actually.

Nice job by RENN in keeping expense growth under control in 2010. Expenses actually grew less on a whole dollar amount in 2010 than in 2009.

2010 - $76.5 million in revenues. Gross margins of 78%. Operating expense ratio decreased nicely from 2009's 83% to 2010's 68%. Very good sign for future profitability. Operating margins of 10%. Folding out currency exchanges and plugging in interest income and 15% tax rate, net margins of 8.9%, EPS of $0.02.


Again growth is an issue here. Including the 3/11 quarter, the last 4 quarters have shown no growth. Revenues in the 6/10 quarter were $19.8 million, $21.7 million in the 9/10 quarter, $20.9 million in the 12/10 quarter and $20.6 million in the 3/11 quarter. The word to describe this is lackluster.

Expenses increased significantly in the first quarter of 2011 as RENN focused on spending to grow advertising dollars. This un-did a lot of the expense constraint of 2010.

Revenue growth should kick in the back half of 2011. Revenues of $115 million, a 50% increase over 2010. Gross margins improving to 80%. Based on Q1, operating margins do not appear to improve much at all. 12% operating margins, 10.5% net margins. EPS of $0.03.

YOKU came public with the 'YouTube of China' tag. Quick look at each.

YOKU - $6.44 billion market cap, bottom line losses in 2011 expected. Top-line is expected to be the same as our 2011 forecasts for RENN. The difference is quarterly growth. While RENN saw none sequentially the back half of 2010, YOKU grew quarterly sequential revenues 48%, 61% and 31% the final three quarters of 2010. Also note that in range RENN's valuation is comparable to YOKU's after YOKU has appreciated substantially from ipo.


Priced to perfection in range. Revenue base just is not there yet to hold that $4 billion valuation. Revenue growth has been nonexistent the past 4 quarters as well, something I found very surprising.

These issues may not matter initially as RENN should price and open strongly. Why? Currently there just is not nearly enough internet social networking stock out there for the worldwide demand. This is the hottest segment of the worldwide market currently and investors want a piece. That 'Facebook of China' tag means RENN will easily work in range short term. Also YOKU's (The YouTube of China) valuation does not make RENN's valuation look nearly as stretched. Of course comparing skyhigh valuations can easily turn into a house of cards, simply ask anyone loaded in US internet stocks a decade ago. That is a discussion for another time I suppose.

Will work in range. I have issues with this deal and valuation however. I just do not like the lack of growth and the reliance on online multi-player games for revenues. To work longer term, growth is going to have to accelerate at more than 2010's $30 million a year. That revenue growth number is (and should be) a concern. Also of concern is the reliance on multi-player online role playing games for a large chunk of revenues. Popularity of games come and go, meaning RENN will need to continue to develop and/or license popular games. I've a lot of longer term concerns here actually on this deal at this market cap.

Keep in mind the past 4 quarters ending 3/31/11 have shown revenues of $19.8 million, $21.8 million $20.9 million and $20.6 million. If RENN does not start growing revenues sequentially, the stock will suffer down the line.

Deal should work off the 'Facebook of China' tagline, I've a lot of reservations here even in range though. QIHU looked stronger in range than RENN, much stronger.

May 5, 2011, 3:34 pm

NQ - NetQin Media

NQ - NetQin Media

NQ - NetQin Mobile plans on offering 8.2 million ADS(assuming overs) at a range of $9.50-$11.50. Piper Jaffray is leading the deal, Cannacord and Oppenheimer co-managing. Post-ipo NQ will have 46.3 million ADS equivalent shares outstanding for a market cap of $486 million on a pricing of $10.50. Ipo proceeds will be used for sales efforts, R&D and general corporate purposes.

Chairman & CEO will own 27% of NQ post-ipo. Sequoia Capital will own 7%.
No sense burying the lead:
***On 3/15/11 a piece on CCTV(China Central TV) reported complaints of fraudulent practices against NQ. These accusations included uploading malware or viruses to mobile phones to promote NQ's mobile security products. Since major China media outlets have reported that China’s Ministry of Industry and Information Technology, or MIIT, directed the three major telecom operators in China to cease offering NQ's mobile security applications on their respective online application stores, and as a result the three major telecom operators have terminated their business relationships and contracts with NQ. In addition Nokia has removed NQ's products from their mobile online store.
From the prospectus:
'We are a leading software-as-a-service, or SaaS provider of consumer-centric mobile Internet services focusing on security and productivity.'
Chinese mobile security software operation. A play on the growing number of smartphones and internet data transfer over mobile devices. Cloud platform and client side application combination. Provides mobile anti-malware, anti-spam, privacy protection, data backup and restore. Operates much like non-mobile internet security offerings, continuously updating database of malware and spamware evolving over time.
68% market share in the Chinese mobile security sector. 86 million registered users in over 100 countries. Free service with option to choose from premium paid services.
Compatible with Android, Symbian, iOS, Blackberry and Windows Mobile.
67% of registered users are in China. While there are 86 million registered users, there were actually 30 million users in the month of 3/11.
Interesting - 2011 Technology Pioneer Award bestowed by the Davos World Economic Forum.
NQ's solutions:
Mobile Security - Protecting users from malware, data theft and private intrusions. Mobile malware scanning, internet firewall, account and communication safety, anti-theft, performance optimization, hostile software rating and reporting and other services.
Mobile Productivity - Enhance time and relationship management, including screening incoming calls, filtering unwanted spam short messaging services messages, or SMS messages, protecting communication privacy and managing calendar activities. In addition, cloud-side synchronization of personal data, including address books, text messages, calendars and other data.
Cloud Services - Synchronized contacts/calendars. mobile users’ contact information can be used to link calendar activities across related contacts.
***Revenues are derived by selling subscriptions to premium services. While NQ had 30 million users in 3/11, only 3.67 million were paying accounts. Very large market cap here for just 3.67 million monthly paying users at what appears to be a $5 annual average subscription rate.
Key going forward obviously is converting user base into paying users. Thus far migration to pay services seems to be a bit slow as for the first quarter of 2011 saw just 12% of users converted to paying users.
Note that approximately half of revenues are actually collected by the wireless carriers.
***21% of revenues derived through mobile payment service provider Yidatong. Yidatong is owned by a former NQ consultant. NQ had provided Yidatong with interest free advances in order to fund liquidity needs. Yidatong has paid back these advances prior to this ipo.
Competitors include QIHU, Kingsoft and international security operations.
$1.50 per ADS in cash post-ipo.
Revenues here are minuscule to date. I am perplexed at the attempted market cap here with such a small current revenue stream.
2010 - Revenues tripled, however just $17.7 million in total revenues. Gross margins of 71%. Operating margins of 12 1/2%, net margins of 10%. EPS of $0.04.
First quarter of 2011 looked strong with $7.6 million in revenues, a tripling of first quarter 2010.
2011 - Until we see the fallout in quarter two of China's big 3 mobile operators barring NQ we simply cannot project 2011. One of the 'Big 3' China Unicom did not offer NQ's products, the other two did. I simply at this point do not have enough information to project 2011. If first quarter momentum were to continue I do believe NQ would book $40 million in 2011 revenues, more than double 2010. EPS would be $0.25. Was a very good first quarter, however we've the issues mentioned above casting a shadow on the 2nd quarter.
Attempting a nearly $500 million market cap with just $17 million in 2010 revenues. On top of that just a month ago China's 3 largest mobile operators have ceased doing business with NQ due to accusations of fraud. To be fair, one of the three did not offer NQ's products anyway. Very surprised they are going through with this ipo right now and not waiting another quarter or two. Yes, a great first quarter of 2011 here. However I'd rather wait and see how revenues are effected in the 2nd quarter before considering entry here. Aggressive market cap here on ipo even without the recent malware accusations. With them, this is a 'wait and see' deal to me.

April 28, 2011, 10:45 am

TLLP - Tesoro Logistics

Report was available to subscribers 04-13-2011
TLLP - Tesoro Logistics LP

TLLP - Tesoro Logistics LP plans on offering 14.375 million units at a range of $19-$21. Citi, Wells Fargo, BofA Merrill Lynch and Credit Suisse are leading the deal, Barclays, Deutsche Bank, JP Morgan, Raymond James and RBC are co-managing. Post-ipo TLLP will have a 31.1 total units outstanding for a market capo of $622 million on a pricing of $20. Nearly all the ipo proceeds will go to parent Tesoro(TSO). In addition, on ipo TLLP will borrow $50 million which go to TSO as a cash distribution.

Refiner Tesoro(TSO) will own all non-floated shares, the general partnership and incentive distribution rights.

Yield - As an MLP, TLLP will distribute all net cash flows quarterly to unitholders. The initial distribution is expected to be $0.3375 quarterly. On an annualized $1.35, TLLP would yield 6.75% annually to unitholders.

Lets not bury the lead here. We all know by now that these energy MLP's trade based on cash flows ans yield. TLLP derives revenues based on fees from Tesoro, not based on the underlying price of the commodity. As long as TSO's refineries are operating at or near capacity, TLLP's cash flows should be consistent and predictable.

The business here, terminals and pipelines for refineries, is ideal for an MLP structure. Not a growth sector, but one in which cash flows are consistent and predictable. Growth comes from either dropdowns from the parent or acquisitions. The debtload of the ipo comes into play here. The better the balance sheet, the easier to fund acquisitions and flow those cash flows to the bottom line and unitholders.

In order to pay the full $1.35 per unit distribution and fund capital expenditures TLLP will need to borrow approximately $3 million the first 12 months public. This is not an issue as it amounts to just $0.10 per unit in a 12 month period in which TLLP plans more than normal expansion capital expenditures. This is something to keep an eye on going forward however. Ideally you want the entity(TLLP) structured so that cash flows are sufficient to pay both the full distribution and fund capital expenditures.

There are at least 4 publicly traded refined products pipeline & terminal MLP's.

SXL - Yields 5.3% annually, average debt load for the group.

PAA - Yields 6% annually, above average debtload for the group.

HEP - Yields 5.9% annually, average debtload for the group.

MMP - Yields 5.1% annually, less than average debtload for the group.

Not exactly apples to apples, the strength of the parent and the location and scalability of operations also come into play.

Based purely on yield and balance sheet, TLLP looks quite attractive in this space.

TLLP - On a $20 pricing, would yield 6.75% annually with minimal debtload.

From the prospectus:

'We are a fee-based, growth-oriented Delaware limited partnership recently formed by Tesoro to own, operate, develop and acquire crude oil and refined products logistics assets. Our logistics assets are integral to the success of Tesoro’s refining and marketing operations and are used to gather, transport and store crude oil and to distribute, transport and store refined products.'


*Crude oil gathering system in North Dakota/Montana. Includes 23,000 barrels per day truck-based crude oil gathering operation and approximately 700 miles of pipeline and related storage units.

*Eight refined products terminals in the midwest and west with capacity of 229,000 barrels per day. Distribution for refined products from TSO's refineries in Los Angeles and Martinez, CA, Salt Lake City, Utah; Kenai, Alaska; Anacortes, Washington; and Mandan, North Dakota.

*Crude oil and refined products storage facility in Salt Lake.

*Five related short-haul pipelines in Utah

Growth plans include constructing new assets and by acquiring dropdowns from parent TSO and third parties. TSO plans on growing their logistics segment, with a focus on increasing yield for TLLP. TSO recently announced a refining expansion of 64,000 bpd at their North Dakota refinery.

As noted above revenues are derived from fees charged for gathering, transporting and storing crude oil and for terminalling, transporting and storing refined products.

Parent TSO accounts for nearly all revenues.

Tesoro(TSO) - Tesoro is the second largest independent refiner in the United States by crude capacity and owns and operates seven refineries that serve markets in Alaska, Arizona, California, Hawaii, Idaho, Minnesota, Nevada, North Dakota, Oregon, Utah, Washington and Wyoming. Tesoro also sells transportation fuels and convenience products through a network of nearly 1,200 retail stations under the Shell, Tesoro and USA Gasoline brands.


$50 million in debt post-ipo. Balance sheet is set-up here nicely for future dropdowns from parent TSO.

12 months ending 3/31/12: $97.3 million in revenues, 45% operating margins. Debt servicing will eat up just 5% of operating profits. Net margins of 42.5%. Factoring in capex, cash flows will be $1.25, $0.10 short of the expected distribution. Capex is expected to be $15 million, far higher than 2010's $1.7 million.

Conclusion - solid MLP deal coming attractively valued in range on a yield basis. We want to keep an eye on borrowings going forward as ideally cash flows should be sufficient to cover distributions and capex. For the first twelve months public TLLP plans on borrowing $0.10 per unit to fund distributions and capex. Slight negative that. Strong 6.75% yield though and very good balance sheet which should lead to acquisitions and increased yield going forward. Recommend.

April 17, 2011, 12:24 pm

ZIP - ZipCar

ZIP - Zipcar plans on offering 9.6 million shares (assuming overs) at a range of $14-$16. Goldman Sachs and JP Morgan are leading the deal, Cowen, Needham and Oppenheimer are co-managing. Insiders will be selling approximately 3 million shares in the deal. Post-ipo ZIP will have 38.6 million shares outstanding for a market cap of $579 million on a pricing of $15. Ipo proceeds will be used to repay debt taken on during an acquisition and for working capital.

From the prospectus:

'Zipcar operates the world’s leading car sharing network.'

560,000 car sharing 'members.' 8,250 Zipcars total. 68 members per auto currently. an oddity here - Over the past 2 quarters, ZIP has grown members from 470,000 to 560,000. However the number of available autos has dropped from 8,860 to 8,250. More people, less autos available.

Self service vehicles located in reserve parking spaces throughout neighborhoods in large metro areas as well as college campuses. Target demographic is 1) urban dwellers needing a car a few times a month for either day or shopping trips; 2) college students without a vehicle.

Web and mobile app based reservation model.

Vehicles available for use by the hour or day. Fuel and insurance are covered in the price. Note however that there appears to be substantial evidence on the web of customers being charged by ZIP for damages done to cars. Prices average $6-$12 by the hour and $60-$80 by the day, with some busy weekend being up to $150 per day. ZIP appears to be attempting to manage auto inventory by shifting price based on demand, very similar to car rental agencies. 180 miles are covered in the price, additional miles are $0.45 per mile. Did a quick search in major metro areas and ZIP's rates are not really a bargain at all compared to the average auto rental. One day rates usually vary from $15-$45 in various metro areas. That does not include gas or insurance, although insurance is offered through major credit card programs. Plugging in $20 for gas (180 mile limit), one day auto rentals from car rental agencies run about $35-$65 with ZIP's all inclusive rates being $60-$70. With car rental agencies offering various reward programs for loyal and often users, there really is not much of an incentive currently for use of ZIP outside of college students too young to rent via auto rental agencies. ZIP is an alternative to renting a car from an agency, however not really a cost effective alternative.

The above is probably why ZIP operates on 230 college campuses throughout the US, but in just 14 non-university focused metro areas in the US, Canada and Europe. To me, ZIP's core user and growth niche would appear to be college students and those simply needing a vehicle for an hour or two once in a while. Not a bad alternative if seeking that timeframe, however not really a deal on price for much above that need.

Note also that cars are not generally cleaned between use. Often one driver drops off a car and another has it reserved soon after.

ZIPS slogan is a 'cost saving alternative to car ownership'. If one used ZIP's service for 5-6 days a month, one is looking at $350+ in monthly costs. Note that ZIP does not claim to be a cost saving alternative to traditional auto rentals.

Not knocking the service, simply pointing out on a cost basis, ZIP is rather pricey from all angles. The exception would be college students or others that needed a car for just 5-6 hours a month, not days.

Locations include New York, Boston, DC, San Francisco, Chicago, Baltimore, Toronto, Vancouver and London. In '07 ZIP merged with Flexcar and added Seattle, Portland, Atlanta Philadelphia and Pittsburgh.

In April of 2010, ZIP acquired Streecar, a car sharing service in the UK. Plan is to expand into other European metro areas. Actually the plan is to rapidly expand into 100+ metro markets worldwide down the line.

ZIP utilizes each auto for 2-3 years.

Competition - Note that car rental companies have recently announced car sharing programs. As they've the inventory and the locations, they would seem to be a natural competitor. In addition some auto manufacturers such as BMW are rolling out car sharing programs.


$88 million in cash post-ipo, $20 million in debt. ZIP is intent on fast growth, expect the debt to stay on the books as the cash is used to fund growth.

ZIP has never posted a GAAP profit or positive cash flows.

2010 - Pro forma, assuming the purchase of Streetcar has occurred 12/31/09. $194 million in revenues, an increase of 25%+ from 2009. GAAP growth is stronger due to the acquisition. Fleet operations are the big expense here. They are dropping slowly as a % of revenues, however they are still in an area in which profitability will be very difficult. In 2010, fleet operation ratio was 66%. This is simply the cost of the vehicles in the fleet in 2010. Total operating expense ratio was 104%, net loss $0.25.

2011 - Much depends on rollouts in new areas. I would expect 20% topline growth to $233 million. Operating expense ratio should still be at least slightly negative. The combination of auto fleet expense and sales/marketing expense are making it impossible for a positive bottom line currently. Would expect a loss in the $0.15-$0.20 area.

Throughout the prospectus, ZIP attempts to position themselves as part of the new age/era of on-demand services. The difference here between ZIP and online and mobile operations is that ZIP is not running that sort of business model. ZIP is in reality an 'old-school' hefty inventory car rental service with a twist. The twist however does not mean ZIP operates on an inventory model any different than the large car rental agencies. As ZIP grows areas and members, they will need to grow inventory at roughly the same rate in order to fulfill members demands for autos. A recent magazine article compared ZIP to OpenTable, the reservation system. Yes both tend to operate in major metro areas, but that is the extent of the similarity. OpenTable is an online service easily scalable without much additional investment, and no capital investments. ZIP is not, for reasons stated immediately above. ZIP has done a nice PR job attempting to position themselves as something different than their actual business model suggests.

Market leader in car sharing has a value. This deal is garnering some hype and honestly I've no idea if this ipo works initially or not. I have serious doubts however whether ZIP will ever be able to put much on the bottom line anytime in the mid or long term. ZIP is simply a different way to paint an auto rental company. Not a bad thing, however I'm not thrilled with either the financials or the hype here. Organic growth is not that impressive in mature markets(about 10% annually) and to date there really has not been much margin improvement. I foresee years GAAP losses ahead here, not a deal I can recommend simply on that basis.

First mover, market leader. Could be a short term trade based on hype, however I question the longer term sustainability of the business model.

As a side note, one of the most annoying prospectus I've ever read in regards to hype and 'new agey' catch words. ZIP, you are running a car rental operation with a small twist you are not redefining modern living in a 'socially conscious environmentally aware' way...and yes the latter is their claim.

April 7, 2011, 11:56 am

SDT - SandRidge Mississippian Trust

Disclosure - on blog post date(4/7/11), tradingipos.com is long SDT.

SDT - SandRidge Mississippian Trust

SDT - SandRidge Mississippian Trust plans on offering 14.375 million units(assuming overs) at a range of $19-$21. Raymond James and Morgan Stanley are leading the deal, Wells Fargo, RBC, Oppenheimer, Baird, Madison Williams, Morgan Keegan and Wunderlich are co-managing. Post-ipo SDT will have 28 million units outstanding for a market cap of $560 million on a pricing of $20. Ipo proceeds will go to parent SandRidge Energy(SD).

SandRidge Energy(SD) will own 49% of SDT post-ipo. SD will control SDT via a separate unit class. SD is an independent oil and natural gas operation focused on West-Texas, Oklahoma and Kansas. Market cap of $5.1 billion. Proved reserves of 545.9 MMBoe.

Initial distribution is expected to be made 8/30/11. Note that this distribution will include both the first and second quarter of 2011 even though SDT was not a public company in the first quarter of 2011. This initial distribution is expected to be $1.01 per unit.

From the prospectus:

'SandRidge Mississippian Trust I is a Delaware statutory trust formed in December 2010.'

SDT will own 1)royalty interests in 37 horizontal wells producing in the Mississippian formation in Oklahoma, and 2)royalty interests in 123 horizontal development wells to be drilled in the same formation. Wells are required to be drilled by 12/31/14.

Parent SD holds 64,200 acres in the formation. Until SD drills the 123 wells for the royalty trust they will not be able to drill in the formation for themselves.

SDT will receive 90% of all SD's proceeds from the currently producing wells and 50% of SD's proceeds in the yet to be drilled wells. The lower % in the yet to be drilled wells reflects parent SD's costs to drill these wells.

***Note that parent SD owns on average a 56.3% interest in the producing wells. SDT will receive 90% of Sd's 56.3% average interest in these wells, or 50.7% of all revenues from these wells. In the yet to be drilled wells SD owns on average a 57% interest, putting SDT's total interest in these wells at 28.5%.

SD operates 73% of the producing wells and owns a majority interest in 75% of the yet to be drilled wells.

Note that the Trust will not be responsible for any drilling costs or other operating or capital costs. The Trust simply receives revenues from the wells.

Hedges - SD will hedge 60% of SDT's expected revenues through 12/31/15. 2011 hedged prices are $103.60 for oil and $4.61 for natural gas.

Total reserves attributable to SDT are approximately 19,276MBOE, with approximately 2/3's of that expected to come from the yet to be drilled wells.

48% of reserves oil, 52% natural gas. Oil will account for approximately 79% of 2011 revenues.

Risk here is quite similar to recent ipo ECT - 2/3's of SDT's expected revenues over the life of the trust are expected to come from wells yet to be drilled. If parent SD runs into any difficulty in drilling these wells, SDT's distributions would dry up quickly....even a short term event delaying drilling would impact the expected distributions listed below.

Mississippian Formation - Anadarko shelf in Northern Oklahoma and south-central Kansas. Thousands of vertical wells have been drilled over the past 70 years. Horizontal drilling and fracturing began in 2007. 140 horizontal wells drilled just since 2009 in the formation. Currently 20 horizontal rigs drilling in the formation with eight drilling for SD. SD has a total of 880,000 acres leased in the formation.

Distribution - Set up much like recent ipo ECT, production will ramp up through 2014 as new wells are drilling. After the peak in 2014/2015, production will decline annually as the reserves targeted for SDT begin to dry.

Yield assumes a $20 pricing and average 2011 selling prices of $98 for oil and $4.50 for natural gas with similar estimates through 2013. Oil hedges are $100+ through 2015, natural gas collared between $4 and $8.55 through 2015.

2011 - Total distributions of $2.31, yielding 11.55%.

2012 - $2.82, yield of 14.1%

2013 - $3.03, yield of 15.15%

2014(peak yield) - $3.36, yield of 16.8%

2015 - $3.01, yield of 15.05%

First five years public SDT estimates unitholders will receive $14.53 in distributions. This compares favorably to ECT's distributions first five years of $13-$14 per unit.

ECT currently trades at $31.26 and relies on natural gas for the majority of revenues. ECT's 2012 expected yield is 10%, SDT's 14.1% at $20. 2013, ECT 11.6%, SDT 15.15%. 2014 ECT 9.4%, SDT 16.8%. If looking for a trust yield to buy, SDT in pricing range is the one to go for over ECT at $31+.

***Note that distributions will begin declining significantly beginning in 2016. Assuming a $20 price, SDT would yield 12.2% in 2016 and dip to 7 3/4%. Still not a bad yield nearly 10 years in.

Trust termination date is 12/31/30. Upon termination, any royalty interest retained will be sold be the Trust with proceeds going to SD and shareholders. SD has right of first refusal on purchase.

Nice mix here of both oil and natural gas. Oil is the driver here accounting for an expected 75%+ of Trust revenues through the lifespan of the Trust. Currently that is a positive as the price of oil has risen much faster the past two years than that of natural gas. Hedges in place to mitigate some price risk, also will cap some potential upside if oil blows off from here. SDT was structured to mimic ECT. ECT is up 50%+ from ipo last summer. Solid parent operation with extensive experience in the Trust assets area. Easy recommend here in range, would expect SDT to trade $30+ here sometime first year public.

April 3, 2011, 2:21 pm



GNC - GNC plans on offering 25.875 million shares at a range of $15-$17. Insiders will be selling 9.875 million shares in the deal. Goldman, JP Morgan, Deutsche, and Morgan Stanley are leading the deal, Barclays Credit Suisse, Blair and BMO are co-managing. Post-ipo GNC will have 103.55 million shares outstanding for a market cap of $1.657 billion on a pricing of $16.

A big chunk of the ipo monies will be used to pay a dividend to insiders. Note that insiders also paid themselves a nice dividend as well on a recent debt restructuring. Remainder of the ipo proceeds will be used to repay debt.

Due to a couple leveraged buyouts over the past decade debt here is substantial. Post-ipo GNC will have $903 million in debt on the balance sheet.

Ares will own 28% of GNC post-ipo. Ares and other entities purchased GNC from Apoll in a 2007 leveraged buyout. Total consideration was $1.65 billion much of it funded via debt. Apollo attempted unsuccessfully to take GNC public twice in the 2004-2006 timeframe.

From the prospectus:

'Based on our worldwide network of more than 7,200 locations and our GNC.com website, we believe we are the leading global specialty retailer of health and wellness products, including vitamins, minerals and herbal supplements ("VMHS";) products, sports nutrition products and diet products.'

Large, successful brand and retailer here. Our one question is to discover if the pricing range here works factoring in the hefty debtload.

Much like competitor VSI, GNC enjoys higher margins on their own branded 'GNC' product line. GNC branded products accounted for approximately 47% of GNC's total 2010 sales. Branded products are sold at company owned stores, GNC franchise stores and Rite-Aid 'GNC store within a store' locations.

Sector - The US nutritional supplement industry generated $28.7 billion in sales in 2010. Growth projections are for 5%+ annually through 2015. Fragmented sector, GNC is largest participant with an estimated 5% US market share.

***GNC has had an impressive 22 straight quarters in company owned same store sales growth. Again, not a question here of a strong brand name or a successful operation. GNC is both. The question is the valuation with debt factored in.

As of 12/31/10, 2,917 company owned stores, 2,340 franchise stores and 2,003 franchised Rite-Aid stores within a store locations.

GNC plans on growing US company owned retail space by 3%-4% in 2011.

2010: 5.6% company owned same store sales growth, 2.9% franchise same store sales growth. $438,000 average revenue per company owned store. 101 company owned store openings, 40 closings.

2009: 2.8% company owned same store sales growth, 0.9% franchise same store sales growth.

GNC manufactures approximately 35% of products sold over the past five years.

Franchise revenues account for 16% of total revenues. Revenues from Rite Aid accounted for 3.5% of 2010 revenues.

11% of revenues from international operations, mostly in Canada.


$903 million in debt post-ipo.

2010 - $1.822 billion in revenues an increase of 6.7% from 2009. Gross margins of 35%. Operating margins of 11 1/2%. Interest expense ate up 19% of operating margins. For the size of the debt load, a nice positive here that interest expense is only cutting into 19% of operating margins. The debtload is large here, but not killing GNC operationally. Net after tax margins of 6.1%. EPS of $1.08. Note that cash flows here pretty much match EPS. If GNC continues to bring in 100+ million in cash flows annually, they can substantially pay down their debt load over the next five years.

2011 - Based on planned square footage growth and plugging in positive same store sales puts 2011 revenue growth at 5%-6%. Operating margins should improve slightly as debt servicing % will dip a bit. On a run rate of $1.922 billion with net margins of 6.5% puts 2011 EPS at $1.20. On a pricing of $16, GNC would trade 13 1/2 X's 2011 estimates.

Quick look at GNC and recent ipo VSI.

VSI - $955 million market cap, trades 24 X's 2011 estimates. Much less debt, $75 million. 33% gross margins, but just 3% net margins.

GNC - $1.66 billion market cap, at $16 would trade 13 1/2 X's 2011 estimates. 35% gross margins 6%+ net margins. Debt is the issue at $903 million.

Conclusion - IB's and private equity entities have finally been valuing these indebted ipo reasonably. The debt is an issue here, however debt servicing eats up just 19% of operating profits. Not ideal of course, but not enough to impede cash flows. GNC is a market leader, the worldwide supplement/vitamin leader in terms of revenues and store locations. Coming just 13 1/2 X's 2011 estimates is cheap. Definite recommend here in range, solid deal coming reasonably valued.

March 18, 2011, 4:11 pm



HCA - HCA Holdings plans on offering 142.6 million shares (assuming over-allotments) at a range of $27-$30. Insiders will be selling 36.3 million shares in the deal. BofA Merrill Lynch, Citi and JP Morgan are leading the deal, Barclays, Credit Suisse, Deutsche Bank, Morgan Stanley, Wells Fargo, Credit Agricole, Mizuho, RBC, RBS, SMBC Nikko, Suntrust, Avondale, Baird, Cowen, Susquehanna, Raymond James, Lazard, Morgan Keegan and CRT are all co-managing. Post-ipo HCA will have 533.8 million shares outstanding for a market cap of $15.213 billion on a pricing of $28.50. Ipo proceeds will be used to repay debt.

Hercules Holding will own 70% of HCA post-ipo. Hercules Holdings consists of Bain Capital, Kohlberg Kravis Roberts, Citigroup, BofA and Merrill Lynch Global Private Equity (now BAML Capital Partners) as well as HCA's founder. The private equity groups purchased HCA in 11/06 for approximately $33 billion. Of that total, just $5.3 million was cash from the private equity conglomerate. Counting dividends paid in 2010, the shares being sold on ipo (Hercules is the inside seller) and the 70% post-ipo stake, the private equity group will have approximately tripled their investment (assuming a $28.50 pricing). Another cash grab from private equity funds via a leverage buyout.

Post-ipo HCA will be swathed in debt to the tune of $26 billion, nearly all of which was placed here in the 2006 LBO. These deals always tend to leave a sour taste in my mouth for one big reason - When one entity profits massively in a deal coming public by laying debt onto the public entity, buyer beware. We've seen these heavily in debt LBO deals work if priced properly, we'll attempt to discern if this deal is coming public attractively....while always keeping the massive debtload in the forefront.

From the prospectus:

'We are the largest non-governmental hospital operator in the U.S. and a leading comprehensive, integrated provider of health care and related services.'

Acute care hospitals, outpatient facilities, clinics and other patient care delivery settings.

164 hospitals with 41,000 beds and 106 surgery centers in 20 states throughout US and England. Most located in the South, HCA derives nearly half their revenues in Texas and Florida.

Very simple deal for such a large company: Largest non-government hospital group in the US coming public highly leveraged due to a private equity LBO 5 years prior. One very big positive - largest hospital group, one very big negative - $26 billion in debt post-ipo.

Sector - Aging US population driving hospital stay and surgical center traffic. Those aged 65+ in the US will grow 3% annually over the next 20 years and constitute 19% of the population by 2030.

Impact of health reform law - Although significant reductions in Medicare program payments are expected, HCA believes the expansion in the number of those covered could potentially lead to larger private/government program payments combined. Short term however, HCA believes the Health Reform Law will negatively impact per patient government program reimbursement.

Performance - For the 12 months ended 3/31/10, HCA's hospitals achieved a score of 98.4% of the CMS core measures, compared to 95.3% national average.

No single facility contributes more than 2.3% of revenues and no metro area more than 8%. 3000 managed care contracts with no single commercial payer representing more than 8% of revenues.

Outpatient services account for 38% of revenues.

20,523 average daily patient census across HCA's network. 5.7 million emergency room visits in 2010, a strong growth niche for HCA. 1.25 million surgeries in 2010.

***Debt has remained on the books as HCA has funneled $7.5 million in cash flows past five years into facility upgrades and technology systems. Note that it appears HCA has only been using net cash flows to funnel into upgrades and technology systems.

Growth plans - Debt is going to hamper growth. Cash flows here are strong, HCA may be best served funneling a portion of future cash flows towards paying down some of that $26 billion in debt. Internally, HCA does plan on expanding in existing hospitals by offering additional services such as cardiology, emergency, oncology and women's. Another expected growth spot includes continuing to beef up outpatient services. Looks as if HCA is not looking at additional hospitals, but rather to continue to grow existing facilities and branching those facilities out.


$26 billion in net debt.

HCA will not pay dividends.

41% of revenues from Medicare and Medicaid programs. Managed care plans account for 54% of revenues.

***Whenever dealing with Medicare/Medicaid, the shifts in payments and forecasts are ever changing. We won't try to delve into the risks here, HCA themselves note that at this point even they do not know the potential impact of the Health Reform Act. Page after page of the prospectus is filled with notes on potential changes in Medicare/Medicaid. We however are traders/investors and not healthcare attorneys. Our takeaway on operations is this: HCA appears to be a very well run hospital network that has improved payment systems and operational efficiencies over the past few years. Well run outfit that should be able to manage as best they can whatever Medicare/Medicaid and the Health Reform Act throw at them.

2010 - After 5%-7% revenues growth in 2007, 2008 and 2009, revenues grew only 2% in 2010. Revenues were $30.7 billion. Operating margins of 27%. Plugging in doubtful accounts/depreciation/pro-forma debt servicing (taking into account debt paid off on ipo), pre-tax margins of 8%.

Note that debt servicing eats into 46% of pre-tax profits. This is substantial, and with the lack of overall growth means the PE level here needs to be pretty low for this deal to work.

Plugging in taxes, net margins of 5.1%. EPS of $2.25. On a pricing of $28.50, HCA would trade at a trailing PE of just over 12 1/2.

2011 - With the state/federal tightening on Medicaid/Medicare growth, another 2%-3% top-line year should be the expectation. Competitors are generally looking for 4%-6% growth, so we will bump up HCA to 4%. Margins should improve slightly, although we should note that in 2010 salaries/benefits increased on nearly 1:1 ratio to revenue growth. On a revenue run rate of $31.8 billion and net margins of 5.3%, HCA would earn $2.55-$2.60. On a pricing of $28, HCA would trade 11 X's 2011 estimates.

Note that annually, HCA books over $1 billion in free cash flow after debt servicing.

A quick look at US competition. Keep in mind HCA is easily the largest comp in this group.

THC: $3.5 billion cap, trading 20 X's 2011 estimates. $4 billion in debt.

UHS: $4.64 billion cap, trading 13 X's 2011 estimates. $4 billion in debt.

CYH: $3.83 billion cap, trading 12 1/2 X's 2011 estimates. $9 billion in debt.

LPNT: $2 billion cap, trading 13 X's 2011 estimates. $1.6 billion in debt.

HMA: $2.56 billion cap, trading 13 1/2 X's 2011 estimates. $3.25 billion in debt.

Yep, a heavily leveraged sector with all players growing about the same 4%-6% in 2011 and trading in a tight PE range. With so much of the business under government payment programs, very difficult to stand out and 'build a better mousetrap'. Result is that the valuations, balance sheets and growth all look about the same.

HCA: $15.23 billion cap on a pricing of $28. Would trade 11 X's 2011 estimates. $26 billion in debt.

Conclusion - Looks to me as if the underwriting team and PE firms are bringing this bloated LBO flipback to the market pretty attractively valued. Yes the debt is massive, which is reason enough not to get too excited here. However HCA is the leader in this space and from all indications very well-managed. $7.5 billion in free cash flows have been invested back into the hospitals the past five years on improvements, upgrades, and technology. Now it is time to take a chunk of that $1+ billion a year in free cash flows and pay off some debt. If they do so, the range here should work well mid-term+. Short term slight recommend here, longer term if HCA continues operating efficiencies and pays down cash this deal should be a success. Not one to pay up for (unless for a flip), but one being attractively priced in range vis a vis peer group.

February 25, 2011, 10:16 am

MEDH - MedQust

Note that MEDH priced 4.5 million shares at $8. Insiders opted not to sell and the deal came at a 27% discount to the middle of the initial range. That combination allowed the deal to work short term and gives it a much better chance to work mid-term as well. Still some issues here, but an attractive pricing. Tradingipos.com does own shares from $8.50 with a stop-out set on a new low $8.29.

MEDH - MedQuist

MEDH - MedQuist plans on offering 9 million shares(assuming overs) at a range of $10-$12. Insiders will be selling 4.3 million shares in the deal. Lazard, Macquarie and RBC leading the deal, Loop Capital co-managing. Post-ipo MEDH will have 51.1 million shares outstanding for a market cap of $562.1 million on a pricing of $11. Ipo proceeds will be used for working capital.

SAC PEI CB will own 32% of MEDH post-ipo.

**A rather lame lock-up agreement here. Approximately 12-14 million shares will not be covered by any lock-up agreements post-ipo meaning they can be sold at any time. Only 22.5 million shares of the 42 million non-floated will be beholden to the 180 day lock-up agreement.

From the prospectus:

'We are a leading provider of integrated clinical documentation solutions for the U.S. healthcare system.'

MEDH's systems convert physicians' dictation of patient ineractions into an electronic record.

Solutions are a combination of voice capture and transmission, automated speech recognition, or ASR, medical transcription and editing, workflow automation, and document management and distribution.

MEDH is the largest provider of clinical documentation solutions based on the physician narrative in the US. 3.4 billion lines of clinical documentation processed annually. MEDH is actually a combination of three separate companies, CBay, MedQuist and Spheris.

***Not all of MEDH's transcription is done automated. Approximately 42% is transcribe offshore by 14,000 individuals. 67% is from automated speech recognition software. So we've a 2/3 tech company here and a 1/3 outsourcing transcription operation. MEDH has done a nice job of increasing the technology/automated percentage annually.

Customers include 2,400 hospitals clinics and physician practices throughout the US, including 40% of hospitals with more than 500 beds. Average tenure of top 50 customers is 5 years with 98% of all revenues being recurring.

Sector - Accurate and timely clinical documentation has become a critical requirement of the growing U.S. healthcare system. Medicare, Medicaid, and insurance companies demand extensive patient care documentation. The 2009 Health Information Technology for Economic and Clinical Health Act, includes numerous incentives to promote the adoption and meaningful use of electronic health records, or EHRs, across the healthcare industry MEDH believes these drivers will fuel growth going forward. MEDH believes the medical transcription sector will grow 8% annually over the next 4 years. MEDH believes outsourcing of medical transcription is just 33% of the overall market.

Total current outsourced transcription end market is $1.7 billion annually. MEDH is the largest provider, based on 2010 revenues they appear to have an approximately 25% market share. Pretty impressive.


Debt is the issue here. Debt post-ipo will be $295 million. Note that MEDH will have $64 million of cash on the balance sheet. They seem intent on using this cash to acquire however so expect 1)an acquisition over the next 1-2 years and 2) that debt to remain on the books.

Gross margins improvement as MEDH shifts a higher percentage of transcriptions to all electronic.

2010 - $461 million in revenues, a pro forma drop of 10%. Revenue decrease is 100% due to the drop in Spheris, whose assets MEDH purchased in 2010. Actual revenues increased however Spheris revenues declined significantly in 2010. Gross margins of 37%, operating margins of 9%. The kicker here is the debt. Sort of a chicken and egg issue here as without the two large acquisitions, MEDH's revenues stream would be relatively small. With the acquisitions, you've a sector leader with $461 million in annual revenues saddled with debt.

Debt servicing looks to eat up 75% of operating profits. Too much, too much, too much. MEDH has extensive tax loss carryforwards, so a nil tax rate in 2010. Net margins of 2 1/4%. EPS(pro forma) of $0.20.

2011 - Look for margins to continue to improve. MEDH expects to have approximately $20 million in debt maturing as well as continued tax loss carryforwards. Revenues should increase as MEDH digests the Spheris acquisition. 10% puts MEDH at $500 million, right where the combined entities were in 2009. Gross margins of 39%, operating margins of 11%. Debt servicing still looks to eat up 55% of operating profits in 2011. Net margins of 4.5%, EPS of $0.44. On a pricing of $11, MEDH would trade 25 X's 2011 estimates.

Conclusion - Different medical services niche, but this deal reminds me quite a bit of Emdeon(EM). Dominant sector leaders with quite bit of debt. If you look at the financials, these two match up quite well on growth, sector leadership and even debt servicing ratio. EM trades about 15 X's 2011 estimates and has really been lackluster since ipo. MEDH does have potential for better bottom line growth imo as they continue to shift from outsourcing transcriptions to automation. However, the debt should cap the upside here for quite awhile. Neutral on the deal, sector leader coming public valued about right.

February 11, 2011, 8:39 am

KMI - Kinder Morgan

KMI - Kinder Morgan

KMI - Kinder Morgan plans on offering 92 million shares at a range of $26-$29. Insiders will be selling all shares in the deal. Goldman Sachs and Barclays are leading the deal, BofA Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Wells Fargo, Madison Williams, Morgan Keegan, Raymond James, RBC and Simmons co-managing. Post-ipo KMI will have 707 million shares outstanding for a market cap of $19.443 billion on a pricing of $27.50. KMI will receive no proceeds from the ipo.

Richard Kinder and 4 investment funds took KMI private in 2007 for approximately $15 billion. Post-ipo Richard Kinder will own 30% of KMI, Goldman Sachs 20%.

From the prospectus:

'We own the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P., referred to in this prospectus as the "Partnership" or "KMP."

An outsized version of recent ipo Targa Resources (TRGP). Difference other than size is that KMI was public for a number of years before going private in 2007 at over $108 a share (approximately $15 billion valuation).

KMI's main asset is an 11% interest in publicly traded KMP as well as the General Partner and incentive distribution rights of KMP. Note that KMI is not a master limited partnership, however their (nearly) only business is their stake in the master limited partnership KMP.

In addition KMI owns a 20% interest in NGPL PipeCo. NGPL is an interstate natural gas pipeline and storage system operated by KMI.

95% of revenues are derived from KMP, 5% from NGPL.

KMP - Owns 8,400 miles of refined petroleum product pipelines in the United States that deliver gasoline, diesel fuel, jet fuel and natural gas liquids, as well as 15,000 miles of natural gas pipelines and gas storage facilities. Also owns 1,400 miles of U.S. carbon dioxide pipelines, stakes in eight West Texas oil fields, 120 fuel terminals and 2,500 miles of pipeline in Canada.

KMP has grown distributions at a 40% compound annual growth rates since 1996.

In the US, KMP is:

* the largest independent transporter of petroleum products;

* the second largest transporter of natural gas;

*the largest provider of contracted natural gas treating services;

*the largest transporter of CO2;

*the second largest crude oil producer in Texas;

*the largest independent liquids terminal operator;

Distributions - KMI plans on paying shareholders $0.29 per quarter. At an annualized $1.16, KMI would yield 4.2% on a pricing of $27.50. Normally I prefer to see a 5%+ yield n the General Partnership deals, however recent TRGP ipo'd right at 5% and has appreciated to a yield of just 3.5%. KMI's underlying asset of KMP is one of the most successful MLP's in the history of the market, much stronger in every aspect than TRGP's NGLS.

In 2011, KMI expects to receive $1.3 billion in distributions from KMP. In 2010 KMP distributed $4.40 per common unit for the full year.

KMI's interests in KMP:

1 - The General Partner of KMP, include all incentive distribution rights.

2 - 21.7 million units, 7% limited partner interest.

3 - 12.1 million i-units, representing an addition 4% limited partner interest. i-units receive distributions in additional i-units instead of cash.

Growth - KMP has shown an ability for organic and acquired growth over the past 15 years. As KMP continues to grow yield, KMI receives more money quarterly.


$200 million in cash but a lot of debt here at $3.1 billion. I would imagine a portion of this debt was taken on through the going private transaction in 2007. Not thrilled with the debt levels here for an operation that, for the most part, just holds interests in KMP. In contrast, recent ipo TRGP had a pretty clean balance sheet.

Bulk of projected revenues are coming from KMP's General Partner. 86% of projected revenues are a result of KMP's General Partner/Incentive Distribution Rights.

2011 Projections - KMI is projecting $1.363 billion in total distributions from KMP and NGPL. After taxes and interest they are projecting exactly the $1.16 available for distribution in 2011.

Conclusion - Deal will work in range due to the name brand of Kinder. Kinder stocks – KMP, KMR, and KMI (before going private) have made investors a massive amount of money over the past 15 years or so. Really, home run stocks! However, I do not love the debt as a chunk of it was placed there to fund a “going private” deal.

Bottom line is pretty simple: The strong brand name in the MLP space ipo'ing here yielding 4.2% make this a recommend.

February 8, 2011, 7:49 am

IFT - Imperial Holdings

IFT - Imperial Holdings

IFT - Imperial Holdings plans on offering 19.2 million shares at a range of $14-$16. FBR, JMP and Wunderlich are leading the deal. Post-ipo IFT will have 27.3 million total shares outstanding for a market cap of $410 million on a pricing of $15. 2/3's of the ipo proceeds will be used to support IFT's finance transactions, with 10% to support IFT's settlement transactions.

Management and directors will own the non-floated shares.

IFT will not pay a dividend.

From the prospectus:

'We are a specialty finance company founded in December 2006 with a focus on providing premium financing for individual life insurance policies issued by insurance companies generally rated “A+” or better by Standard & Poor’s or “A” or better by A.M. Best Company and purchasing structured settlements backed by annuities issued by insurance companies or their affiliates generally rated “A1” or better by Moody’s Investors Services or “A−” or better by Standard & Poor’s.'

IFT finances life insurance premiums and also purchases structured settlements.

Revenues are earned from interest charged on financing loans and fees affiliated with those loans.

IFT historically funded their business by floating debt. Since 2007, the cost of debt financing has risen dramatically as lending rates and requirements such as collateral have increased.

IFT's financing costs in 2010 were 31.1% per annum of the principal balance of loans compared to 14.5% per annum in 2007. ***Result of these increased costs is that IFT has lost money on the bottom line in each of 2008, 2009 and 2010. Going forward IFT plans on using ipo proceeds to fund future financing transactions, lower the cost of capital and increasing the spreads.

IFT offers financing to individual life insurance premium holders allowing policy holder to retain coverage and miss scheduled payments for a period of time. Average principal balance is $213,000. Loans are approximately 2 years in duration and collateralized by the underlying policy. Individual receiving loan is not required to make any payments during the term of the loan. Average loan interest rate past two years has been 11%. At end of term either payment is made in full or default occurs and IFT takes control of the policy. IFT is generally required by lenders to insure policies upon lending and collects the insurance in case of default. This of course assists in increasing the cost of capital to that 31% annually.

Cost to IFT is 31% to finance loans with an average interest rate of 11%. IFT charges origination and agency fees as well, which allowed them to make a profit pre-2008 when cost of capital was 14.5% annually. At double+ the cost of capital, IFT needed to come up with an alternative. This ipo is that alternative, giving them capital to fund on their own part of their life insurance loan program.

***what a racket this appears to be. For loans that matured during the first nine months of 2010, 97% defaulted. No wonder IFT's cost of obtaining financing for these loans is so high, the loans nearly universally default. I don't care how much money IFT is making(they are not making any money since 2007), I don't want to invest in this type of business which essentially is taking advantage of individuals in a desperate situation.

Going forward IFT does not plan on obtaining insurance, rather they will fund their own purchases and grab the life insurance policy when they individual defaults. IFT will look to either sell the policy or hold it for maturity. This ipo is allowing them to change their business plan from one of financing life insurance loans, to a self-funded lender.

Structured settlements - 2nd segment, IFT purchases structured settlements at a discount and flips them and/or finances them through third parties. 2010 purchases were at a 19% discount to settlement. IFT generally resells the majority of their purchases and in 2010 the average sell price to discount was 9.1%. IFT does not generate a full 10% profit as they market heavily on tv, radio, print and internet to locate potential structured settlement sellers.

Bulk of revenues historically has been from IFT's life insurance loan segment.


$5 per share in net cash post-ipo. As noted above this cash will be used to alter the business model to self-funding loans.

2010 - $76 million in revenues, a decline from 2009's $96 million. IFT has not been profitable since 2007, losing more annually since. Losses in 2010 of $0.59.

Conclusion - Distate for both the line of business and the hefty losses in 2008, 2009 and 2010. Business model going forward will be self-funding short term life insurance loans with nearly universal default rates. IFT plans on holding a portion of these defaulted loans, making payments on them until the defaultee expires....then IFT cashes in. No interest.

February 2, 2011, 11:32 am

EPOC - Epocrates

EPOC - Epocrates

EPOC - Epocrates plans on offering 6.2 million shares(assuming overs) at a range of $14-$16. Insiders will be selling 2.6 million shares in the deal. JP Morgan and Piper Jaffray are leading the deal, William Blair and JMP co-managing. Post-ipo EPOC will have 22.3 million shares outstanding for a market cap of $335 million on a pricing of $15. Over 1/2 the ipo proceeds will be going to insiders, the remainder for general corporate purposes.

Goldman Sachs will own 12% of EPOC, Sprout Capital 12%, and Interwest Partners 8%.

From the prospectus:

'Epocrates is a leading provider of mobile drug reference tools to healthcare professionals and interactive services to the healthcare industry.'

Proprietary drug content on mobile devices. One of the original mobile apps, originally for the Palm back in 1998. EPOC was one of the initial iPhone 3rd party apps as well. EPOC was one of five app providers highlighted by Steve Jobs when Apple unveiled the iTunes App Store in a March 2008 briefing. The iPhone has been a nice revenue growth driver for EPOC.

Healthcare professionals are able to access information such as dosing, drug/drug interactions, pricing and insurance coverage for thousands of brand, generic and over-the-counter drugs.

Physicians and healthcare professionals refer to EPOC's content numerous times throughout the day for quick access to drug and clinical information.

Products used on mobile devices at point of care. User network consists over one+ million healthcare professionals including 45% of US physicians and 150,000 nurses. EPOC has worked with all of the top 20 global pharmaceutical companies. EPOC works with the pharmas to act as a rep of the company via their mobile data and content. Pharmas provide information to EPOC as a means to 'get in front' of physicians electronically.

EPOC is compatible with all US mobile platforms including Apple, Android, Blackberry and Palm.

20% of revenues derived through $99-$199 annual subscriptions to EPOC's drug and clinical reference tools.

***60 percent of revenues comes from drug manufacturers, who pay EPOC to supplement information on each drug with patient literature and contact information, so that doctors can contact manufacturers to request samples or ask questions. Insurance companies also pay EPOC to list covered drugs with their content. EPOC derives revenues from users and information providers alike, pretty good business model.

***According to EPOC's own survey of 2,800 physicians, 50%+ reported avoiding one or more medical errors every week. 40% reported saving more than 20 minutes per day. If these stats are truly representative of EPOC's customer base as a whole, we've a product here that creates efficiencies and saves time.

Growth - EPOC's growth initiative is to help doctors take whole practices digital. EPOC wants a piece of the projected hefty Federal incentives to shift patient data from paper to all electronic. This would be a whole new segment for EPOC and is not expected to contribute to revenues in the near term. Patient electronics segment is anticipated to launch in the first half of 2011.

In 11/10 EPOC acquired an Apple focused App store, Modality, for $14 million. EPOC plans on utilizing Modality to create an Apple platform based application for their planned employee health records initiative.

Competitors include WBMD and UpToDate inc...


$3 per share in cash post-ipo.

Solid cash flows over the past 4 years, better than GAAP EPS. EPOC has been cash flow positive since 2003.

A nice positive here is the lack of dependence on Medicare and Medicaid for revenues.

Revenues entirely derived in the US. 9% of users are paid, the remainder use EPOC's free service.

***EPOC has ramped up expenses heading into their spring '11 launch of their digital patient records initiative. To date they've derived no revenues from this initiative, the added expenses have negatively impacted the bottom line. Operating expense ratio the first nine months of 2009 were 54%, jumping to 65% the first nine months of 2010. Stock compensation expenses were roughly the same through both periods, the culprit here is definitely this new growth initiative. It will be well after ipo until it is known whether or not these expenses will pay off. EPOC expects margins increase to historical norms in the back half of 2011.

Quarterly revenues have been flat the past 4 quarters. It appears there is a sound reason for EPOC launching their growth initiatives. Their strong iPhone fueled growth in 2008 and 2009 has plateaued on them.

4th quarter is historically the strongest.

2010 - $102 million in top-line revenues, a 12% increase over 2009. 69% gross margins. As noted above, a notable increase in operating expense ratio, not ideal heading into ipo. 5.3% operating margins. 3.4% net margins, EPS of $0.15.

2011 - EPOC hopes to see margins return to 2009 levels in the back half of 2011. 2009 operating margins were 16%, compared to 2010's 5.3%. Assuming revenues begin to accrue from the electronic records initiative, EPOC should be able to grow revenues 15%-20% in 2011 to $120 million. Operating margins of 10%, net margins of 6.5%. EPS of $0.35. On a pricing of $15, EPOC would trade 43 X's 2011 estimates.

Conclusion - Solid niche leader coming public after their fast growth stage. This is a deal that most likely would have come public(and done quite well) in 2008 or early 2009 had the ipo window been far enough open. Instead EPOC is coming public in 2010 in a bit of stagnant top line and deteriorating bottom line period. Both may be temporary if EPOC's electronic patient records segment takes off as EPOC hopes. That is the key to this ipo here. If EPOC can lay on revenue and margin improvement the 2nd half of 2011, EPOC will do quite well mid-term plus. Until then, a holding pattern. Market cap in range is quite reasonable here at $335 million, neutral short term...mid-term+ will depend on the success of the electronic records initiative.

January 28, 2011, 2:48 pm

VELT - Velti

VELT - Velti

VELT - Velti plans on offering 14 million shares(assuming over-allotments) at a range of $9-$11. Insiders will be selling 1.9 million shares in the deal. Jefferies is leading the deal, Needham, RBC, Cannaccord and ThinkEquity are co-managing. Post-ipo VELT will have 50.8 million shares outstanding for a market cap of $508 million on a pricing of $10. Ipo proceeds will be used to repay debt and fund an acquisition.

CEO and COO will each own 7%-8% of VELT post-ipo.

**Note that VELT has been trading on the London Stock Exchange since 5/06 under the symbol VEL. The close on 1/21/11 was $9.76 per share in US dollars. This is technically a secondary, although the first time VELT has floated shares in the US.

In the past these initial US listings of companies listed elsewhere in the world tend to run up into US offering and then initially sell-off post US placing. VELT has run up 30%+ in London over the past 1-2 months. 52 week range of $5-$10, VELT is right at the top of trading range in London.

From the prospectus:

'We are a leading global provider of mobile marketing and advertising technology that enable brands, advertising agencies, mobile operators and media companies to implement highly targeted, interactive and measurable campaigns by communicating with and engaging consumers via their mobile devices.'

In addition to mobile, VELT's platform allows their customers via a single online userface to use traditional media such as television, print, radio and outdoor advertising.

Through the first nine months of 2010 600 clients used VELT's platform to conduct 1,500 campaigns. Clients include 13 of the 20 largest worldwide mobile operators. Other campaign clients include AT&T, Vodafone, J&J and McCann Erickson.

Ads can be placed in 30+ countries.

Real-time monitoring of ads. Platform enables clients to manage media buys, create mobile applications, design websites, build mobile CRM campaigns and track performance.

Acquisition - in 9/10 VELT acquired Mobclix a US based mobile ad exchange. In addition, VELT acquired Ad Infuse in 2009 and Media Cannon in 6/10.

Interesting niche here with the massive growth in use of mobile technology to communicate and access data & entertainment. We've seen numerous web based online advertising ipos over the past decade +, one would expect the focus going forward will be to maximize ad spending and power on mobile devices.

wordwide mobile marketing/ad spending is expected to increase from 2007's $1.64 billion to $29 billion by 2014.

Two two customers accounted for 30% of revenue the first nine months of 2010.

75% of revenue is in Euros. UK accounts for 1/3 of revenues with both Russia and Greece accounting for 10%+.

VELT owns a majority in 2 joint ventures, one in India and one in China.


$1 per share in net cash post-ipo.

Very seasonal here as VELT notes holiday spending and ad budgets combine to make the 4th quarter the strongest annually, by far. VELT derives all of their operating margin annually in the 4th quarter.

2010 - Financials are a bit difficult to decipher because of an odd revenue recognition blip in the 4th quarter of 2009. As VELT is already trading in the London, we'll simply use those top-line estimates for 2010 and 2011. Revenue should be $120 million, a 30% increase over 2009. Operating margins slightly positive in the 10% range. Earnings of $0.16.

2011 - $160 million in revenues, another 33% increase annually. Good spot here for future growth, VELT however has not quite been able to post much in the way of operating margins. Would not expect more than 12%-15% operating margins total in 2011. Earnings of $0.30. On a pricing of $10, VELT would trade 33 X's 2011 estimates.

Conclusion - I like this niche quite a bit and would like this deal much more were it not already trading for years on another worldwide exchange. VELT in London has risen 30%+ over the past 6 weeks or so heading into this deal. This is a recommend, but keep in mind these type of ipo/secos that run up into offering tend to cool off before moving higher. Interesting deal in a niche that should show strong growth mid-term+.

January 25, 2011, 5:05 pm

DMD - Demand Media

DMD - Demand Media

DMD - Demand Media plans on offering 8.6 million shares at a range of $14-$16. Insiders will be selling 3.5 million shares in the deal. Goldman and Morgan Stanley are leading the deal, UBS, Allen, Jefferies, Stifel, RBC, Pacific Crest, Raine and JMP are co-managing. Post-ipo DMD will have 83.7 million shares outstanding for a market cap of $1.256 billion on a pricing of $15.

The bulk of ipo proceeds will be used for investments in website content.

Oak Investment Partners will own 27% of DMD post-ipo, Spectrum Equity 17% and Goldman Sachs 7 1/2%.

CEO Richard Rosenblatt, former Chairman of MySpace, was instrumental in the eventual sale to News Corp in 2006. Mr. Rosenblatt also steered iMall towards a $500-$600 million sale in 1999. Pretty good timing by Mr. Rosenblatt (in both cases) as had he waited just a few years later on each, the selling price would have been massively lower.

From the prospectus:

'We are a leader in a new Internet-based model for the professional creation of high-quality, commercially valuable content at scale.'

DMD claims that instead of creating content based on anticipated consumer interest, their properties create content that responds to actual demand.

At heart DMD is a large group of freelance online content creators as well as a website registrar. DMD contracts more than 13,000 freelancers to produce articles and videos for its websites and outside online publishers. Revenues are accrued from advertising placed on the content. Demand also runs a domain name registry, eNom, which accounts for 35-40% of revenues.

The two segments:

Content & Media - Freelancer fueled content creation studio and a network of websites including eHow.com, Livestrong.com and Cracked.com. Surprisingly DMD's owned and operated websites comprised the 17th largest web property in the US. I've looked at the list and I do not believe I have ever intentionally clicked on one of DMD's websites. 105 million unique visitors worldwide monthly. In addition, DMD places content on 375 third party websites. Bulk of Content & Media revenues are derived from ads placed on their content. **In 2010 DMD's 13,000 freelance content creators generated 2 million online articles and videos. DMD does have a number of big name third party customers including USAToday.com, the NFL's website and various newspapers online sites. This segment accounts for 60%-65% of revenues.

Registrar - 10 million domain names under management, worlds second largest registrar overall. 72% 2010 renewal rate for expiring domain registrations. 35%-40% of annual revenues.

***Note that 69% of content produced in 2010 was for DMD's eHow.com website. We can almost simplify this ipo down to this: DMD is ehow.com and a registrar, enom.com.

Two interesting notes: DMD pays just $15-$30 per article on average to their freelancers. However DMD has opted to depreciate some of this expense out over 5+ years as they claim that is the useful revenue generating lifespan. Very unusual as all other public web properties expense content costs in real time in the quarter in which they occur. DMD's method will make them appear more profitable in the short run than actual cash flows. Oddly while it makes them appear more attractive on the bottom line currently, it could negatively impact them down the road as they are depreciating years of costs that have been long paid. Personally we think the claim that an article placed online has 5+ years of useful revenue generation is a bit of stretch. Not that huge of a deal however, as the expenses will need to be accounted for at some point whether all at once or over time.

Wholly owned content library currently consists of 3 million articles and 200,000 videos. DMD expects this library will increase dramatically going forward as they continue to aggressively add content to their shelves.

Growth - nicely scalable business here, limited only by the volume of ad revenue generating content DMD can churn out. Really, the question/concern here is how much content can a company churn out that will generate ad revenues? DMD does plan on focusing internationally going forward and sees that as a prime growth spot.

Google relationship - Google's cost-per-click advertising accounted for 28% of 2010 revenues. DMD eschews direct sales staff for most of their ad generation instead utilizing Google's ad generation service.

41% of traffic derived from internet search engines with majority coming from Google.


About $1 per share in cash post-ipo.

**Nearly all of DMD's growth is being generated from their Content side as the Registrar segment have been relatively flat the past three years.

23% of 2010 revenues derived from eHow.com.

Revenue growth has been solid. Revenues of $170 million in 2008, $198 million in 2009 and a nice breakout to $252 million in 2010.

**DMD has never posted an operational profit in any fiscal year to date.

2010 - $252 million in revenue, a solid 27% increase from 2009. Slightly negative operating margins. Should note that DMD for the first time moved into a slight operating profit in the back half of 2010. Loss of $0.03. Note that cash flows will also be negative in 2010.

DMD to date has not been able to significantly lower their operating expense ratio. In 2008 it was 111%, 109% in 2009 and right around 100% in 2010. Going forward the longer term success of this ipo will be levered to DMD's ability to show more improvement in this metric...to date it has not occurred.

2011 - Looking at trends, would not be surprised to see DMD book $300 million in revenues. Operating margins have been slowly trending towards positive. 5% positive operating margins in 2011. DMD has extensive tax loss carry-forwards putting the tax rate in the just the 10% ballpark. 4.5% net margins, $0.16 EPS. Cash flows should be about break-even in 2011.

Conclusion - 2nd tier internet ipo not generating much in the form of positive cash flows or earnings. Having written that, organic growth here has been solid the past two years and appears to be trending well into 2011. At a $1.256 billion market cap (on a $15 pricing), this appears pretty fully valued here on ipo. May get some play short term due to prior successes of the CEO.

In addition, this ipo looks like an initial step to set a baseline valuation for a future buyout. eHow ranks as the number 37 visited website in the US, well ahead of another niche site such as WedMD. WBMD currently has a $3 billion market cap with about double the expected 2011 revenues of DMD. WBMD is also more profitable, however it was not at time of ipo a few years back. If one wants to make a bull case here based on comparables and buyout potential, I believe it could be made...even though I do see this one fully valued in the $14-$16 range.

December 15, 2010, 7:45 am

FLT - FLeetCor

disclosure - at time of posting, tradingipos.com is long FLT

FLT - FleetCor Technologies

FLT - FleetCor Technologies plans on offering 16.6 million shares at a range of $23-$26. **Insiders will be selling all the shares in the deal except for 431,000 shares. JP Morgan and Goldman Sachs are leading the deal, Barclays, Morgan Stanley, PNC, Raymond James and Wells Fargo co-managing. Post-ipo FLT will have 78.7 million shares outstanding for a market cap of $1.928 on a pricing of $24.50. FLT will receive just $6.3 million from this ipo and plans on use a chunk of that to repay debt.

Summit Partners will own 30% of FLT post-ipo. Summit is selling 5.1 million shares in the deal.

Bain Capital will own 15%. Bain is selling 2.5 million shares on ipo.

From the prospectus:

'FleetCor is a leading independent global provider of specialized payment products and services to commercial fleets, major oil companies and petroleum marketers.'

Fuel and lodging cards for enterprise fleets. Partners with major oil companies and offers fleet payment programs/cards to enterprises worldwide.

530,000 commercial accounts in 18 countries in North America, Europe, Africa and Asia. Approximately 2.5 million commercial cards in use during 12/09. Those cards are charge cards typically paid in full monthly by the enterprise customer. Cards accepted at 83,000 locations worldwide.

In '09 $14 billion in purchases on FLT's network and third party networks. FLT operates six 'closed loop' networks in addition to utilizing third party networks. FLT's closed loop networks e-connects to merchants.

FLT's payment programs enable businesses to manage and control employee spending.

Primary customers are vehicle and government fleets focusing on small and medium commercial fleets. In addition, FLT manages commercial fleet card programs for BP, Chevron, Citgo and 800 petroleum marketers. FLT in this way has revenue sources from fleet users as well as fleet fuel providers from whom they make money on the spread between fuel bought/sold.

Draw here is the recurring revenue stream from both ends. FLT generates fees every time a card is used as well as the fuel spreads.

Growth - FLT has grown predominantly via acquisitions over the past decade. Sine 2002, FLT has made 40 acquisitions of smaller companies. This has brought upon debt, as roll-up strategies often do.

Sector - As we've seen with other payment ipos this year/decade, the use of electronic payments is fast growing with favorable future trends. Card purchase volumes grew at an annual rate of 10%+ the past 5 years reaching $6.8 trillion annually in 2009.

Fleet Vehicles - Approximately 42 million fleet vehicles in the US(with another 68 million fleet vehicles worldwide) with fleet purchase volumes of $50.8 billion. 35% of fleet vehicle fuel volume in 2009 was via specialized fleet cards.

36% of revenues are non US dollar denominated, primarily British Pound and Czech Koruna.

2/3rd's of revenue derived from North America.


Substantial debt here of $498 million post-ipo. FLT will also have $110 million in unrestricted cash on the balance sheet post-ipo. Expect that cash to be put to work acquiring smaller fleet payment operations. Debt here is not a dealbreaker however as through the first 9 months of 2010 debt servicing only ate up 11% of operating profits. Anything solidly under 20% and the debt is not a dealbreaker for me in range. A very strong ipo MJN had similar debt metrics as FLT pre-ipo.

FLT's revenues fluctuate with the price of fuel. FLT believe the absolute price of fuel was responsible for 19% of 2009 revenues. In addition 18% of revenues are derived from the spreads in fuel, the difference between the amount FLT pays for fuel from partner petroleum companies and the amount FLT charges enterprise customers. Lodging accounts for 10% of revenues.

***Note that FLT does something quite interesting. They securitize and sell-off a portion of their accounts receivables in order to finance charges(future receivables). As FLT is not just the processing company, but also often the company fronting the charges, securitizing future cash flows helps them keep sufficient cash on hand to pay enterprise customer monthly charges. The end result is they remain liquid enough to act as the 'bank', however doing so they give up some of their net receivables. The margins appear stronger with this model as we will see below.

Bad debt expense was $32 million in 2009 and $15 million through the first 9 months of 2010.

54% of revenues are derived from fees and charges associated with transactions. So two main revenue streams here often overlapping: 1) fees for charge transactions; and 2)The spread on the difference between FLT's fuel cost and the price charged the enterprise customer.

2010 - Revenues of $442 million, a 19% increase over 2009. Note that this increase does take into effect FLT's sizable 2009 acquisition as if that occurred 1/1/09. 2009 revenues were rather flat due to the global economic slowdown. ***Operating margins here are very strong at 45%. As noted above interest expense drains 11% from operating margins. Plugging in net securitization expenses and full taxes, net margins of 27 1/2%. EPS of $1.54. On a pricing of $24 1/2, FLT would trade 16 X's 2010 earnings.

2011 - FLT will use that $110 million in cash on the balance sheet to acquire. I do not believe FLT will increase revenues organically by anywhere close to 2010's 19%. Comparables with 2009 were just too easy. Plug in 5% organic growth and 5% from acquisitions while slightly increasing margins gives us an EPS of $1.70-$1.75. On a pricing of $24 1/2, FLT will trade 14 X's 2011 earnings.

Conclusion - A very interesting ipo here. FLT not only operates fleet card programs, they process the payments, front a substantial portion of the charges(act as the 'bank'), partner with oil companies to make money on fuel spreads and are now into fleet lodging programs. They've been A very aggressive successful operation, FLT has been net profitable since at least 2005. With the successes of e-payment related ipos such as GDOT/ONE/NTSP, this deal should work quite well short term and mid-term. Keep an eye on the debt levels, do not want to see FLT leverage themselves too heavily while growing and acquiring smaller operations. Pretty interesting, unique and exciting deal here. Recommend in range.

December 9, 2010, 4:32 pm

BONA - Bona Film Group

BONA - Bona Film Group

BONA - Bona Film Group plans on offering 13.5 ADS(assuming overs) at a range of $7-$9. BofA Merrill Lynch and JP Morgan are leading the deal, CICC, Piper Jaffray and Cowen co-managing. Post-ipo BONA will have 59.2 million ADS equivalent shares outstanding for a market cap of $474 million on a pricing of $8. Ipo proceeds will be used to acquire theaters, film distribution rights and general corporate purposes.

Chairman of the Board and CEO Dong Yu will own 35% of BONA post-ipo. Sequioa Capital will own 10%.

From the prospectus:

'We are the largest privately owned film distributor in China.'

Since the beginning of 2007, BONA's distributed films have had a whopping 42% of the box office for the 20 highest grossing domestic Chinese films. This number is a tad misleading, as BONA's distributed films had a 17% total market share.

BONA's revenues rely annually on a few movies. BONA's top five films in 2007-2009 accounted for 60% of their revenues.

Since 11/03, BONA has distributed 139 films, including 29 which have been released internationally. 16-20 films a year is the norm.

**In addition to distributing films, BONA also invests in film production and owns 6 movie theaters. Note that BONA purchased the theaters from their own CEO for shares equaling $93 million on a pricing of $9.

BONA also runs a talent agency.

China film industry - 32% average annual growth from 2005 to 2009. $926 million in total 2009 box office with average ticket prices of $4.60. 200 million admissions in 2009 with an estimated 258 million admissions in 2010. 1,687 urban movie theaters.

State owned film distributors account for approximately 50% of film revenues in China. Note that state owned distributors own the exclusive right to show foreign movies, mainly US hits movies.

Production - BONA has stepped up their production of films which kicked off in 2007. Film production can be much riskier than straight distribution as it requires a larger up front cash outlay with no guarantee of a return. In 2008, BONA spent $4 million in film production costs, $19.5 million in 2008 and through the first 9 months of 2010, $47.5 million. In comparison, BONA has spent just $1.2 million in distribution rights in the first nine months of 2010. ***Looking at expenses it is obvious that BONA is shifting their business model from purchasing/distributing films to producing and distributing their own self-produced films.

Obvious risk here is for BONA to spend heavily on producing a few films that end up flopping. Very similar risks to US film production studios.


$1.00 per ADS in net cash post-ipo. BONA does keep short term debt on the books to assist in production and distribution financing.

Taxes - BONA should continue to benefit from a low tax rate through 2013. Distribution revenues earned by film distributors are exempted from business tax until 12/31/13. BONA derives the bulk of their revenues from distribution.

BONA has been GAAP operationally profitable since at least 2007.

Cash flows - As BONA has gone deeper into film production, their cash flows have not surprisingly gone more negative. Film production eats up cash on the front end, with revenues coming on the back end then often used to fund future productions etc...This makes for a very risky business model as all it takes is a year or two of disappointing returns to dry up cash coming in. BONA has increased their borrowing in 2009 and 2010 to cover film production costs. The ipo proceeds should slow their need to borrow. Do not expect positive annual operating cash flows here going forward. just the way film production tends to work.

2010 - GAAP revenues should be $65 million a 71% increase from 2009. Gross margins of 50%. Operating margins of 21%. Negligible taxes, net margins of 20%. EPS of $0.22. On a pricing of $8, BONA would trade 36 X's 2010 earnings. Again keep in mind that BONA is able to amortize production expenses, which allows for positive GAAP earnings with negative cash flows.

2011 - Really with this type of business model, forecasting is just a guess. 80%+ of revenues are derived from film distribution, nearly all of which for 2011 have not been released as of yet.

Conclusion - First Chinese film company to list in the US. Valuation looks a little dear here due to the nearly 60 million shares outstanding. At 1/2 the market cap, this would be quite attractive, a $474 million market cap for a negative cash flow film operating generating $65 million in revenues seems pricey.

A number of these recent China ipos seems to have quite a few shares outstanding. So while the actual pricing number appears reasonable there are so many shares in the market cap that any upside valued them quite dearly. We continue to see deal after deal across many sectors attempt(and succeed) to price at a very high price to revenues multiple. BONA is another of these. Not a bad looking ipo as 17% of the entire Chinese film distribution segment is impressive. However aluation on any appreciation above range will look awfully aggressive for this high risk sector.

December 9, 2010, 8:31 am

DANG - E-Commerce China Dangdang

**Note - DANG priced $16 yesterday and is currently trading $30+, making this piece already a part of ancient history. Tradingipos.com does an analysis piece on every US ipo for subscribers prior to pricing/open...These pieces are available in the subscribers section.

DANG - E-Commerce China Dangdang

DANG - E-Commerce China Dangdang plans on offering 19.55 million ADS at a range of $11-$13. Insiders will be selling 5.8 million ADS in the deal. Credit Suisse and Morgan Stanley are leading the deal, Oppenheimer, Piper Jaffray and Cowen are co-managing. Post-ipo DANG will have 78.2 ADS equivalent shares outstanding for a market cap of $939 million on a pricing of $12. Ipo proceeds will be used to advance and enhance operations.

The two co-founders will own a combined total of 1/3 of DANG post-ipo. They will retain voting power due to a separate share class.

From the prospectus:

'We are a leading business-to-consumer, or B2C, e-commerce company in China.'

DANG is being called the Amazon.com of China. Website is dangdang.com. Been in business online for a decade.

Online bookseller now branching out into other consumer categories. DANG is the largest bookseller in China. 590,000 titles with more than 570,000 Chinese language titles. DANG believes they have more Chinese language titles available than any other seller in the world.

New products being offered include beauty and personal care products, home and lifestyle products, and baby, children and maternity products. Much like Amazon.com, DANG now offers third party products on their website.

6 million active customers in 2009 with 1.24 million daily unique visitors in 2010. That last number is pretty impressive. Already through first nine months of 2010, DANG has seen 6.8 million active customers ordering 20.8 million products.

78% of revenues generated from repeat customers.

Delivery to over 750 cities in China. DANG offers cash on delivery service as well as online payments. Cash on delivery is a popular payment method in China.

Sector - Chinese retail sales of $929 billion in 2009 with the book market generating $4.6 billion in revenues. Online commerce accounted for $39 billion in 2009 revenues. 46% of China's internet users bought book and/or other media products online in 2008. B2C e-commerce sales accounted for just 0.2% of overall Chinese retail sales in 2009.

***Revenue growth has been staggeringly good. Revenues grew 67% in 2008, nearly 100% in 2009 and are on pace for 50% in 2010. Gross margins are slowly improving, still fairly low though in the 22%-23% range. Operating expenses are growing slower than revenues meaning DANG has been inching towards profitability. The financials have not quite caught up with the strong top-line growth yet. However we've the 'amazon.com' of China booking third straight top-line revenue growth of 50%+ in 2010. That combination makes the deal a recommend in range. Period.

Primary online competition is Amazon.cn/Joyo and Taobao Mall. An interesting potential competitor could come in the way of electronic books. With their entrenched platform one would assume that DANG would be on the forefront in China in e-book sales.


$2.25 per ADS net cash post-ipo.

Cash flows in 2010 have been impressive, much better than EPS. Through the first nine months of 2010, operational cash flows have been $0.33. 2009 was DANG's first year of GAAP and cash flow profitability.

84% of 2010 revenues from book sales.

Seasonality - 4th quarter strongest, 1'st quarter weakest.

Taxes for 2010 will be negligible. Same should hold for 2011 as DANG works off previous losses.

2010 - Revenues should be $335 million with the 4th quarter being the strongest on top and bottom lines. Gross margins of 23.2%, an increase over 2009's 22.4%. Operating margins of 2%, net margins 2%. EPS of $0.09.

Note again however that operating cash flows will be much stronger than GAAP EPS for 2010. Depending on strength of 4th quarter, operational cash flows could be in the $0.45-$0.50 ballpark for 2010.

Conclusion - Disregard the EPS here for now, this deal will work in range short and mid-term. Dominant market leader growing revenues strongly while improving gross margins and operational metrics. Cash flows are improving nicely year over year, EPS should follow in the not too distant future. Strong deal.

November 22, 2010, 3:36 pm

IPHI - Inphi

IPHI - Inphi

IPHI - Inphi plans on offering 7.8 million shares(assuming overs) at a range of $10-$12. Morgan Stanley, Deutsche Bank and Jefferies are leading the deal, Stifel and Needham co-managing. Post-ipo, IPHI will have 25.1 million shares outstanding for a market cap of $276 million on a pricing of $11. Ipo proceeds will be used for general corporate purposes.

**Note that IPHI also has 6.6 million share via options at an average exercise price of $3.68. Expect most of these options to be exercised the first 2 years public, which will dilute market cap by over 25%.

Walden International will own 14% of IPHI post-ipo.

Samsung will own 5% of IPHI post-ipo. IPHI derives approximately 1/3 of their revenues annually from Samsung.

From the prospectus:

'We are a fabless provider of high-speed analog semiconductor solutions for the communications and computing markets. Our analog semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption.'

IPHI's semiconductors address bandwidth bottlenecks in networks.

Two notes. IPHI is a fabless semi operation, meaning they do not manufacture they design. Margins tend to be higher at fabless operations; Secondly IPHI is an analog semiconductor operation in a world that is moving digital where possible. Analog semis at this time tend to have lower margins and be more of commodity.

IPHI does note that their solutions do provide a high speed interface between analog signals and digital information in telecommunications systems, networking equipment, datacenters, and storage systems.

17 product lines with over 170 products. End customers include Agilent, Alcatel-Lucent, Cisco, Danaher, Dell, EMC, Hewlett-Packard, IBM and Oracle. As noted above, Samsung accounted for 1/3 of revenues the past 6 quarters. Micron has accounted for 12% of 2010 revenues.

43% of revenues in 2009 were from a single semi product, the GS04 which consists of an integrated phase lock loop, or PLL, and register buffer. The GS04 provides an interface between the CPU and memory to increase the memory capacity. Essentially the GS04 assists in handling wireless network signal deterioration issues by making existing equipment more efficient. A next generation semi to make previous generation equipment run more efficiently if you will. The primary driver here is the growth in video, mobile and cloud computing putting stress on current network bandwidth. The GSO4 helps declog bandwidth issues by increases existing memory capacity and efficiency. Next generation versions of the GS04 now comprise substantial revenues for IPHI.

Wireless networks are driving the need to improve network bandwidth. Most of the semi ipos we've seen over the past year deal with the need to improve wireless network capacity.

Products can operate up to 100 gigahertz.

IPHI does not work off of long term contracts. It is 100% purchase orders.

Risks - Very cyclical and competitive sector. Companies rarely enjoy extended pricing power on next generation products as the competition tends to catch up and surpass quickly. Tends to mean pricing drops quickly after products are introduced to market. IPHI's GS04 is a great example. This product accounted for 43% of 2009 revenues, however IPHI notes that it is now considered a 'mature' product and sales are declining. In fact, IPHI expects nearly zero 2011 revenues from the GS04. Companies such as IPHI constantly need to develop better/faster/newer mousetraps to drive revenues. End products highly dependent on consumer and enterprise spending cycles. Not uncommon for an inventory glut to strike during economic slowdowns sending pricing and revenues down hard from expectations. Conversely, at the trough of a cycle these type companies tend to outperform going forward as inventory levels for end products are depleted.

The above tends to mean quarterly results can be quite choppy.

Sector also characterized by lots of litigation. In '09 Netlist filed a patent infringement suit against IPHI. IPHI in turn filed against Netlist claiming NLST infringed on IPHI's patents. Suit is still in early stages of litigation. In addition a customer has filed an $18 million warranty claim against IPHI for defective parts shipped in 2009. IPHI believes the $4 million already paid to cover the warranty issues is sufficient. Case still to be decided.

Acquisition - In 6/10 IPHI purchased the assets of Winyatek Technology for just under $10 million.


$3 per share in cash post-ipo.

IPHI has had extensive tax incentives and tax loss carryforwards. Tax rate going forward should be in the 10% ballpark for awhile. Note that in 2010, IPHI booked a substantial gain on taxes. This is non-operational and will be folded out of results below.

2009 was IPHI's first year of operational profitability.

2010 - Total revenues should reach $85.2 million, a strong 41% increase from 2009. Keep in mind, '09 was a trough year for the sector. Gross margins of 64%. R&D is the major expense line here as IPHI needs to continue developing new and better semis. 15% operating margins. Plugging in pro forma 10% taxes, net margins of 13.5%. EPS of $0.46. On a pricing of $11, IPHI would trade 24 X's 2010 estimates.

2011 - In 2010, revenues grew faster than expenses on a percentage basis. A good sign and IPHI's 3rd year in a row of improvement on that metric. Looking at direct competitors, they are forecasting low double digit growth in 2011 of 10%-12%. If we plug in similar for IPHI we get: $96 million top line/65% gross margins/16.5% operating margins/15% net margins and $0.55-$0.60 in EPS. On a pricing of $11, IPHI would trade 19 X's 2011 earnings.

Direct competitors include HITT and BRCM. As each is more diversified than IPHI, a straight comparable of the entire company is not quite apples to apples. However each does compete directly with IPHI and each has been doing quite well of late. HITT has been one of the more successful ipos of the past decade actually.

Conclusion - Well run company that was not only able to increase revenues in a trough year 2009, but had first year of operational profitability. By all metrics 2010 has been a very good one for IPHI. I do like the annual increases in revenues and operating margins here the past few years. If IPHI can sustain each through 2011, this will be a successful deal in the short and mid-term. Definite recommend here. Solid, well run semi company finding solutions to the wireless bandwidth bottleneck.

One note to keep in mind is the option dilution which should hit pretty hard from the 6 month to first year public timeframe.

November 8, 2010, 8:55 am

PRMW - Primo Water

PRMW - Primo Water

PRMW - Primo Water offered 9.6 million shares at $12. Stifel and BB&T led the deal. Janney Montgomery and Signal Hill co-managed. Post-ipo PRMW has 19.1 million shares outstanding for a market cap of $229 at $12. Bulk of ipo proceeds will go to help pay for the Culligan Refill acquisition, the remainder to repay debt.

The Chairman, CEO and President Billy Prim owns 10% of PRMW post-ipo.

From the prospectus:

'We are a rapidly growing provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide.'

Purified water company, selling those larger bottles you see in company water systems. Initial sale of water dispensers and then generate recurring revenues via sales of the 3 and 5 gallon bottles of water. Empty bottles are exchanged at recycling center displays in retail outlets.

Exchange centers include Wal-Mart, Lowe's, Sam's club, Costco, Target, Kroger, Albertsons and Walgreens. 7900 exchange locations nationwide. PRMW has done a nice selling in their water bottles/exchange centers at major US retail locations. **Looking at PRMW's margins I suspect they were able to sell in their dispenser/exchange centers into so many large retailers by giving the retailers premium pricing...in other words Wal-Mart and Lowes etc...are getting a chunk of PRMW's margins by allowing PRMW to locate with them. PRMW does even note in the prospectus that they offer retailers 'attractive margins'.

PRMW believes dispenser owners consume 35 3-5 gallon bottles annually on average.

PRMW utilizes 55 independent bottlers and 27 independent distributors to service their retail network.

Acquisition - PRMW recently purchased Culligan's water filtration ansd store vending/refill business. Culligan operates in 4,500 retail locations. Total cost was $105 million. Customers of the Culligan Refill Business include Walmart, Safeway, Meijer, Sobeys, Target, Hy-Vee and Kroger. In 2009 this business generated $26 million in revenues.

Revenues thru Lowes account for 33% of revenues, Sam's Club 19% and Wal-Mart 15%.

Same store sales have increased approximately 5% through the first nine months of 2010.

**Management team took Blue Rhino public in 1998 through sale in 2004. Note that soon after ipo, there were auditing issues with Blue Rhino due to extensive revenues derived from sales to inter-related party companies. In an article in early 1999, the WSJ questioned Blue Rhino's business practices. Blue Rhino's stock went from $13 pricing to $25 soon after ipo to $2 within a year. Blue Rhino did rebound and eventually sold to Ferrellgas for $17 a share in 2004. All in all, after the turmoil first year, Blue Rhino was a successful public company. Ipo market cap was $94 million in 1998, buyout market cap was $340 million in 2004.

PRMW's management team is using the same exchange business model here with water that they employed with propane at Blue Rhino.


$11 million in net debt post-ipo.

PRMW has never had an annual operational or net gain.

2010 - Pro forma(factoring in Culligan purchase) revenues actually look to dip slightly in 2010 as sales of PRMW's systems have dipped. Refills have increased in 2010, the actual systems have lagged though. Full year revenues should be $69 million, down 4% from 2009. Operating margins are negative, losses should be in the $0.10-$0.15 ballpark.

Conclusion - Since operation commenced, PRMW has never been able to generate positive operating margins. The core business will show a revenue dip in 2010. PRMW blames this on inventory glut from 2009. Either way a company not generating growth and with consistent negative margins and debt on the books should not be generating a market cap 3 X's+ revenues. Yes there could be potential here if PRMW is successful in integrating the Culligan business in a cost-effective manner, however I'd rather wait and see than step in here on ipo. Pass.

October 28, 2010, 3:46 pm

BOX - Seacube

updated 10/28 to account for slashed pricing to $10:

BOX - net debt will remain same at $700 million even with slash in pricing. appears Fortress will not take out money from BOX pre-ipo as planned. sharecount increases by a shade under 1 million, so eps estimates closer to $1.40-$1.45 for 2010.

Quick look at BOX and the two direct competitors trading:

BOX - $223 market cap, trading 1.6 X's revenues, 7 1/2 X's 2010 estimates and yielding 7.3%. $700 million net debt.

TAL - $817 million cap, 2.3 X's revenues, 14 1/2 X's earnings..$1.4 billion in net debt. Yielding an annualized 6% based on increased divvy announced today.

TGH - $1.22 billion cap, trading 4 X's revenues, 10 1/2 X's earnings. $615 million in net debt. yielding 4.2%.

all these companies doing essentially the exact same thing in the exact same space. BOX appears to be very well run based on profit margins through economic trough, so no management discount and/or premium here compared to other two. pretty straightforward, either TAL/TGH coming way back in, or BOX is going to rise. got to be one or the other.

in this market in this day and age, you just don't often see a dislocation in valuation this large....and this is not a 'better mousetrap' type sector at all. really rare to see an obvious valuation differential this large, with only explanation being no one wanted what Fortress was trying to sell them no matter unless it was at rock bottom prices. this should take care of itself in the market sooner than later...and with TAL reporting strong today, doubt TAL/TGH sell-off hard in the short run to match BOX valuation metrics...I believe we will see BOX at $15+ sooner than later. I am not the only one that sees this big of a valuation differential.

Original pre-ipo piece based on $16-$18 range:

BOX - SeaCube Container Leasing

BOX - SeaCube Container Leasing plans on offering 8.7 million shares(assuming over-allotments) at a range of $16-$18. Insiders will be selling 5.75 million shares in the deal. JP Morgan, Citi, Deutsche Bank and Wells Fargo are leading the deal, Credit Suisse, Dahlman Rose, DnB, DVB and Nomura co-managing. post-ipo BOX will have 19.3 million shares outstanding for a market cap of $328 million on a pricing of $17. Ipo proceeds will be used to repay debt.

Private equity firm Fortress(FIG) will own 52% of BOX post-ipo. Fortress is the selling shareholder here. **Note that Fortress attempted to bring their container properties public in early 2008 under the name SeaCastle. The market cap at the time was to be over $2 billion. Thankfully it got shelved as that market cap would have been under hefty pressure from the get go. SeaCastle would have had over $3 billion in debt on ipo, brought on by leveraging containers as well as via the leveraged buyout nature of Fortress acquisitions. Post-ipo, BOX will have $700 million in net debt.

**BOX does plan on paying a quarterly dividend. Initial quarterly dividend will be $0.20. At an annualized $0.80, BOX would yield 4.7% annually on a pricing of $17.

From the prospectus:

'We are one of the world's largest container leasing companies based on total assets.'

International shipping containers used on ships, rail and trucks. BOX acquires containers with the intention of leasing them and eventually selling a portion of them in up markets. Leases are generally under long term leases of 5 to 8 years to shipping companies. 58% of leases are directly financed to own by BOX. Average length left on leases of all containers are 3.8 years.

BOX owns and/or manages 507,013 units, representing 795,039 TEU's(twenty foot equivalent containers).

**BOX is the world's largest lessor of refrigerated containers with a 28% market share. 53% of assets are refrigerated units with 44% dry containers.

As far as total containers, BOX is the 6th largest in the world.

Capacity utilization of 98% as of 6/30/10. In a tough 2009 environment, BOX managed a 96.5% utilization rate. Pretty impressive.

Net write off of just 0.44% of billings over the past 6 1/2 years. When combined with strong capacity utilization rates, this looks to be a very well run operation.

Customers - 160 shipping lines, including all of the world's top 20. Largest customers include APL, CMA-CGM, CSAV, Hanjin, MSC and Maersk Line. CSAV accounts for 16% of revenues, Mediterranean Shipping 15%.

Majority of business for BOX containers is transporting goods from Asia for use in the US.

Growth plans - BOX has been growing aggressively acquiring $1.9 billion in containers since 2004. While pretty solidly leveraged post-ipo, BOX still has access to over $300 million in credit lines going forward. This sector works quite a bit like the REIT ipos we have seen. Instead of leveraging property mortgages to increase cash flows, BOX leverages on containers which provide cash flows on top of debt taken on. In addition to continuing to leverage to increase containers owned, BOX does plan to pursue acquisitions.

Trends - 2009 was the only year in the past 30 in which worldwide container trade did not grow. The worlds fleet of containers has shrunk 4% since the beginning of 2009. BOX believes this brings about an opportunity for them as demand increases. 45% of worldwide containers are leased.

While capacity utilization has been strong for BOX, leasing rates ebb/flow based on supply and demand. Very cyclical sector overall, highly dependent on the US consumer.


$700 million in net debt post-ipo.

Revenues have been in decline. As noted above, while capacity utilization has remained strong, pricing has been weak. In addition in 2008, BOX sold approximately 8% of their container inventory.

Revenues were $239 million in 2008, $142 million in 2009 and should decline again in 2010.

2010 - $140 million, a slight decrease from 2009. 54% operating margins. Debt servicing will eat up 60% of operating earnings. The debt definitely hinders BOX. This is a sector that always has substantial debt as they tend to leverage their containers to improve cash flows. However some of this debt was laid on by Fortress while acquiring assets. In addition Fortress is making up the bulk of selling in this deal, taking away money that BOX could use to pay down debt. Lastly Fortress paid themselves $60 million in 2009, money that could have gone to reduce debt. The selling of containers in '09 has reduced debt, however it also negatively impacted revenues.

BOX will have little in taxes post-ipo. Net margins of 22%. EPS of $1.60. On a pricing of $17, BOX would trade 11 X's 2010 estimates.

Quick look at two larger competitors TAL and TGH:

TAL - $758 million market cap, 2010 revenues of $362 million currently trading at 13 X's 2010 estimates. Highly leveraged with $1.4 billion in debt.

TGH - $1.16 billion market cap, 2010 revenues of $308 million currently trading 10 X's 2010 estimates. Better balance sheet than TAL with $615 million in net debt.

BOX - $328 million market cap on a $17 pricing. 2010 revenues of $140 million trading at 11 X's 2010 estimates. $700 million in net debt.

Conclusion - Typically avoid highly leveraged sectors such as this. It does appear as if the underwriting group and Fortress are bringing this one public at a pretty attractive valuation. The market cap here appears to be a bit low for BOX revenue and cash flow base when put beside the competition. Also, the sector has been in a solid uptrend stock wise since the March '09 market bottom. Not my cup of tea, but range here looks priced to work over time. Do not expect much short term however.

October 21, 2010, 7:46 am

VRA - Vera Bradley


VRA - Vera Bradley

VRA - Vera Bradley plans on offering 12.65 million shares(assuming over-allotments) at a range of $14-$16. Insiders will be selling 8.65 million shares in the deal making of the majority of shares offered. Baird and Piper Jaffray are leading the deal, Wells Fargo, KeyBanc, and Lazard are co-managing. Post-ipo VRA will have 40.5 million shares outstanding for a market cap of $608 million on a pricing of $15. Ipo proceeds will go to insiders as VRA shifts from an 'S' corporation to a public company.

Co-Founder Barbara Bradley Baekgaard will own 26% of VRA post-ipo.

From the prospectus:

'Vera Bradley is a leading designer, producer, marketer and retailer of stylish and highly-functional accessories for women.'

28 year old VRA primarily sells women's handbags.

I like the company description from VRA: 'Our brand vision is accessible luxury that inspires a casual, fun and family-oriented lifestyle.' Wonder how much they paid a marketing agency to come up with that line? 'accessible luxury' means fashion at a reasonable price.

VRA's bags seem to be defined as a bit flashy with a myriad of colors and designs. Pricepoints range from $20-$80 with most of the handbags in the $50-$60 range.

Handbags can be viewed here:


Indirect and direct sales channels.

Indirect - 3,300 independent retailers sell VRA handbags and accessories, nearly all in the US. In 2005/2006 VRA shifted most of manufacturing offshore.

Direct - 31 Vera Bradley branded stores, two outlets, verabradley.com and annual outlet sale at Indiana HQ. First store was opened in 2007. Same store sales increases have been quite impressive of late. 2009 saw a 36% same store sales increase and first 6 months of current fiscal year has seen an additional 26% same store sales increase.

Currently indirect revenues account for approximately 60% of total revenues while direct revenues make up 40%. Expect direct revenues to annually increase as a % of revenues as VRA opens new stores.

Growth plans - VRA believes that there is support in the US for up to 300 retail stores. VRA plans on opening 9 full priced and 3 outlet stores in 2011, 14-16 stores in 2012 and 14-20 stores annually thereafter. Very aggressive growth plans when one considers they've just 31 full price stores currently.

Handbags make up 52% of revenues, accessories 32%. Accessories include wallets, ID cases, eyeglass cases, cosmetics, paper and gift products and eyewear.

Competitors include Coach, Nine West, Liz Claiborne and Dooney & Bourke.


One red mark on this deal is the existence of $80 million in net debt post-ipo.

Fiscal year ends 1/31 annually.

40% tax rate. In number below I plugged in the 40% tax rate for 2010. Pre-ipo VRA has been a pass through 'S' Corporation and did not pay corporate income taxes.

VRA has been profitable since at least 2005.

With the global economic slowdown growth was negligible from 2007-2009. First 2 quarters of 2010(FY ending 1/31/11) have been outstanding however. As noted above same store sales growth has been very impressive recently and indirect sales channels have also been quite strong. The impressive first two quarters of the current fiscal year have been strong enough alone to recommend this deal in range.

2010(ending 1/31/11) - Revenues should grow 27% to $367 million. Gross margins strong at 59%. Operating margins of 19%. Plugging in debt servicing and taxes, net margins at 11%. EPS of $1.02. On a pricing of $15, VRA would trade 15 X's 2010 earnings.

2011 - Aggressive store opening plans for 2011 should help boost revenues. I would be uncomfortable plugging in recent same store sales increases going into 2011. It could happen of course, but I'd rather scale that back to mid single digits as opposed to the 20%+ same store sales increases of the past 18 months. In addition forecasting for 2011 is difficult until we see the holiday 2010 numbers early next year.Revenues should increase by 15%-20% in 2011 to $435 million. Gross margins should remain roughly the same at 59%. Economies of scale do kick in a bit, improving operating margins to 20%-21%. Net after tax margins of 12%. EPS of $1.25-$1.30. On a pricing of $15, VRA would trade 12 X's 2011 earnings.

Conclusion - Based on recent growth and impressive same store sales increases, the range here looks quite attractive. Deal should definitely work off pricing. Longer term success will be determined by VRA's aggressive store opening plans. If these stores are a 'hit' and same store sales continue to be solid, pricing range here will be left far behind in a few years. If VRA ends up adding to their debt to fund lackluster new store opening there will be problems. That will be decided later however. Short and mid-term, this deal looks priced to work in the $14-$16 range.

October 19, 2010, 6:54 am

SHP - ShangPharma

SHP - ShangPharma

SHP - ShangPharma plans on offering 6.6 million ADS(assuming over-allotments) at a range of $14.50-$16.50. Insiders will be selling 3.4 million ADS in the offering. Citi and JP Morgan are leading the deal, William Blair and Oppenheimer co-managing. Post-ipo SHP will have 18.65 million shares outstanding for a market cap of $289 million on a pricing of $15.50. Ipo proceeds will be used to expand services.

Chairman of the Board and CEO Michael Xin Hui will own 55% of SHP post-ipo.

From the prospectus:

'We are a leading China-based pharmaceutical and biotechnology research and development, or R&D, outsourcing company.'

Competitor to WX, an ipo from a few years back.

Discovery, pre-clinical and clinical pharmaceutical trials for drug candidates. The pattern in recent years has been for biotech and pharmaceutical companies to outsource their early stage discovery and pre-clinical work to cheaper labor countries such as China while keeping clinical stage trials closer to home.

100+ customers including all of the top 10 worldwide pharmaceuticals and biotechs.

Top 10 customers in 2008 and 2009 have remained as customers in 2010. Good sign.

Ipo monies will be used to essentially double lab space to nearly 1 million total square feet.

Draw here is low cost labor and large amount of lab space with proven company.

Sector - The worldwide CRO space had been a swift growth area for much of the decade. However the credit crisis left available discovery/clinical trial dollars in short supply due to credit tightening. The China CRO market continued to expand however due to the cheaper costs of doing business. If anything, the global credit crisis helped the shorter and longer term outlook for China outsourcing. In a difficult clinical discovery and trial worldwide environment, the China CRO market grew 27% from 2007-2009.


Approximately $2 per share in cash post-ipo. Bulk of cash will be used to expand lab space.

SHP has been operationally profitable since at least 2006.

15% tax rate.

2009 - $72 million in revenues, 33% gross margins. 14% operating margins. Net margins of 12.5^]% when currency hedges factored in. EPS of $0.53.

2010 - Good first two quarters to 2010. $88 million in revenues, a 22% increase over 2009. Gross margins slight improvement to 34.5%. Operating margins of 15%. Net margins of 14.5%. EPS of $0.70. On a pricing of $15.50, SHP would trade 22 X's 2010 estimates.

Comparison between SHP and WX.

WX - $1.16 billion market cap. WX currently trades 17 X's 2010 estimates with a 20% revenues growth rate in 2010. WX ipo'd just near the top of the last worldwide CRO growth story and slid with the sector through most of 2008 and into 2009. Stock is pretty much flat in 2010, in what has been a pretty tough sector for the group of stocks.

SHP - $289 million market cap on a $15.50 pricing. At $15.50 would trade 22 X's 2010 estimates with a 22% growth rate. Due to smaller revenue base on ipo, SHP should be able to outgrow WX top/bottom line over the next few years.

Conclusion - We've seen some massive China outsourcing IT ipo success stories from VIT to CIS to HSFT. The CRO sector has been a bit tougher due to the costs involved in conducted new drug discovery and trials. The sector still has not completely recovered from the credit crisis. This has effected SHP/WX. While each will be able to show nice growth in 2010, that growth is a bit muted still due to the slower discovery/trial plans of the large pharmas/biotechs. I like the sector longer term, shorter term SHP appears priced about right. I like this deal over time, would not expect too much short term here.

September 30, 2010, 7:02 am

RNO - Rhino Resource Partners

RNO - Rhino Resource Partners

RNO - Rhino Resource Partners plans on offering 3.7 million units (assuming over-allotments) at a range of $19-$21. Raymond James, RBC and Stifel are leading the deal. Post-ipo RNO will have 25 million total units outstanding for a market cap of $500 million on a pricing of $20. Bulk of Ipo proceeds will be used to repay debt.

Wexford Capital will own 85% of RNO including the general partnership. RNO is a collection of coal assets that have been acquired beginning in 2003. This is the 2nd attempt Wexford has made bringing Rhino public. The first was ill-timed in August/September 2008. That deal looked okay, albeit with an aggressive valuation in range. It was not structured as a Partnership however. This second attempt appears structured far better and offers value/yield to the holder.

Yield - RNO plans on distributing $0.445 quarterly to unit holders. On an annualized $1.78, RNO would yield a strong 8.9% annually.

From the prospectus:

'We produce, process and sell high quality coal of various steam and metallurgical grades.'

Steam coal for electric utilities and metallurgical coal to steel and coke producers.

Coal reserves located in Central Appalachia, Northern Appalachia, the Illinois Basin and the Western Bituminous region. As of 3/31/10, RNO controlled 273 million tons of steam coal and 12.5 million tons of metallurgical coal with an additional 122 million tons of non-reserve coal deposits.

Operates 11 mines, 6 underground and 5 surface. Mines are located in Kentucky, Ohio, Colorado and West Virginia.

Production of 4.7 million tons of coal annually with another 2 million tons purchased for reselling.

One major issue when structuring E&P operations as a partnership: It can be quite difficult to pay a sufficient yield AND also cover capital expenditures needed to replace reserves that have been turned into production. We've seen this in the recent similar ipo OXF. OXF simply will not have sufficient cash flows to cover both the distribution and reserve replacement capex. The result is OXF will be loading up the balance sheet with debt going forward to distribute cash to holders.

***RNO is forecasting sufficient cash flows to cover all distributions as well as all capital expenditures. This is a very good sign.

RNO plugs in the current selling prices for coal when making their cash flow projections for first 12 months as a public company. While they've locked in commitments on volume/price for 60% of production, a steep drop in coal prices would negatively affect cash flows. Should prices drop appreciably, RNO would need to borrow to cover both distributions and capex. Note that RNO has already committed and locked in prices on 60% of their expected coal sales the first 12 months public.


$40 million in debt. These debt levels will not impact operations or cash flows severely.

Forecast for first 12 months public (ending 9/30/11):

$348 million in revenues (equating to 5.1 million tons of coal sales) with net earnings of $2.32 per share.

Distribution coverage from cash flows projected at 107%.

There are currently four publicly traded coal partnerships- OXF, PVR, NRP and ARLP. A quick comparison:

RNO - Would yield 8.9% annually at $20. They are forecasting cash flows sufficient to cover entire distribution as well as all capital expenditures the first 12 months public. Very nice balance sheet with just $41 million of debt.

OXF - Yields 9.1%. $91 million in debt. OXF is forecasting cash flows to cover only 61% of distributions/capex first 12 months public. OXF will need to borrow to both pay distributions and spend on replacement capital expenditures. That 9.1% yield carries far more risk than RNO's 8.9% yield.

PVR - 7.8% yield, $650 million in debt. PVR is a classic case of continued borrowing to fund yield/capex as their debt increases annually. Note that PVR has also moved into the natural gas pipeline business.

NRP - 8% yield, $640 million in debt.

ARLP - 5.4% yield, $450 million in debt.

When included distributions, PVR/NRP and ARLP are all up quite strongly over the past 12 months.

Conclusion - Good looking coal partnership. Structure is favorable to unitholders and should allow for sufficient reserve replacement while also paying a strong yield. These sort of deals often do not do much for awhile and following OXF's lackluster debut I would not expect much in the short run. However this is a superior deal to recent comparable OXF and mid-term should provide appreciation through distributions and price. Recommend.

September 25, 2010, 2:10 pm

COR - CoreSite Realty Corp

COR - Coresite Realty Corp

COR - CoreSite Realty Corp plans on offering 19.4 million shares(assuming over-allotments) at a range of $15-$17. Citi, BofA Merrill Lynch and RBC are leading the deal, KeyBanc and Credit Suisse co-managing. Post-ipo, COR will have 48.4 total shares outstanding for a market cap of $774 million on a pricing of $16. Bulk of ipo proceeds will go to insiders, specifically Carlyle Group.

DBD Investors will own 60% of COR post-ipo. DBD is controlled by private equity firm Carlyle.

From the prospectus:

'We are an owner, developer and operator of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago and New York City.'

Data center REIT. As a REIT, COR will distribute to shareholders quarterly essentially all after tax income.

11 operating data centers with one under construction and one development site. 1 million active net rentable square feet, with another one million under construction or development. Of the one million, 19% is currently available for lease as data center space.

Over 600 customers with top ten customers accounting for 37% of annualized rent. Customers include AT&T, British Telecom, Microsoft, Google, Facebook and China Unicom.

Sector - Data centers are highly specialized and secure buildings that house networking, storage and communications technology infrastructure, including servers, storage devices, switches, routers and fiber optic transmission equipment. The shift has been to outsource data center needs to operators such as COR.

CEO Thomas Ray has 22 years of experience with 11 years of data center experience including 5 with REIT's.

75% renewal rate in 2009.

68% of data center space location in California.

Growth plans - Continue to convert available space into data center space. Increase rates on expiring rental contracts. Pursue acquisitions.


Pretty good looking balance sheet here with $125 million in debt and $75 million in cash. Most of the cash will be used to expand data center space, so the $125 million in debt here will remain on the books.

Distributions - COR plans to initially pay a quarterly dividend of $0.13. At an annualized $0.52, COR would yield 3.25% on a pricing of $16. COR is set-up well to expand the dividend over time as new data center space comes online. Once concern here however is that currently only approximately 81% of current available data center space is occupied.

Competition - COR's closest comparables are DLR and DFT. DLR currently yields 3.4%, while DFT yields 1.8% annually.

Conclusion - Pretty solid looking REIT here. Good balance sheet which should allow for growth and dividend appreciation. Appears to be coming fairly valued with competition. I would expect COR to end up yielding a bit more than forecasts.

August 20, 2010, 12:12 pm

GMAN - Gordmans Stores

Note - GMAN ended up pricing below range at $11. At date of this post 8/20, tradingipos.com is long GMAN.

GMAN - Gordmans Stores

GMAN - Gordmans Stores plans on offering 6.2 million shares(assuming over-allotments are exercised) at a range of $13-$15. Insiders will be selling 3 million shares in the deal. Piper Jaffray and Wells Fargo are leading the deal, Baird and Stifel co-managing. Post-ipo GMAN will have 18.7 million shares outstanding for a market cap of $262 million on a pricing of $14. Ipo proceeds will be used for debt repayment and general corporate purposes.

Sun Capital Partners will own 67% of GMAN post-ipo. Sun Capital acquired 100% stake in GMAN in 9/08 for total considerations of just $55.7 million. Of this, $32.5 million was debt on the back of GMAN. That debt will be paid off on ipo.

From the prospectus:

'Gordmans is an everyday low price retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment.'

Discount retailer in the Mid-West. 68 stores in 16 Midwestern states. 50,000 square foot stores. 'Upscale discounter' appears to be how GMAN positions themselves.

10 stores in Missouri, 9 in Iowa and 8 in Illinois.

GMAN defines their target as: 'Our primary target shopper is a 25 to 49-year-old mother with children living at home with household incomes from $50,000 to $100,000.'

Apparel 53% of revenues, Home Fashions 29% and Accessories 18%.

GMAN positions themselves as a blend of specialty, department and off-price retailer. Up to 60% off department store prices with a broad selection of fashion-oriented apparel. Also, GMAN keeps mentioning that their stores offer a shopping experience infused with 'fun and entertainment'.

GMAN has beefed up their Home Decor, Juniors and Young Men's sections in an attempt to offer a broader range of selection in these three area than their competitors.

Growth - GMAN opened 23 stores from 2004-2008, but just one in 2009. One store opening in first quarter of 2010. Plan going forward is to increase store base by approximately 10% annually. That would be roughly 7 new store openings a year.

Same store sales increase of 4.6% in 2009 with 4th quarter '09 totaling 9.3%.

***Strong start to 2010 with same store sales increase of 15.4% in first quarter of fiscal year. As we all know, retail comparables against first half of 2009 are quite easy as that period represented the trough of the recent recession...especially the first 3 months of 2009.

Footwear is sold under a licensing agreement with DSW.

All store locations are leased.


$1 per share in net cash post-ipo.

Fiscal year ends last working day of January annually. FY '10 ends 1/31/11.

FY '09(ending 1/30/10) - Revenues of $457.5 million. 4.6% same store sales growth. Average store sales of $6.9 million. 42.4% gross margins. Operating expense ratio of 36.7%. Operating margins of 5.7%, net margins of 3.8%. Earnings per share of $0.92. Pretty good results considering the shaky consumer spending environment the first half of 2009.

FY '10(ending 1/31/11) - GMAN had a strong first quarter to the fiscal year. In fact, the past two quarters have easily been the strongest operating profit quarters in GMAN history. Impressive here is that GMAN followed up a strong holiday season with a fantastic quarter in what is often a slow one for retailers. The question going forward is whether GMAN can continue this momentum. I've attempted to be conservative and factored in a flat quarter for the 2nd Q of FY '10 and rather conservative growth the back half of the fiscal year.

Total revenues should grow a solid 14% to $520 million. Note that in the first quarter of the fiscal year, GMAN grew revenues year over year by 20%, so again I am factoring in more conservative results rest of fiscal year. Gross margins look as if they will improve to 44%. Operating expense ration should remain similar at 7%. 7% operating margins, 4.6% net margins. Earnings per share of $1.27. On a pricing of $14, GMAN would trade 11 X's FY '10 estimates.

Conclusion - GMAN is being priced in range at similar PE's to discounters such as TGT/ROST/TJX. Those three trade 12-13 X's 2010 estimates. Key differences are 1)GMAN is expected to grow 14% my conservative 2010 estimates, while the other discounters are growing 4%-8%; 2)GMAN only has 68 stores in existence, leaving a lot more room for % store growth than those other discounters.

Solid retailer coming public attractively priced.

August 9, 2010, 7:06 pm

NXPI - NXPI Semiconductors

NXPI - NXPI Semiconductors

NXP - NXPI Semiconductors plans on offering 34 million shares at a range of $18-$21. Credit Suisse, Goldman, Morgan Stanley, BofA Merrill Lynch and Barclays are leading the deal, JP Morgan, KKR, ABN Amro, HSBC and Rabo co-managing. Post-ipo, NXPI will have 249.3 million shares outstanding for a market cap of $4.861 billion on a pricing of $19.50. Ipo proceeds will be used to repay a portion of NXPI's substantial debt.

KKR will own 28% of NXP post-ipo, Bain Capital 24%. Philips Electronics will own 17%. KKR, Bain and others acquired NXP from Philips Electronics in a 2006 leveraged buyout.

***Debt is the issue here. Factoring in debt paid off on ipo, NXP will have $4.5 billion in dept post-ipo. I will never be interested in an ipo coming public with $4.5 billion in debt. It is that simple here. $4.5 billion in debt makes the underlying business irrelevant, I've no interest in this deal at any price.

From the prospectus:

'We are a global semiconductor company and a long-standing supplier in the industry, with over 50 years of innovation and operating history. We provide leading High-Performance Mixed-Signal and Standard Products solutions that leverage our deep application insight and our technology and manufacturing expertise in radio frequency ("RF";), analog, power management, interface, security and digital processing products.'

NXP produces a variety of mixed signal(analog and digital) and 'standard' semiconductors. The standard semis tend to be the more commoditized, lower margin semiconductors. End markets include automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications.

58% of revenues from Asia-Pacific region.

Large operation here. 68% of of Mixed-signal semis and 80% of 'standard' semis are either the number one or two market position in the world. 14,000 worldwide issued and pending patents.

Top customers include Apple, Bosch, Continental Automotive, Delphi, Ericsson, Harman Becker, Huawei, Nokia, Nokia Siemens Networks, Oberthur, Panasonic, Philips, RIM, Samsung, Sony and Visteon.

The semiconductor sector is highly cyclical. The worldwide recession had a severe impact on operations. This led to a 2008 'redesign' of the company including 1)a focus on higher margin Mixed Signal semiconductors; 2) $650 million in annual costs savings; 3) reduced manufacturing facilities from 14 to 6.

Mixed-signal semi revenues now account for approximately 65% of total revenues. Gross margins for these are 52%, compared to approximately 30% for standard semis.


$4.5 billion in debt post-ipo. Debt servicing will cost NXPI $1.50 per share annually.

2009 - Revenues declined significantly 30%. Revenues of $3.8 billion. Gross margins of 25%. Negative operating margins. Plugging in debt servicing and folding out one-time charges, losses were a whopping $4.84 annually. Note that a portion of these losses were non-cash amortization charges related to the 2006 leveraged buyout. Cash flow wise plus debt servicing led to a 'more reasonable' loss of $4.40 per share.

2010 - Revenues and margins improving substantially, while NXPI has attempted to also get costs under control. Total revenues should be $4.8 billion, an increase of 26% from 2009. Gross margins should improve to 31%, due to the increase in mixed-signal semi revenues. Operating margins of 7%. Unfortunately debt servicing will eat up all operating profits and then some. Losses should be around $0.25 per share. Note again amortization charges will be pretty steep. Cash flows with debt servicing factored in give us a better idea of the profit picture. There, NXPI should see a small positive overall cash flow in 2010.

Conclusion - The debt levels make NXPI very susceptible to trouble during cyclical low points in the sector. NXPI was fortunate to survive the 2008 slowdown. Actually if revenues had remained depressed for even another year, NXPI may have not been viable. The debt here is issue. NXPI is a large dominant player in the mixed-signal and standard semi space. Unfortunately the debt levels are far too high here. Not interested at any price

August 1, 2010, 5:16 pm

CHKM - Chesapeake Midstream Partners

CHKM - Chesapeake Midstream Partners

CHKM - Chesapeake Midstream Partners plans on offering 24.4 million units at a range of $19-$21. Lot of underwriters on this one. UBS, Citi, Morgan Stanley, BofA Merrill Lynch, Barclays, Credit Suisse, Goldman Sachs, Wells Fargo are all joint book runners. BBVA and BMO co-managing. Post-ipo CHKM will have 142 total units outstanding for a market cap of $2.84 billion on a pricing of $20. 1/2 of the ipo proceeds will be used to repay borrowings, the remainder for capital expenditures.

Chesepeake Energy(CHK) and Global Infrastructure Partners will each own 42% of CHKM post-ipo. CHK will manage CHKM.

From the prospectus:

'We are a limited partnership formed by Chesapeake and GIP to own, operate, develop and acquire natural gas gathering systems and other midstream energy assets. '

Natural gas gathering pipelines. Gathering pipelines are the first segment of midstream energy infrastructure that connects natural gas produced at the wellhead to third-party takeaway pipelines.

CHKM's pipelines service Chesepeake and Total under long-term 20 year contracts.

Gathering systems are primarily in the Barnett Shale region in north-central Texas. 2,800 miles of pipelines servicing 4,000 natural gas wells. In the three months ending 3/31/10, CHKM's pipelines gathering 1.5 Bcf of natural gas per day, making them on of the largest natural gas gatherers in the US.

Chesapeake Energy(CHK) - One of the largest natural gas producers in the U.S. by volume of natural gas produced. The most active driller of natural gas in the US based on number of active rigs. CHK focuses on unconventional shale drilling. CHK plans on dropping down additional gathering assets to CHKM over time. Strong parent here, which is a key to a successful midstream MLP.

CHKM relies on CHK for virtually all revenues.

Commodity risk here is limited as CHKM collects all revenues via long term fixed fee contracts. CHKM does not take ownership of the natural gas flowing through their pipelines. 20 year fixed fee contracts mean solid cash flow projections here.

Growth - Other than future dropdowns from CHK, CHKM expects volumes to increase in their current operations. In early 2010, CHK and Total formed a joint venture agreement in which Total took on a 25% interest in CHK's Barnett Shale assets. Total is providing $2.25 billion in funding to the assets and CHK plans to significantly increase rig count in the region be end of 2010.

Capex - CHKM plans on using 1/2 the ipo proceeds toward an extensive expansion program. In the 12 months ending 6/30/11, CHKM plans on spending $223.5 million on capital expenditures, primarily pipeline expansion to meet CHK's and Total field needs. **Cash on hand from ipo will fully cover this expansion capex. We've seen a few deals lately in which the MLP borrows money to fund capex and distribute yield. In this case, ipo proceeds will be sufficient to fund CHKM's aggressive expansion plans over the next 12 months.


***Clean balance sheet post-ipo. $1.75 per unit in cash on hand post-ipo. As noted above, this ipo cash will be used for expansion capex over the next 12 months.

Distributions - Quarterly distributions of $0.3375 per unit, 1.35 per unit annually. On a pricing of $20, CHKM would be yielding 6.75% annually.

Historically $350-$400 million in annual revenues.

Forecast for the 12 months ending 6/30/11 - A substantial increase in revenues to $479 million. As noted above, with the partnership with Total, CHK plans on aggressively increasing drilling on their Barnet Shale properties. CHKM is also spending aggressively in pipeline expansion to meet those wells. Strong operating margins of 44%.

***Distribution coverage ratio is expected to be 119%. This includes an additional $70 million in maintenance capex also. Very strong coverage ratio here, CHKM has plenty of cash flows for maintenance capex and yield, good sign.

Quick 'back of the envelope' look at other public MLP gathering pipelines operating in the same general geographic area:

ETP: 7% yield, $6 billion of debt.

XTEX: Over-leveraged, halted distributions while selling off assets. $750 million in current debt, may yield 2.5% over next 12 months best case scenario.

KGS: 7.3% yield, $250 million in debt. KGS looks pretty attractive here actually.

WES: 5.7% yield, $385 million in debt.

RGNC: 6.9% yield, $1 billion in debt.

CHKM on a $20 pricing: 6.75% yield, no debt.

Conclusion - Grade 'A' pipeline ipo here. Strong parent, clean balance sheet. Expect CHKM to utilize the clean balance sheet to acquire dropdown gathering assets from parent CHK which should increase distributions over time. This should work in range short, mid and long term. Recommend strongly.

July 18, 2010, 12:20 pm

RLD - RealD

Following piece was done pre-ipo for subscribers. RLD priced strongly at $16 and traded in a $19-$21 range first day. While I liked this deal mid-teens, I am not a buyer at all $20+.

RLD - RealD plans on offering 12.4 million shares (assuming over-allotments) at a range of $13-$15. Insiders will be selling 6.4 million shares in the deal. JP Morgan and Piper Jaffray are leading the deal, William Blain, Weisel, and BMO co-managing. Post-ipo RLD will have 52.5 million shares outstanding for a market cap of $735 million on a pricing of $14. Note that sharecount includes warrants/options given to movie theater chains as incentives to sell-in RLD's 3-D technology. These options are included as an expense item to fair value on the earnings statement. However as they will eventually be converted to shares it is best to remove the expense item and include those in the sharecount instead.

Ipo proceeds will be used to repay debt and for general corporate purposes.

CEO and Chairman of the Board Michael V. Lewis will own 14% of TLD post-ipo. President Joshua Greer will also own 14% of RLD post-ipo.

From the prospectus:

'We are a leading global licensor of stereoscopic (three-dimensional), or 3D, technologies. Our extensive intellectual property portfolio enables a premium 3D viewing experience in the theater, the home and elsewhere.'

The 'Avatar' ipo essentially. Avatar was such a huge 3-D success, film companies all over the world are now planning on filming and/or converting their big releases into 3-D...and RLD is far and away the worldwide leader in movie theater 3-D technology. The Last Airbender was shot in 2-D with no plans on a 3-D release. Post-Avatar, The Last Airbender was converted into 3-D and grossed $70 million total over the July 4th holiday weekend. Only a percentage of that take was from the 3-D screens, still the trend post-Avatar is to now release a 3-D version of a 'big release' movie. The next Spiderman installment for example is now expected to be in 3-D.

Note that there is a big difference from filming 3-D (as Avatar was filmed) and filming in 2-D and converting in post-production. Either way though, the end result is shown in theaters on RLD's 3-D screens.

Our 2nd 'story stock' ipo of the summer here, this one has better financials than TSLA at least...Although it would be quite difficult to have worse financials than TSLA!

RLD licenses their 'RealD Cinema Systems' to theater chains. In addition, RLD sells their 3-D formant, eyewear and display/gaming technologies to consumer electronics manufacturers and contend providers for 3D viewing in high-def TV's, laptops and displays.</p>
In addition RLD's 3D technology has been used in applications such as piloting the Mars Rover, military jet displays and medical procedures.

***Growth has been ridiculously good over the past few years, reaching critical mass in the 12 months ending 3/31/10. As of 3/31/10, RLD's 3-D technology had 5,321 screens, up from 2,108 on 3/31/09. That is a year over year screen growth of 152%. With the sector trends noted above and this sort of year over year growth and clean balance sheet, this is a recommend in range right here. RLD is not just winning the movie 3-D technology battle, they have won the war.

Main competitor is IMAX. IMAX grew to 438 screens in 3/31/10 from 371 in 3/31/09. By all indications, the IMAX experience is more impressive than RLD. RLD has won on installation cost however as retrofitting existing theater's for RLD 3-D is far less expensive than an IMAX installation. RLD has won on cost.

***Note that growth continues. As of 6/30/10, RLD's systems were on 5,966 screens a sequential quarterly rate growth of 12%. RLD screens are in 51 countries with 64% being in the US. </p>
First RLD 3-D release was Disney's Chicken Little in 2005. With that release, RLD became the first company to enable 3D theater screens using digital projection.

Current licensees include the big chains: AMC, Cinemark and Regal. Revenues are generally on a per-admission basis, although RLD does have fixed-fee and per-motion picture contracts as well. Contracts are excluse five year deals with theater chains. RLD has agreements with the three to install RLD systems in an additional 5,100 screens which would push RLD over the 10,000 screen number.

RLD currently has 75% of the domestic 3D box office market. Avatar was released on 4200 RLD enabled screens.</p>
Growth - From 2005 through 2009, 27 3D motion pictures were released. In 2010 alone, 23 3D motion pictures will be released with 33 more expected in 2011.

Competitors include Dolby, Imax Masterimage and Xpand. As noted above, RLD has won the movie theater 3D war, remains to be seen in consumer electronics.


$1 per share net cash post-ipo.

Fiscal year ends 3/31. FY '10 ended 3/31/10.

Product revenues(eyewear) accounted for approximately 55% of revenues, licensing per movie revenues 45%.

Gross margins are negatively impacted by the 3D eyewear. Currently RLD sees a negative net margin on eyewear. in Fy '10 RLD began an eyewear recycling program they hope will lower their costs and push eyewear into positive margin territory. Currently this is an issue however and longer term profitability will in part be determined by RLD's ability to gain some margin traction on their eyewear.

Licensing margins are strong as the costs there are minimal. This part of the revenue stream (55% in FY '10) is similar to the Dolby business model. The technology is already there so the cost to RLD is minimal.

***Note that GAAP earnings for FY '10 and FY '11 have been/and will be skewed by theater stock options. A few years back RLD offered, nearly free, 3.6 million stock options total to AMC, Cinemark and Regal as incentive to grow the installed RLD 3D screen base. Those options fluctuate with the implied price of RLD's stock worth. These options will be exercised once screen targets are achieved, so they belong in the sharecount and not on the earnings statement. Because the implied value of RLD's worth grew so much in FY '10, these options accounted for a GAAP drag of $39 million on net revenues. This was not a real cost and gets folded out and those options get put into the sharecount instead.

The above could be a potential drag on the stock price as those theater chain stock options make it appear as if RLD is much less successful on the bottom line than they really are. To date, all the mainstream press articles on RLD note the losses without noting they come from these external stock options.

Two issues, one real and one a GAAP accounting rule. The real issue is RLD's need to improve margins on their eyewear. The licensing model is raking in the cash on top/bottom line, the eyewear is currently killing margins.

FY '10 (ended 3/31/10) - $189 million in revenues, a massive increase from $45 million in FY '09. Drivers here include 1) an increase in RLD 3D screens, 2) more 3D film releases and 3) the massive success of Avatar. Gross margins were 26%. Again the negative margins on the 3D eyewear are hurting overall gross margins. Operating expenses have grown far slower than overall revenues, a good sign. Operating expense margin was 23%, putting operating margins at a slim 3%. Plugging in taxes puts net margins at 2%. Earnings per share of $0.07.

FY '11(ending 3/31/11) - Very difficult to forecast. By the end of the fiscal year, RLD 3D screens should grow by 50%. Factor in the increased slate of 3D releases and it should be another solid revenue growth year. The question mark however is 'The Avatar Factor'. Avatar accounted for a huge chunk of FY '10 licensing revenues, plus eyewear revenues per attendee. It is doubtful there will be another Avatar like performer in FY '11. Toy Story/Shrek were the drivers in the June quarter, each becoming a big hit. Harry Potter should drive revenues in the December quarter.

I would estimate FY '11 revenues in the $260 million range, approximately a 36% increase from FY '10. As usual, I'd rather be a bit conservative here. FY '10 gross margins were impacted by eyewear recycling start-up costs. Folding those out and including some success in that program in FY '11 should push gross margins to 30%. Operating expense ratio should dip to the 20% area, putting operating margins at 10%. Plugging in taxes puts net margins at 6 1/2%. Earnings per share of $0.32. On a pricing of $14, RLD would trade 44 X's FY '11 earnings.

Again, as noted above, GAAP earnings will be negatively impacted by theater chain stock options. I folded those out and placed those options in the sharecount.

Conclusion - Trends here are about as strong as they come. RLD's 3D technology is the standard and by 2011 they should be in over 10,000 screens. In addition, the major film companies are planning approximately 30 3D releases annually the next couple of years. At a pace of over 1 per every two weeks, it should keep those screens lit. The question mark here is whether RLD can convert this swift growth into bottom line growth/profits. Thus far that has not really happened due to negative eyewear margins, and the risk here is that it never will. Growth and the trends are so strong here though that this is an easy recommend in range.

June 29, 2010, 11:28 am

TSLA - Tesla Motors

TSLA - Tesla Motors plans on offering 12.8 million shares (assuming over-allotments) at a range of $14-$16. Insiders will be selling 2.2 million shares in the deal.

In addition, Tesla/Toyata will be conducting a private placement outside of the ipo offering. Toyota will be purchasing $50 million in TSLA stock at ipo price in a concurrent private placement. On a pricing of $15, Toyota will be purchasing 3.33 million shares. This is a big boost to this deal. TSLA is a first mover here with a workable/marketable electric car that can operate on highways and has a 236 mile range. The automakers are spending heavily to catch-up and the concern with this deal is that TSLA will eventually be passed by the major auto manufacturers and left behind. Toyota making a significant investment in TSLA leads to the possibility of a partnership down the line. Really, to me, this private placement with Toyota at ipo price is what allows this deal to work at least in the short run. In addition to the stock purchase, Tesla and Toyota have announced their intention to cooperate on the development of electric vehicles.

Goldman Sachs, Morgan Stanley, JP Morgan and Deutsche Bank are leading the deal.

Post-ipo TSLA will have 95.2 million shares outstanding for a market cap of $1.428 billion on a pricing of $15.

Ipo proceeds will be used to fund capital expenditures and working capital.

Of note, TSLA is setting aside shares in this ipo to be offered to those that have purchased a Tesla Roadster.

**Ceo Elon Musk will own 29% of TSLA post-ipo. Mr. Musk co-founded Paypal.

From the prospectus:

'We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components.'

Two things of note:

TSLA focuses exclusively on electric automobiles and electric powertrains.

Second, TSLA owns their vehicles sales and services networks. No franchises. As of 6/14/10, TSLA operated 12 Tesla stores in North America and Europe.

This is a tech company from silicon valley, not a traditional car company. Keep that in mind.

**First mover is the key and selling point here. Fully functional electric cars have been on the drawing board for a number of years, TSLA is the first to succeed. From the S-1: 'We are the first and currently only company to commercially produce a federally-compliant highway-capable electric vehicle.'

TSLA currently has one vehicle model, the Tesla Roadster. The Roadster retails for approximately $100,000, can accelerate from zero to 60MPH in 3.9 seconds and has a range of 236 miles on a single charge.

As of 3/31/10, TSLA has sold 1,063 Roadsters. Looking at previous filings sales totaled just 9.7 cars per week in the first quarter of 2010. In contrast, TSLA sold 16-17 cars a week in 2009, their first full year of production.

TSLA has made a splash with a high end vehicle, shifting next into premium sedans with the Model S due in 2012. TSLA plans an annual production of the Model S of 20,000. Model S will be a four door, five passenger sedan and will retail for approximately $50,000. Future vehicles will work off the Model S platform.

Collaboration - In addition to the Toyota stock purchase on ipo, TSLA has an existing collaboration with Daimler AG. In 3/08 TSLA made a deal with Daimler to apply the TSLA battery pack and charger technology for Daimler's electric drive. An affiliate of Daimler owns TSLA stock as well. Daimler currently has a 1,500 battery pack purchase commitment which began shipping in 11/09.

**Going forward TSLA plans on developing and marketing electric powertrain components to both Daimler and Toyota.

In 1/10, TSLA entered into a $465 million long term low interest loan from the US Department of Energy. The loan will be used to finance the manufacturing facility for the S model. Through 6/14/10, TSLA had drawn down $45 million from this loan. In addition, TSLA has been granted $31 million in California tax incentives for the development of the Model S.

Sector - In 2008 electric vehicles and hybrid electric vehicles account for 3% of worldwide vehicle sales. Estimates put this number at 14% annually by 2015.


Approximately $2.25 in net cash post-ipo. Expect a lot of this cash, as well as the USDOE low interest loans to be utilized in the manufacturing and launch of the Model S.

TSLA has a very unimpressive first quarter compared to 2009. The 'newness' and hype factor of the Roadster launch has obviously worn off. This is a niche car aimed at a relatively small end market and the first movers got theirs soon after launch. Sustaining that early momentum has been difficult.

Losses will be steep over the next 2-3 years as TSLA spends heavily on the production of Model S.

2010 - Assuming the Roadster sales per month have permanently leveled off (and I believe they have), revenues for 2010 should be in the range of 2009 at $110 million. Gross margins of 15% or so. Operating expenses far exceed gross margins. Losses for 2010 should be in the $1 per share range.

Conclusion - Anyone telling you with certainty where TSLA's market cap will be 4-5 years from now is telling stories.

Ideal situation: Tesla is successful in profitably selling their own electric vehicles. They also develop their partnerships and their powertrain and battery technology, which is used in a number of other auto manufacturers electric vehicles. The electric vehicle market takes off and TSLA has a much higher market cap than current.

The risk: Tesla proves to be a fad and can never sell enough of their vehicles at price point to make a profit. The Model S is delayed by a year or more while other auto manufacturers bring fully electric cars to market at more attractive price points. Company bleeds money year after year, stock is near worthless and technology and remains are scooped up by Daimler or Toyota or another of the large auto makers.

Each scenario is in play down the line and I have no idea which will play out...or something in between. Really we will not have much of an idea until TSLA begins producing and selling their $50,000 luxury sedan in 2012. Currently their Roadster has a niche appeal at best. The S model will be going head to head with Mercedes, Lexus, Audi and BMW after a much broader target market. How that plays out, it will tell a lot about the future of Tesla.

This deal works short term though. Why? TSLA has built the first good looking all electric high performance sports car. They beat the worldwide auto manufacturers at their own game. That says a lot about the technology and the potential. One also needs to look at how a potential shift to electric cars over the next 10-20 years would greatly reduce pollution from vehicle emissions. This technology with be favored and promoted by governments worldwide and right now TSLA has the best (and first) mousetrap. Pre-TSLA, all electric vehicles were essentially low power 'around town' vehicles with limited miles per charge range and weak horsepower. Not anymore, and TSLA is the one that beat everyone else to market. That alone is very impressive and gives TSLA some long term hope.

Yes TSLA has been bleeding money since inception. The possibility that this fact never changes is what puts the long term viability of TSLA into question. As noted above, the longer term success/failure range here for TSLA is as wide as I've seen in an ipo. Even knowing that going in, this deal should absolutely work in range short term. Pretty exciting deal.

June 21, 2010, 1:07 pm

ONE - Higher One Holdings

ONE - Higher One Holdings

ONE - Higher One Holdings plans on offering 16.3 million shares (assuming over-allotments are exercised) at a range of $15-$17. Insiders are selling a lot of stock in this deal, 12.5 million shares. Goldman is leading the deal, UBS, Piper, Raymond James, William Blair and JMP are co-managing. Post-ipo ONE will have 56 million shares outstanding for a market cap of $896 million on a pricing of $16. Ipo proceeds will be utilized to pay down debt and for general corporate purposes.

Lightyear Capital will own 23% of ONE post-ipo.

From the prospectus:

'We are a leading provider of technology and payment services to the higher education industry.'

Financial aid disbursement technology/services as well as student banking. Another technology ipo geared towards shifting a historical paper based process (financial aid checks) into an outsourced streamlined electronic process. In reality though, ONE is an on-campus banking system disguised as a student loan processing operation.

Essentially ONE takes over the financial aid disbursement process from higher education institutions. Instead of issuing paper checks, ONE electronically deposits monies into student accounts.

In addition, for students ONE offers an FDIC insured banking account complete with debit ATM cards and the usual banking services. This is actually the key to the business model, called OneAccounts.

ONE links their disbursement payments electronically to students with their banking service (OneAccount) in an attempt to gain student accounts. This linkage is the key to ONE's revenues. Students receiving disbursements via ONE tend to open OneAccounts as the payments are electronically deposited into these checking accounts. Essentially a captive student 'audience'.

***ONE derives the bulk of their revenues from fees on their student OneAccount checking accounts. Fees generated include interchange fees from use of debit cards; ATM fees; non-sufficient fund fees and other assorted fees. College students as a demographic tend to run up more banking fees per capita than other demographics.

ONE also offers payment transaction services allowing higher education institutions to utilize ONE's software themselves. Again, ONE charges fees for transaction over this software payment platform and in turn, again uses these transactions as a selling point for their student OneAccount banking accounts.

Student banking revenues accounted for 80% of revenues for the first quarter of 2010, while revenue from the higher education institutions themselves accounted for less than 10% of revenue.

**Pretty sneaky business model here. The banks for years continue to spend a lot of time and effort in order to gain college student financial accounts (banking/debit/credit etc). ONE sells their student loan outsourcing service on the cheap to higher education institutions (a loss leader), to gain banking access to students receiving financial aid. Those student accounts end up driving revenues, not the disbursement processing/outsourcing service. ONE is a quasi bank disguised as a student loan processor.

This approach has enabled ONE to gain 1.2 million banking customers over the past five or so years. Note that ONE does not hold banking assets, they contract with Bancorp Bank on that end. They gain the accounts for Bancorp via their processing service and then collect the fees generated from that account. Bancorp's compensation are the investment returns on the deposits. Essentially they serve as deposit assets on Bancorp's balance sheet that they can then lend against.

ONE does not originate or manage student loans. They contract with higher education institutions to streamline/outsource the student loan disbursement process at that higher education campus...with the ultimate goal being to utilize this process to gain student banking customers. There were a few student loan originator ipos earlier in the previous decade including FMD/NNI. Each does do loan processing, however their core business models have been to originate student loans and/or service or securitize those loans. Two different business models: ONE integrates the student loan process of specific higher education institutions as a driver for their student banking services, FMD/NNI originate and service and/or securitize student loans.

As of 3/10 there were 402 campuses serving 2.7 million students that had purchased ONE's 'OneDisburse' outsource service and 293 campuses serving 2.2 million students that had contracted for one of more of ONE's software products. In addition ONE had 1.2 million banking accounts.

No single campus accounts for more than 4% of revenues. To date ONE has penetrated 14% of potential higher education campuses, leaving plenty of room for potential growth.

97% retention rate since 2003 among higher education clients. Not surprising as ONE is a nice value proposition for the higher education clients. ONE takes the student loan disbursement process off of the clients’ hands for a relative pittance as the key for ONE is the banking access to students receiving financial aid.

Acquisition - In 2009, ONE acquired higher education payment processing company CashNet for $27 million.

Risk - The big risk here is the legislative interest in reducing banking related fees. We recently saw a pretty significant sell-off in MasterCard/Visa on pending legislation that would create limits on debit card interchange fees. ONE uses Mastercard to process their OneAccount debit cards.

Competition - ONE believes no other competitor offers the full range of services that ONE offers. Others that offer payment software products and services include Sallie Mae, Nelnet, and TouchNet.


$.50 per share in cash post-ipo, no debt.

Revenues have increased nicely annually as ONE has grown student banking accounts.

2nd quarter (6/30) annually is lowest revenue quarter annually. Fewer student loan disbursements are made in this quarter, resulting in less transaction fees generated from student banking accounts.

2009 - Numbers are proforma assuming a full year of Cashnet. Revenues of $92 million. Gross margins of 61%. Again, ONE is a quasi bank without the actual assets. Instead they make money off the transactions involving those assets/accounts without having the actual accounts on their books. Operating expense ratio of 38%, operating margins of 23%. Net margins of 15%. Earnings per share of $0.25.

2010 - ONE had a monster first quarter of 2010. They continue to add new accounts as they add more higher ed institutions. Also, they tend to increase banking account penetration among student populations in existing higher ed clients. They've been doing a fantastic job of selling in their products and banking accounts. Based on first quarter (and adjusting for 2nd quarter seasonality), total revenues should grow 40% to $155 million.

Gross margins look to be about the same, however there should be a slight operating margin improvement in the back half of 2010. At 61% gross margins and 24% operating margins, net margins would be 16%. Earnings per share of $0.45. On a pricing of $15, ONE would trade 33 X's 2010 earnings.

Conclusion - The PE looks a tad aggressive here for the current ipo climate. Factor in the potential reigning in of interchange fees and on the surface it appears the range here will need to come in on pricing. However, ONE is trending as strongly as any ipo we've seen the past few years. The first quarter was, by far, the best in company history even if you fold out the revenues from their 11/09 acquisition. The key here is ONE's success in turning financial aid disbursements to students into banking accounts from those students. If this trend continues as it has the past two quarters, ONE could be putting up blowout revenue/earnings numbers in the back 1/2 of 2010 and into 2011. My estimates could turn out to be a bit low for 2010. Even if they are on par, it would mean ONE would be on track for another large EPS gain in 2010 as they continue to add banking accounts. This is a very good looking financial services ipo, coming public at a multiple that looks a bit pricey. Hopefully the market will agree and discount this one from $15-$17. As it is, I like this one in range mid-term plus and would be thrilled to be able to get it below range. Definite recommend in range.

June 15, 2010, 12:20 pm

CBOE - CBOE Holdings

CBOE - CBOE Holdings

CBOE - CBOE Holdings plans on offering 13.5 million shares (assuming over-allotments are exercised) at a range of $27 - $29. Insiders will be selling 2.1 million shares in the deal. Post-ipo CBOE will have 104.3 million shares outstanding for a market cap of $2.92 billion on a pricing of $28. Ipo proceeds will be utilized to purchase insider shares in a tender offer to come in two stages, 60 and 120 days post-ipo. Assuming tender offers are fully subscribed, CBOE will have 93.6 million shares outstanding for a market cap of $2.62 billion.

From the prospectus:

'Founded in 1973, the CBOE was the first organized marketplace for the trading of standardized, listed options on equity securities.'

World's first and largest options exchange in the US, based on both contract volume and value of contracts traded.

Hybrid model of open outcry and electronic trading in a single market. Contracts include options on individual equities, market indexes and exchange-traded funds. Not all of CBOE's products currently trade on their electronic platform, notably S&P 500 options. Note that CBOE is planning on launching a second e-platform later in 2010 which will be capable of trading all of CBOE's products. It appears that slowly CBOE is phasing out open outcry.

In 2009 volume of options contracts traded at CBOE was 1.13 billion, or 4.4 million contracts per day. US market share in US listed options was a leading 31.4%. 4.5 million contracts in the 3/10 quarter for a 30% market share. ***Note that as market volatility increased in early May, so did CBOE's volumes. April/May volume averaged 6.08 million contracts per day, well above first quarter 2010 volume of 4.5 million per day. Listed US options volume actually hit an all-time record in May, 2010 so pretty good timing here for the CBOE ipo.


Equity Options - Put/Call options with terms of up to nine months on 2400 NYSE/Nasdaq/Amex stocks. In addition, CBOE offers LEAP options on 800 equities. Of note, CBOE invented LEAP options. Average transaction fee per contract is 18 cents.

Index Options - Option on 10 different market indexes, including the CBOE developed VIX index. Others include the usual S&P 500, Nasdaq, Russell and Dow Jones Industrials. **CBOE has exclusive rights to list options on the S&P 500, S&P 100 and DJIA indexes. With exclusive rights to the VIX and S&P/DJIA products, average transaction fee for Index options is much higher at 60 cents per contract.

ETF Options - Options on 250 ETFs and LEAPS on 66 ETFs. The ETF options have been a large growth area showing 38% annual growth rate the past 4 years. Average transaction fee is 24 cents.

In most recent quarter (3/10), equity options accounted for 56% of CBOE volume, ETF options 23% and indice options 24%.

Bulk of revenues (74%) are derived from transaction fees, 11% for access fees and 5% for data fees.

Sector - Over the past decade, use of financial derivatives has expanded dramatically, as we are all aware. Exchange traded options are utilized for hedging, speculation and income generation while also providing leverage. 8.8 billion listed options were traded globally, with 3.6 billion traded in the US. 25% annual growth rate in listed options over the past five years. Should be noted the financial havoc in late 2008 resulted in only a 1% growth in US listed options volume in 2009.

Future growth - A potential driver is the transition of over the counter derivatives to an exchange traded model. This is an expected result of the 2008/2009 financial crisis fueled in part by unregulated over the counter derivative products.

**The International Securities Exchange (ISE) has legally challenged CBOE's exclusive license on DJIA/S&P index option products. Actually ISE has challenged the use of exclusive licenses for options in general. Cases are currently pending. A determination in favor of ISE would most likely dent CBOE's market share position in specific index options.

Another risk is a recent SEC proposal to limit transaction fees to 30 cents per contract. CBOE estimates if this proposal is enacted it would have meant a 4.4% revenue hit in 2009.

Post-ipo, CBOE will issue monthly access permits for firms to trade. This will replace the old member or seat status of access to the CBOE. CBOE expects 1,025 permits with fees ranging from $2,500-$7,500 excluding discounts. This should result in approximately $35 million in annual access fee revenues.

Closest competitor is ISE, with 21.5% of listed US options volume. ISE was bought out in 2007. The Philadelphia stock exchange (owned by Nasdaq) has a 20% market share.


$2 3/4 per share in cash. Note that this assumes 104.3 million sharecount with no shares tendered in CBOE's offer to buy out current shareholders. If tender offer is fully subscribed, cash on hand will be $0.25 per share, but sharecount will be 93.6 million shares.

Dividends - CBOE plans on paying regular quarterly dividends that annually equal to 20%-30% of prior year's net income. In 2009 this would have equaled approximately $0.25 per share. On a pricing of $28, CBOE would yield nearly 1% based on 2009 net income.

2010 - Due to market volatility, 2nd quarter looks to be the best one for CBOE in at least past six quarters. When factoring in increased access fees the second half of 2010, total revenues should be $475 million, a 5% increase over 2009. Operating margins of 40%, very strong. Net margins of 23%. Earnings per share of $1.05. **Assuming stock tender offer is fully subscribed, earnings per share would be $1.14. Lets cut the difference and make it $1.10. On a pricing of $28, CBOE would trade 25 X's 2010 earnings.

As CBOE's primary competitor ISE was bought out a few years ago we do not have a pure comparable. We do have two exchanges that ipo'd this decade CME and ICE. Each are trading 18-22 X's 2010 earnings estimates.

CBOE is a blue chip ipo without a doubt. The issue here is the aggressive valuation considering the lack of growth in 2009 and 2010. CBOE's transaction volume grew just 1% in 2009 and, until a very volatile May 2010, looked to be rather flat again in 2010. With SEC mulling limits on transaction fees and ISE legally questioning CBOE's exclusive index options, CBOE's profit driver is in question. That profit driver is their exclusive index option products, which derives up to twice the transaction fees per contract compared to rest of their products. Future EPS growth will be difficult if those index transaction fees are reigned in, which it appears only to be a matter of time.

Something to consider - Nymex Holdings, CBOT Holdings and International Securities Exchange were all bought within three years of their IPOs. In doing research for this piece, there seems to be a thought that the initial ipo range here consists of a bit of a 'buyout premium' here as a base. I tend to agree and think the initial range here reflects the chance that a buyer will step up over the next few years to purchase CBOE.

Conclusion - A must own in range due to blue chip name and leading position in the US listed options exchange market. There does appear to be a premium here in comparison to other options exchanges and definitely in comparison with stock exchanges traded publicly. Some of that premium may be warranted, but be wary of buying this in the aftermarket up too much from range. If buying this in aftermarket $30+, realize that you are paying a premium here in the sector, and definitely a premium for current market conditions.

Should absolutely work in range short, mid and longer term, this is a very good looking ipo.

Note that until we see the actual access fee revenues post-ipo, they are quite difficult to estimate. I plugged in an annualized $40 million, as CBOE will be discounting these pretty heavily for 2010(and possibly beyond). As usual this is probably slightly conservative.

May 11, 2010, 4:56 pm

NKA - Niska Gas Storage Partners

NKA priced this evening at $20 1/2.

NKA - Niska Gas Storage Partners

NKA - Niska Gas Storage Partners plans on offering 20.1 million units(assuming over-allotments) at a range of $20-$22. Goldman Sachs and Morgan Stanley are leading the deal, eight other firms co-managing. post-ipo NKA will have a total of 71 million units outstanding for a market cap of $1.49 billion on a pricing of $21. Ipo proceeds will be used to repay debt.

Holdco will own 70% of NKA post-ipo as well as incentive distribution rights and managing interest. Holdco is owned by private equity firms Carlyle and Riverstone.

From the prospectus:

'We....own and operate natural gas storage assets.'

Carbon copy deal of recent successful ipo PNG. Both are North American based natural gas storage partnerships.

NKA owns and/or operates 185.5 billion cubic feet(Bcf) of total storage capacity, about four times the size of PNG. NKA is the largest independent owner and operator of natural gas storage assets in North America.

Need - Supply of natural gas throughout the year remains stable, however demand fluctuates seasonally. NKA provides customers with the ability to store gas for resale or use in higher value periods.

Storage facilities are locared in Alberta, Canada, northern California, and Oklahoma.

92% of capacity is utilized by third-parties, however only 68% of revenues are derived from third parties. Third parties contract for storage over long term contracts, averaging 3.3 years.

Proprietary optimization - NKA fills in their capacity gaps by purchased, storing and selling gas for their own account. NKA hedges their own purchases by immediately entering into forward sales contracts for purchased volume. Proprietary purchases historically have accounted for 8% of capacity, but 32% of revenues.


NKA will have substantial debt post ipo of $915 million. By contrast, PNG came public with $200 million in debt. With the debt levels to available distributable cash, PNG would appear much better positioned to grow yield over the next few years.

Distribution - NKA plans on distributing $0.35 to unitholders quarterly. At an annualized $1.40, NKA would be yielding 6.7% on a pricing of $21.

Sector Yield - Looking at the natural gas only MLP's the average yields currently are in the 5 1/2%-7% range. Recent ipo PNG currently trades at a 5.9% yield. Note that most of the natural gas related MLP's are pipeline oriented and not storage. Some do own both, including SEP and EPD.

Fiscal year ends 3/31 annually. FY '10 ended 3/31/10.

FY '10 - $210 million in revenues. Interest expense ate up 40% of operating profits. Earnings per share of $0.19. Earnings per share are not as important here as distributable cash flows. Should be noted however that NKA is saddled with good size debt on ipo.

NKA did have sufficient cash flows to have covered the $1.40 2009 distribution per unit, only when borrowings were included. ***Folding out borrowings, NKA would not have had sufficient cash flows in 2009 to fund distributions and capital expenditures. This indicates that any future capital expenditures will need to be funded by debt. Coverage here is pretty much 1:1.

FY '11 - Indeed to 1) fund capital expansion and 2) meet debt servicing obligations, NKA plans on borrowing $76 million in FY '11(ending 3/31/11). A red flag here is NKA plans on borrowing monies to service debt. Not ideal. NKA simply cannot fund their operations and distribute $1.40 annually without borrowing more money. Current debt servicing is killing cash flows. This is not a good structure for unitholders.

Risk - NKA makes a disproportionate amount of revenues on proprietary natural gas purchasing/storing/selling. While only 8% of capacity is used on this, 32% of revenues come from their own gas trading. For a partnership heavily leveraged without sufficient cash flows to fund operations, this brings a whole new level of risk. We've seen a few MLP's 'blow-up' due to management proprietary trading activities. NKA relies heavily on this sort of activity for 1/3 of revenue stream annually.

conclusion - Largest gas storage operator in North America yielding 6.7% on ipo. That should be a good combination. Note however again that just to meet operational/debt servicing obligations, NKA plans on increasing borrowing in FY '11 by $76 million. Annual distributions are pegged at $96 million, so in essence NKA is borrowing 75%-80% of their distribution in FY '11. They shift things around to make it appear otherwise, but the reality is NKA's operations and debt levels do not justify a $1.40 annual payout. Factor in too the risk of proprietary gas trading and this is a pass in range.

Structure here is poor for public unitholders. Much higher quality natural gas partnerships out there yielding similar. Operations seem fine, structure of the public NKA looks risky.

April 24, 2010, 10:55 am

4/19 Week in Review

IPO Week in Review.

The week of 4/19, with eight deals pricings, was the busiest ipo week since the fall of 2007. Was a very average group overall and the pricing and initial aftermarket performance reinforced that case.

Ipo fallacy: 'It is all about the initial pop and the only way to make money is getting the deal and flipping on open'. Wrong, wrong wrong. Yes that case a decade ago, when the market was frothy and an ipo pricing at $13 routinely would open at $55. Quick fact: The initial ipo 'pop' from pricing since 1/1/09: 5 1/2%. The average gain(based on Friday's close) for ipos since 1/1/09: 13%. Most of the gains have been made in the aftermarket as was the case during the last bull run of 2003-2006. The first day is really not all that important, the key to making money over time with ipos is to find a deal that is overlooked and has the potential to appreciate over time.

A quick look at this week's deals with my thoughts.

EXL - Excel Trust: Priced 15 million shares at $14. Opened pretty much broken and closed down 5% at $13.30. EXL is a REIT focused on acquiring and owning retail community centers(strip malls essentially). Plan is to leverage up on mortgage debt to increase return to shareholders. Management has a solid track record, key here is whether one believes commercial real estate has bottomed. Minimal operations to date, this is one to look at down the line after a year or so to see how things are progressing. No interest in this deal.

ALIM - Alimera Sciences: Priced 6.6 million shares at $11. Closed Friday at $11.01, flat from pricing. ALIM is a development stage pharmaceutical focused on retina disease. Expected to have first candidate commercialized n early 2011. Question marks here include acceptance of their product as well as size of end market here. No interest in this deal either.

CDXS - Codexis: Priced 6 million shares at $13. Closed Friday at 14.04 for an 8% gain from pricing. Biocatalysts for biofuel and pharma. Large collaboration with Shell to develop biofuels. Not close to commercialization in biofuel segment, working initially as a 'green' and 'clean' fuel ipo. Highly speculative, will either be a home run or a below $5 stock in 2-3 years. I'd put odds on the latter, still too early to jump in here. No interest, although if CDXS/Shell are successful this has 'home run' potential.

DVOX - Dynavox: Priced 9.4 million shares at $15. Closed Friday at $15.18 a 1.2% increase over pricing. DVOX is the dominant market leader in assisted speech technology and devices. Makes products that speaks for those that cannot. Profitable since at least 2005, strong gross(75%) and operating margins(25%), should book a 35%+ revenue gain in FY '10 and earn $.63. I like this one a lot and believe it got lost in the shuffle of 'average' deals this week. The only ipo of the week I am currently long, this one has the potential to be a long term winner if they continue to execute. I see DVOX and FNGN(Financial Engines) as the two top deals of 2010 as far as appreciation potential from pricing 1-2 years out.

DHRM - Dehaier Medical Systems: 1.5 million shares priced at $8. This was an 'as offered' deal that was nearly impossible to get on ipo. I know of one person that was able to get 1,000 shares and that is it. Opened $10.25 and closed Friday at $12.49 for a massive 56% gain from pricing. China Medical equipment distributor. Is it really this good? No, not at all. This was a case of a very small float controlled by the underwriter in a deal designed to make the underwriter and clients a quick buck. Not a bad company, I liked this one a bit at $8 actually although there was not chance to get it there. This is one of those a year from now will most likely be back solidly into single digits and we will take a look at it at that point.

GGS - Global Geophyscial: Priced 7.5 million shares at $12. Closed Friday at $12. Priced well below range, probably found a level it can sustain here at $12. Seismic operations for the oil and gas industry. Very high capital intensive business has meant GGS has been able to put little on the bottom line. Had a massive one off deal in 2009, meaning 2010 will see a decline in revenues. There is value in here somewhere, but not interested currently.

MITL - Mitel Networks: Priced 10.5 million shares at $14. Closed Friday at $12.07 a 14% drop from pricing. Original range here was $18-$20, this was mispriced the whole way. IP based communications for small and medium business. Nothing at all here to be interested in, I panned this deal pretty vigorously at original $18-$20 range and it could even hold a slashed $14 pricing. Not a bad company, in a business with hefty competition and no real technology advantage. There would be value here $10 or below longer term, but currently no interest here.

SPSC - SPS Commerce: Priced 4.1 million shares at $12. Closed Friday at $13.91, a 16% gain. Micro cap on demand supply chain management software company. Nice little micro-cap in a spot(retail) that has been working in the market. Looks pretty fully valued here, would be interested on a pull back to pricing levels.

Pre-ipo I recommended in range DVOX and DHRM, with a 'neutral' on SPSC and a 'pass' on all the others. At current prices, DVOX is the one that appears to look most attractive going out the next year or so. I would look at SPSC and DHRM on a bit of a pullback. Yes a very busy week in ipoland, unfortunately most of the deals were just not that enticing.

April 22, 2010, 9:44 am

DVOX - Dynavox

DVOX - Dynavox

DVOX - Dynavox plans on offering 9.375 million shares at a range of $15-$17. Assuming over-allotments, the deal size will be 10.8 million shares. Piper Jaffray and Jefferies are leading the deal, William Blair and Wells Fargo are co-managing. Post-ipo DVOX will have 31 million shares outstanding for a market cap of $496 million on a pricing of $16. 1/3 of the proceeds will go to debt repayment, the remainder will go to insiders.

Vestar will own 35% of DVOX post-ipo and will control voting interests via a separate share class.

From the prospectus:

'We develop and market industry-leading software, devices and content to assist people in overcoming their speech, language or learning disabilities. Our proprietary software is the result of decades of research and development and our trademark- and copyright-protected symbol sets are more widely used than any other in our industry.'

DVOX is a leader in two areas for assistive technologies: speech generating technologies and special education software.

DVOX is the largest provider of speech generating technology. Users communicate through synthesized or digitized recorded speech. Users are those who are unable to speak, such as adults with amyotrophic lateral sclerosis, or ALS, often referred to as Lou Gehrig's disease, strokes or traumatic brain injuries and children with cerebral palsy, autism or other disorders. Devices can be controlled/used via touch or even via tongue, head or eye movements. 82% of revenues are derived from DVOX's speech generating products.

Special Education software - 18% of revenues. Used by children with cognitive challenges, such as those caused by autism, Down syndrome or brain injury; physical challenges, such as those caused by cerebral palsy or other neuromuscular disorders; as well as by children with learning disabilities, such as severe dyslexia. DVOX's proprietary symbol sets are the most widely used for creating symbol-based activities and materials in the industry. Funding generally comes from federal sources.

I like this statement in the S-1: 'We believe that our speech generating technologies can transform the lives of those who have significant speech, language, physical or learning challenges by enabling their communication.'

Two most recent products are the EyeMax eye-tracking accessory and the highly portable Xpress speech generating device.

Speech generating products are sold via a direct sales force focused on speech language pathologists. Special education software is sold via internet and direct mail.

Products are sold in the US, Canada and Great Britain.


Speech Generating - 20 million adults and children in the US suffer from conditions that may lead to speech impairment. DVOX believes the annual new market for speech products is $1.8 billion in their geographic market. DVOX does believe this potential end market is currently under penetrated. Growth driver include a growing awareness among speech pathologists and the underserved population. DVOX believes speech generating products are only now achieving mass awareness. A big reason for this are technological advances making the products far more accurate and user friendly.

***I have a feeling that speech generating products are only now beginning to reach 'tipping point' stage. With the aging US population coupled with technological advances in the products themselves, this is a fantastic growth spot over the next 10+ years...and DVOX is far and away the market leader. Assuming the financials look at least okay, this is a very unique, interesting and strong ipo.

Special Education Software - In the US 6 million students are deemed to require special education with a market opportunity of $1 billion+ annually. DVOX believes higher education standards coupled with increased special education funding are the growth drivers for their Special Ed software.

Risks - A large chunk of DVOX's revenues are derived from the public school system as well as Medicaid and Medicare. With budget shortfalls, each of the preceding is finding itself in 'cutback' mode. This could stall growth somewhat, particularly in DVOX's special education segment. I doubt very much that funding cutbacks are going to effect the speech generating segment however as there are few voice communication alternatives out there currently for those without speech.

Competition: From the S-1: 'Within our particular areas of speech generating technology and interactive software for students with special educational needs, we believe we are the largest player and have no dominant competitors.' Rarely do you see in a prospectus a statement this strong when describing the competition.


$30 million in net debt post-ipo. Expect DVOX to pay this down via cash flows going forward. Debt not enough to impede operations.

Fiscal year ends 6/30 annually. FY '10 ends 6/30/10.

Revenues have increased annually for at least five years in a row. DVOX has been profitable since at least FY '05.

Seasonality - Revenues are stronger in the back half of the fiscal year, with the 4th quarter(6/30) being the strongest. In FY '09 33% of revenues were derived in the 4th quarter of the fiscal year.

FY '09(ended 6/30/09) - Revenues of $91 million, a 12% increase over FY '08. Gross margins were strong at 73%. Operating expense ratio of 52%, operating margins of 21%. Solid margins here. Plugging in debt servicing and full taxes, net margins were 11 1/2%. EPS of $0.34.

FY '10 - Strong start to the fiscal year for DVOX through the first 2 quarters of the fiscal year. Keep in mind that DVOX's strongest quarters are to come and DVOX should post a strong number in the 6/30/10 quarter.

***Revenues should grow a strong 37% to $125 million. As I noted above, DVOX's speech generating products appear to be hitting critical mass as revenues in that spot are accelerating strongly here in FY '10.

Gross margins are improving as are operating expense ration, although the latter only slightly. Gross margins should be 75%. Operating expense ratio of 51%, putting operating margins at a quite healty 24%.

Debt servicing should eat up 9% of revenue, well below my 20% threshold. Again, I would expect this debt to be erased altogether sometime in FY '11.

Net after tax/debt margins of 15%. Earnings per share of $0.63. On a pricing of $16, DVOX would trade 25 X's FY '10 earnings.

FY '11 - Really is just a guess here until we see the 6/30 quarter, which will set the tone for FY '11. Let us take a guess though. I do not expect another 30%+ quarter as some of that strength is due to easy recession year comparisons in FY '09. Note though that even in a tough economic climate, DVOX grew FY '09 revenues 11%. I would peg FY '11 growth around 20%, a conservative number. Gross margins have gone about as far as they can I think at 75%. Operating margins should improve slightly as should net margins. On 16 1/2% net margins and 20% revenues growth, DVOX would earn $0.80 per share. On a pricing of $16, DVOX would trade 20 X's FY '11 earnings.

Conclusion - Market leader in what should be a nice growth area over the next decade. Strong recommend in range here, I like this ipo quite a bit. DVOX looks poised to have a great future, very reasonable market cap in range when we take into account the potential here going forward. This one has the potential and the look of a long term winner

April 12, 2010, 7:05 pm

CELM - Anatomy of a trade

I've not ever done this before. However it seems that most 'ipo experts' out there do nothing but plug themselves even though most do not even trade or own ipos. At tradingipos.com we put our money where our analysis is. Here is a little self-promotion:

We liked CELM on ipo quite a bit, especially with the slashed $4.50 pricing. We owned a large position in the stock, which we sold the last of today at $7.70. We post real-time trades on the forum in our subscribers section, and have been for five years.

We consistently make money at tradingipos and have been fortunate to make a nice living for a decade now exclusively trading these ipos. As important, we help subscribers make money.

Before posting the pre-ipo piece on CELM, here are the timestamps/comments on CELM from the forum on our subscribers section. All, but the last are from me"

Posted: 28 Jan 2010 11:40 am Post subject:

CELM..just looked at prospectus, appears same number of shares outstanding to with new range, so this is a nice reduction in market cap and valuation. at $4.50, it is priced to work.

Posted: 29 Jan 2010 08:01 am Post subject:

celm added 4.64 on open..no stop.


Posted: 03 Mar 2010 08:58 am Post subject:

celm, yep we all here know this is going to run, most likely to at least 7ish...just a matter of time after amcf popped. haven't been this sure of something in a long time


Posted: 09 Mar 2010 07:24 am Post subject:

CELM, yes $8 target. As I have been saying, this thing should hit at least $7 and that is the area I am looking to take some off.


Posted: 16 Mar 2010 07:36 am Post subject:

celm, am already loaded in the name..my avg right around 4.85-4.90.


Posted: 12 Apr 2010 12:57 pm Post subject:

celm, playing out perfectly here although it is setting up for blow-off gap up in morning...I am out here of all 7.7's for final 1/3. nearly 60% gain on that last 1/3


and this post today from a subscriber:

Posted: 12 Apr 2010 07:03 am Post subject: CELM

just wanted to thank you guys for your input on CELM and Bill for your analysis. Even though I sold a bit early last week I still managed to make my year with it by taking oversized positions on the 2 runs from sub $5 to low to mid $6.


Following is the analysis piece I did on CELM for subscribers back in January pre-ipo. These pieces are the basis for my trades...trades/positions I've posted in the subscriber section of tradingipos.com for 5 years now.

Okay, the self-promotion is over...Anyone publishing the CELM analysis piece below, please do so with the above. The piece is now a bit dated as CELM has moved so much and it is now intended as a companion piece to the live trading comments posted above. Thanks.

CELM - China Electric Motor

CELM - China Electric Motor plans on offering 6.7 million shares at a range of $5.50-$6.50. Insiders will be selling 2.5 million shares in the deal. If over-allotments are exercised, the deal size will be 7.5 million shares. Note that in addition to the shares being offered, CELM is giving the underwriters warrants for an additional 425k of stock. Roth and Westpark are leading the deal. Post-ipo, CELM will have 20 million shares outstanding for a market cap of $120 million on a pricing of $6.

Ipo proceeds will be used to increase manufacturing capacity, to purchase more industrial space, to modernize factory equipment and for other general corporate purposes.

To Chau Sum will own 50% of CELM post-ipo. He is not listed as a company officer, however CELM's CFO and Chairman are also involved in To Chau Sum's investment and operation arms. While not operating CELM day to day, he appears to be the 'money guy' behind the creation of CELM and fully in control of management. CELM was once a shell symbol and there are a myriad of transactions with subsidiaries of China Electric, To Chau Sum's investment vehicles and WestPark Capital.

Westpark Capital founder Richard Rappaport will own 6% of CELM post-ipo. Mr. Rappaport also owns a similar % stake in recent ipo ZSTN and has already filed to sell that stake. Expect similar here with an insider secondary coming a few months after ipo.

**Private Placement - CELM did a private placement 10/6/09 at $2.08 per share. The ipo price mid-range is nearly triple this private placement price just 3 1/2 months later.

From the prospectus:

'We engage in the design, production, marketing and sale of micro-motor products. Our products, which are incorporated into consumer electronics, automobiles, power tools, toys and household appliances, are sold under our "Sunna" brand name.'

Micro-motors for consumer products. Produces both AC and DC motors, CELM notes that micro-motors are 'simple to control, easy to operate and are generally very reliable.'

Motors for home appliances account for approximately 65% of revenues, motors for automobiles 22%.

Automobile uses for micro-motors include automated car seats, windows, trunks, door locks, mirrors, sliding doors and roofs.

Home appliance uses include including hairdryers, air conditioners, paper shredders, soy milk makers, juice makers, electric fans, heaters and massagers.

As micro-motors are used in consumer appliances and newer model autos, CELM is a direct play on 1) growing middle class in China; and 2) the continued shift to China for the manufacture of small electronic appliances and micro-motor products. The latter being driven by lower cost manufacturing base in China as well as a growing end market in China and surrounding countries.

Motors sold directly to OEM's and distributors. CELM produces 28 different series of motors with 1,200 different product specs. Majority of CELM's revenues are derived from custom products as only 6.5% of sales are for stock 'off the shelves' motors.

Top seven customers account for over 50% of revenues.


With any technology manufacturer, gross margins indicate where on the 'tech scale' the company sits. The higher the margins, the 'higher tech' the company which generally leads to a higher than average multiple. Conversely lower margins indicate a 'commoditized' type tech sector which generally lead to lower multiples. CELM resides in the lower margin area of the tech ladder. Through the first nine months of 2009, CELM's gross margins were 28%.

Approximately $1 per share net cash post-ipo.

CELM has no real accounts receivables issues. They've had no receivables on the books for over 30 days for the past few years.

2009 - Through the first nine months, total revenues look to be on track for $88 million, a 65% increase over 2008. Gross margins as noted of 28%. Operating expense ratio of 10%, putting operating margins at 18%. As is becoming the norm in China, tax rate is right around 25%, putting net margins at 14%. Earnings per share should be $0.62. On a pricing of $6, CELM would trade 9 1/2 X's 2009 earnings.

2010 - CELM's growth in 2009 was a little deceiving as their quarter to quarter revenues were flat through the first 3 quarters of '09 at $19 million, $22 million and $22 million. CELM had a huge revenues jump the first quarter of 2009 and maintained that new level throughout the year. Actually this is similar to their previous two years as it appears their new contracts kick in with the new year. We'll have a much clearer picture of CELM's 2010 revenue story after the first quarter. I would be surprised if CELM is able to grow revenues in 2010 much more than 30%. I am far more comfortable plugging in 25% revenue growth here. The good news is that CELM's gross margins do appear to be improving a bit due to product mix. At a $110 million run rate in 2010, with 30% gross margins CELM should earn $0.90. This may prove to be a bit conservative, but with a micro cap I'd rather err on the conservative side. On a pricing of $6, CELM would trade 6 1/2 X's 2010 earnings.

A quick look here at CELM and HRBN. HRBN produces all sorts of motors, while CELM focuses exclusively on micro-motors. HRBN - $569 million market cap. Currently trading 9 X's 2010 earnings estimates with a projected 90% revenue growth rate. Note that a large chunk of HRBN's 2010 revenue growth is expected to be driven by a significant 2009 acquisition. CELM - $120 million on a pricing of $6. Would be trading 6 X's conservative 2010 estimates with a 25% revenue growth rate. We have a growth and margin comparable here in recent ipo, ZSTN - both ZSTN and CELM are lower margin and similar 2010 growth rates; however, very different tech sector. I do believe CELM is much more viable growth story longer term than ZSTN. CELM has better gross margins than ZSTN, actually much better at a 2009 28% compared to ZSTN's 16%. In addition, CELM appears to be slightly increasing gross margins, while ZSTN's are faltering. Each expected to grow 25% in 2010. ZSTN currently trades 8 1./2 X's 2010 estimates, so simply on that basis it appears there could be appreciation here for CELM in range.

Conclusion - Somewhat commoditized Chinese tech microcap coming at an attractive multiple. CELM has shown strong growth in a difficult 2009. CELM has been operating cash flow positive since 2006 and has improved those cash flows each of the past three years. That is a key here as we have seen numerous China microcap ipos that have been GAAP positive but operating cash flow negative. CELM has not only been operating cash flow positive for 4 years, they've increased those cash flows annually. That is a nice positive in an obscure microcap. The lower gross margins here means we should not get too excited, however in range this deal looks priced to work. Below range it is a no-brainer.

April 7, 2010, 10:47 am

HTHT - China Lodging Group

tradingipos.com piece done for subscribers pre-ipo.

HTHT - China Lodging Group

HTHT - China Lodging Group plans on offering 9 million ADS at a range of $10.25-$12.25. Assuming over-allotments are exercised, the deal size will be 10.35 million shares. Goldman Sachs and Morgan Stanley are leading the deal, Oppenheimer co-managing. Post-ipo HTHT will have 60.25 million ADS equivalent shares outstanding for a market cap of $678 million on a pricing of $11.25. Ipo proceeds will be used to fund expansion.

*** Founder, Executive Chairman of the Board of Directors Qi Ji will own 46% of HTHT post-ipo. Qi Ji also co-founded HMIN and CTRP and served as CEO of each. Qi Ji currently site on the Board of Directors of CTRP. CTRP and HMIN are two of the most successful China ipos of the past decade. In addition CTRP will be purchasing an 8% stake in HTHT on ipo at ipo pricing.

From the prospectus:

'We operate a leading economy hotel chain in China.'

HTHT commenced operations in 2005.

In '08 and '09 HTHT had the highest revenues generated per available room, or RevPAR, and the highest occupancy rate in China.

HTHT operates under the HanTing Express Hotel, HanTing Seasons Hotel and HanTing Hi Inn.

In 2009 approximately 68% of room nights were sold to members of HTHT's HanTing Club loyalty program.

HTHT utilizes a lease and operate model, directly operating the majority of their branded hotels. HTHT does franchise and manage hotels as well. As of 12/3109, HTHT had 173 leased-and-operated hotels and 63 franchised-and-managed hotels. In addition, as of the same date, HTHT had 21 leased-and-operated hotels and 123 franchised-and-managed hotels under development. HTHT currently operates in 39 cities with 28,360 total rooms.

2009 occupancy rate was strong at 94%. Average daily room rate was approximately $25 US with RevPAR at a shade over $23 per day.

Sector - We've seen two ipos this decade in this sector, HMIN and SVN. The lodging industry in China consists of upscale luxury hotels such as four and five star hotels and other accommodations such as one, two and three star hotels and guest houses. The industry grew from approximately 237,800 hotels in 2003 to approximately 315,900 hotels in 2008, and 20.1 million rooms in 2003 to 27.3 million rooms in 2008.

Seasonality - 1'st quarter annually tends to be HTHT's lightest.

HTHT plans to add approximately 90 hotels in 2010, the majority of which will be franchised as opposed to leased and managed. This is key as HTHT's franchised hotels bring in less revenue per hotel than HTHT's leased and managed hotels.


$2.25 in net cash post-ipo.

HTHT moved into operational profitability in 2009.

97% of 2009 revenues were derived from leased and operated hotels.

2009 - $185 in revenues, a 65% increase over 2008. Growth was driven by an increase in hotels and rooms as RevPAR and occupancy remained stable. Gross margins were 21%. Operating margins 6%. HTHT's tax rate is approximately 25%, putting net margins at approximately 4%. Earnings per share were $0.13. On a pricing of $11.25, HTHT would trade 86 X's 2009 earnings.

2010 - HTHT outgrew both SVN/HMIN in 2009 and that should continue in 2010 with the aggressive growth plan. Revenues however will not come close to the 65% increase in 2009 though due to the mix of new hotels leaning towards franchised as well as the flat revenues the back half of 2009. I would plug in 30% revenue growth in 2011, for a total of $240 million. Gross margins should improve to 25%, operating margins 11%. Net margins after tax of 8.25%. Earnings per share of $0.33. On a pricing of $11.25, HTHT would trade 34 X's 2010 earnings.

Quick comparison with SVN and HMIN:

SVN - $320 million market cap. Trading 1 1/2 X's '10 revenues and 33 X's '10 estimates with a 28% revenue growth rate.

HMIN - $1.33 billion market cap. Trading 3 X's '10 revenues and trading 38 X's '10 estimates with a 23% '10 revenue growth rate.

HTHT - $678 million market cap on $11.25. Would trade 2.8 X's '10 revenues and 34 X's '10 earnings with a 30% revenue growth rate in '10.

Conclusion - All three of these(HMIN/HTHT/SVN) are sacrificing shorter term bottom line growth in a race to grow locations and rooms. The problem with this strategy is any appreciation for HTHT over pricing range makes them look awfully pricey when put beside nearly every other China stock across all sectors. That is a perceived valuation issue for this group currently as top line growth should be strong, but bottom line results continue to make the sector look pricey. This deal is a recommend in range for one big reason: HTHT's founder & CEO has also co-founded and was CEO of two very successful Chinese ipos this decade CTRP and HMIN. Factor in that CTRP is purchasing a nice chunk of HTHT on ipo pricing and this is a deal that should work shorter term in range. Mid-term, all depends on what multiple the market wants to give this sector. This is a very competitive group and pricing power(or lack of) will come into play as the economy hotel market becomes better covered and saturated.

Recommend shorter term in range.

March 28, 2010, 8:05 pm

FIBK - First Interstate BancSystem

FIBK - First Interstate BancSystem

FIBK - First Interstate BancSystem plans on offering 8.7 million shares at a range of $14-$16. Assuming over-allotments are exercised the deal size will be 10 million shares. Barclays is leading the deal, Davidson, KBW and Sandler O'Neill co-managing. Post-ipo FIBK will have 41.2 million shares outstanding for a market cap of $618 million on a pricing of $15. Ipo proceeds will be utilized to support growth efforts, pay off remaining long term debt and for general corporate purposes.

FIBK's controlling family, led by Chairman Thomas Scott and Vice Chairman James Scott, will own 33% of FIBK post-ipo.

Dividends - FIBK has regularly issued dividends to shareholders. Over the past year dividends have been $0.11 per quarter. Assuming these levels continue post-ipo, FIBK would be paying holders $0.44 per share annually. Annual yield at $15 would be 2.9%.

From the prospectus:

'We are a financial and bank holding company headquartered in Billings, Montana...We currently operate 72 banking offices in 42 communities located in Montana, Wyoming and western South Dakota.'

As of 12/31/09, FIBK had assets of $7.1 billion, deposits of $5.8 billion, and loans of $4.5 billion.

Company was established by Homer Scott in 1968 with a focus on serving the communities of Wyoming and Montana. Currently FIBK has 72 locations in 42 communities. FIBK is the largest banking presence in over 1/2 of their communities. Overall, FIBK is ranked first in deposits in Montana and second in Wyoming. 50% of deposits are in Montana, 36% in Wyoming and 14% in South Dakota.

Acquisition: In 1/08 FIBK entered South Dakota with the purchase of First Western Bank and their 18 locations.

Strengths - The biggest strength here is that FIBK has not been operating community banks the past few years in Nevada, California or Florida. The three states in which FIBK does operate(Montana, Wyoming and South Dakota), have seen a more stable real estate valuation as well as a relatively stronger economy overall. Unemployment rates as of 12/09: Montana at 6.7%, Wyoming at 7.5% and South Dakota at 4.7%. Each is well below national 10% average. Economy in FIBK's area driven by agriculture and energy.

FIBK has remained profitable and growing through the tough banking cycle of the past few years. 22 consecutive years of profitability.

Community model - Each of FIBK's local bank presidents have discretion and responsibility for loan deposit decisions. Loans and assets are funded directly from local deposits.

Future expansion to be funded via organic growth and potential acquisitions, including FDIC assisted acquisitions.


Bulk of net revenues are derived from the interest rate spread between loan interest earned and deposit interest paid out. FIBK has been able to retain steady spreads of 4-4 1/2% points over the past 4 years.

FIBK has not leveraged their deposits, on 12/31/09 the loan to deposit ratio was 78%. This is well below the historical 85%-90%, a result of tightening loan standards as well as writing off a number of loans in 2008 and 2009. Loan write-offs have been in the 1% of total loan dollars each of the past two years. While historically this is a pretty large bump up for FIBK it is far below many community banks elsewhere in the US.

Operating income decreased in '08 and '09 due to the increase in loan write-offs. 2010 should continue to see a significant loan write-off amount, most likely again in that 1% of loans outstanding ballpark. Why? FIBK's under-performing loans were at 3% of all loans outstanding as of 12/31/09. We can pretty safely assume FIBK will write-off at least 1/3 of those in 2010. This is significant in that it will be difficult for FIBK to increase the bottom line strongly until under-performing loan levels decrease.

65% of loan portfolio is real estate related. Approximately 50% of loan portfolio are commercial loans.

**On a pricing of $15, FIBK would be coming public at 1.3 X's tangible book value.

As FIBK has tightened loan issuance, cash on hand has grown significantly. With a loan book of $4.5 billion, cash on hand sits at $623 million well above FIBK's $163 million under-performing loan levels. Unless those troubled loans increase significantly, it does appear FIBK's cash reserves are strong enough to handle the write-offs and still maintain adequate capital.

2009 - $197 million in net interest income after writing off $45 million in loan losses. Total revenues were $298 million. Operating income was was 27%, net margins 18%. Note that these are a tad skewed as we are using net revenues after written off loans for margins. Earnings per share were $1.31. On a pricing of $15, FIBK would trade 11-12 X's 2009 earnings.

**Note that FIBK's operating income decreased quarterly throughout 2009. Loan write-offs and tightening of loans given out were to blame along with non-interest income. FIBK is going to have a very difficult time even matching 2009's $1.31 eps. Loan write-offs should increase slightly in 2010, while the rest of FIBK's operations should remain relatively stable. I would expect a net here in 2010 in the $1.25 ballpark net of any future acquisitions.

GBCI is probably the closest public comparable. FIBK and GBCI both with a shade over 3% in under-performing loans and each right around 1.3-1.4 X's book value. GBCI is posting much stronger interest spreads at 4.8% to FIBK's 4%. Reason is simple: GBCI is leveraging their deposits to the tune of 2 1/2 times deposits(2.5) while FIBK does not with loans at 77%(0.77) of deposits. FIBK would seem to be the more conservative of the two.

Conclusion - Solid community bank coming pretty fully valued for 2010. FIBK appears in no danger of running into liquidity and/or operational troubles. However, outside of acquisitions, growth is going to be difficult to come by over the next year due to increases in doubtful loans and the needed cash horde to sustain any write-off increases. If cash is sitting on the balance sheet, it impacts the interest rate spreads in which FIBK puts money on the bottom line, Indeed spreads in 2009 shrank to just over 4%, from the historical norm of 4.5%(since 2005). Reason is 100% combination of loan write-offs and the large amount of cash on hand. Neutral in range here, would become very interested if pricing occurs closer to tangible book value. Solid conservatively run community bank operating in a region driven by agriculture and energy.

March 16, 2010, 7:00 am

FNGN - Financial Engines

FNGN - Financial Engines

FNGN - Financial Engines plans to offer 10.6 million shares at a range of $9-$11. Insiders will be selling 4.7 million shares in the deal. Assuming over-allotments are exercised, the deal size will be 12.2 million shares with insider sales remaining the same at 4.7 million shares. Goldman Sachs and UBS are leading the deal, Cowen and Piper Jaffray are co-managing. Post-ipo FNGN will have 41.1 million shares outstanding for a market cap of $410 million on a pricing of $10. Ipo proceeds will be used for general corporate purposes.

Note that FNGN does have a significant amount of option shares that will be exercised over the next few years. Currently FNGN has 11.6 million shares in the form of granted options at an exercise price of $6.07 average.

Foundation Capital will own 14% of FNGN post-ipo, Enterprise Associates 11% and Oak Hill Capital 7%. None of these three entities are selling any shares on ipo.

From the prospectus:

'We are a leading provider of independent, technology-enabled portfolio management services, investment advice and retirement help to participants in employer-sponsored defined contribution retirement plans, such as 401(k) plans.'

Investment advice for the 'common man' focusing on assisting those in retirement plans, notably workplace 401k plans. FNGN focuses on the mass market 401k and other retirement plans via automated web based technology platforms. One can imagine the labor expenses if the approach were actually a 1-to-1, face-to-face or voice-to-voice investment advice business plan focusing on the millions of employees with 401k's and/or other similar retirement plans. FNGN's solution is web based auto-generated advice. Who developed this auto-generated advice?

Financial Engines’ web-based advice is generated using portfolio-analysis programs designed by its co-founder, Nobel laureate William F. Sharpe. FNGN's automated analysis offers specific advice including whether to buy or sell certain funds available under the 401k plan while evaluating investments on factors including asset mix, fund expense, manager performance, risk and tax efficiency.

Approximately half of users have less than $20,000 of retirement assets. This is mass retirement investment advice running counter to most advisor outfits which offer specific fee based advice to higher net worth clients. For FNGN this means one thing: Volume, Volume and...Volume. FNGN needs many 401k accounts to significantly grow their assets under management and in turn grow fees. Growth here is driven by selling in their services to large companies with many employees under the 401k umbrella.

FNGN's three services:

Professional Management - Managed account service designed for plan participants who want affordable, personalized and professional portfolio management services, investment advice and retirement help from an independent investment advisor without the conflicts of interest that can arise when an advisor offers proprietary products. This is FNGN's growth area. When a company's 401k plan offers FNGN's services, plan participants can elect to remove themselves from the decision making/allocation process and have FNGN make those decisions for them. It is portfolio management for the 'little guy' essentially. FNGN currently has 391,000 managed accounts totaling $25.7 billion in assets. **Professional management accounted for 62% of 2009 revenues.

Online Advice - Internet-based service that offers personalized advice to plan participants who wish to take a more active role in personally managing their retirement portfolios.

Retirement Evaluation - Highlights specific risks in a plan participant’s retirement account and assess the likelihood of achieving the plan participant’s retirement income goals.

Customers include 116 of the Fortune 500 and 8 of the Fortune 20. FNGN currently has 354 plan sponsors utilizing all three services above totaling 3.9 million participants and $269 billion in assets under management. **9.5% of these assets are under FNGN's direct professional management.

Since 2004, Financial Engines has retained 97% of its contracted 401(k) sponsors each year.

**This is an easily scalable business here. FNGN has built their proprietary web platforms and can easily scale them to however many plan participants they add. This point may be the strongest pull to this deal. FNGN has already spent significant capital building their platform and are well ahead of competitors in their core business. Fidelity is really the only pension plan selling FNGN's services that also competes with them in a fashion. Other direct competitors include Morningstar (MORN) GuidedChoice and ProManage. Note that investment management for MORN accounts for only 20% or so of their revenues.

Revenues are primarily derived from management fees based on the value of assets managed (assets under management) for plan participants. In addition FNGN derives revenues from recurring subscription platform fees for access to FNGN''s services. A strength here is that revenues are recurring and are also based on 401k's which themselves tend to have recurring regular contributions.

Sales into sponsors are made either directly or through one of eight retirement plan providers. These are ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T. Rowe Price and Vanguard. JPMorgan, Vanguard and ING directly accounted for approximately 18%, 10% and 8% of 2009 revenues.

FNGN's selling point - US companies have shifted from a defined pension plan system to a defined contribution (401k/IRA) retirement system. The result is that most baby boomers and generation X'ers are not remotely close to a retirement nest egg and will be seeking ways to maximize retirement plan assets going forward. FNGN offers independent and unconflicted advice, as FNGN is not recommending buying and/or selling anything they also manage.

Proprietary technology - It appears FNGN's technology platforms incorporate a version of 'Modern Portfolio Theory' used by many large pensions and institutions. They consist of the following:

Optimization Engine - Makes personalized investment recommendations, chosen from the investment options available within each plan. In addition FNGN recommends a level of savings to reach retirement goals.

Simulation Engine - Model the risk and return characteristics of more than 30,000 securities taking into account factors such as asset class exposures, expenses, turnover, manager performance, active management risk, stock specific risk and the security’s tax-efficiency.

Advice Engine - Appears to exist to minimize the risk of holding too much exposure in company stock as opposed to spreading the risk to other assets. Think Enron or Lehman employees here whom held most of their retirement in their company stock and watched it all disappear.

**Okay we have a proprietary technology platform already built and easily scalable to huge numbers of users if needed. We've a recurring revenue model which also is based on contributions that tend to be recurring themselves. FNGN has 8 large pension plans selling in their services which include simply web-based advice all the way to active technology/automated driven 401k portfolio management. This is one heck of a business model here, about as good as it gets. In 2008, the stock and bond markets (outside of US Treasuries that is) took a beating as we are all well aware. Many mutual funds saw assets under management decline by massive amounts. With their strong business model and the fact they do not manage funds themselves, FNGN's assets under management declined by only 4% in 2008. That is very significant in a year in which asset managers across the spectrum took a sound beating.

We should also note that FNGN is the sole provider of services offered in each of the 354 plan sponsors which offer the full suite of FNGN's services. There is no competition once FNGN sells into a sponsor.

Risks here are fairly obvious. If one of the retirement plans stops offering FNGN's services (notably JP Morgan, Vanguard or ING), growth would be stymied going forward. Also if a large company drops FNGN from their plans, revenues would take a hit. This recently happened with competitor Morningstar.


Approximately $1 1/2 per share in net cash post-ipo.

**Assets under professional active management grew 65% in 2009 after dipping just 4% in 2008. These directly managed assets accounted for 62% of 2009 revenues. All of FNGN's growth is coming from this segment.

As of 12/31/09, assets under FNGN's active management were:

Cash 5%

Bonds 25%

Domestic Equity 50%

International Equity 20%

2009 - Revenues were $85 million, a 20% increase over 2008. Operating expense ratio was 92%, operating margins 8%. While at first glance this looks very thin, FNGN is moving swiftly into solid operating profits. In 2009, while revenues grew by 20%, operating expenses grew just 5.5%. Most of that growth in expenses was stock compensation related due to the implied rise in FNGN's share value. Fold that out post-ipo and operating expenses are flat here. Again this is the power of FNGN's business model and technology platform. FNGN has extensive loss carry-forwards as 2009 was their first year of operating profits. Post-ipo the tax rate for 2010 appears as if it will be in the 25% ballpark, so that what we will plug in for 2009. Net margins for '09 were 5.7%, eps $0.12.

2010 - FNGN had a sharp rise in assets under management the fourth quarter of 2009. This should translate into solid growth for 2010 as the bulk of revenues are derived as a percentage of assets under management. Total revenues should be in the $115-$120 million ballpark, a 43% increase over 2009. The stronger growth is due to the easy first half of 2009 comparables. Operating expense ratio should dip from 90% to 80%. Again FNGN is growing revenues far quicker than expenses creating a strong economy of scale here. Plugging in 25% tax rate, net margins should be 10%. Earnings per share should be $0.40-$0.45. On a pricing of $10, FNGN would trade 23 X's 2010 estimates.

MORN is FNGN's closest public comparable. Keep in mind that MORN derives 20% of annual revenues from investment management, FNGN 60%.

MORN - $2.4 billion market cap projecting 11% revenue growth in 2010 currently trading 22 X's '10 estimates. $7 per share in cash on hand.

FNGN - $410 million market cap on a $10 pricing. 43% revenue growth in 2010 trading 23 X's 2010 estimates. $1 1/2 per share in cash on hand.

Conclusion - Fantastic business plan and solid execution past two years. If FNGN continues on current pace, the bottom line will continue to expand quickly. Strong recommend in range.

February 17, 2010, 8:18 am

CHC - China Hydroelectric

CHC - China Hydroelectric

CHC/CHCW - China Hydroelectric plans on offering 3.125 million units at a range of $15-$17. Each unit will consist of one ADS and one warrant.

The warrants will be exercisable upon ipo settlement at a price of $15. The ADS and warrants will trade separately post-ipo with the warrants under the ticker CHC and the warrants under the ticker CHCW. The warrants are exercisable for a period of up to four years post-ipo. They have value only if CHC is trading above $15 as that is the exercise price of all warrants.

Broadband Capital is leading the deal, i-Bankers, Morgan Joseph and Pail co-managing. Note that Broadband Capital also was the lead underwriter for the(thus far) very successful 2009 LIWA ipo.

Post-ipo, assuming all warrants will eventually be exercised, CHC will have 52.1 million ADS equivalent shares outstanding for a market cap of $834 million on a pricing of $16.

Ipo proceeds will be utilized for hydroelectric company acquisitions.

Vicis Capital Management will own 30% of CHC post-ipo, CPI Ballpark Investments 21%.

From the prospectus:

'We are a fast-growing consolidator, operator and developer of hydropower plants in China, led by an international management team. We were formed in July 2006 to acquire existing small hydroelectric assets in China and aim to become the PRC’s largest independent small hydroelectric power producer.'

CHC was formed in 2006 and since2007 has purchased 11 small hydropower plants located in four Chinese provinces. Installed capacity currently is 376.6 MW. CHC generates revenues by selling electricity generated by hydropower capacity to local power grids.

Sector - Hydropower is largest source or renewable energy in China. Electricity generated from hydropower in China has grown at annual rate of 12% over the past decade.

Growth plan is to continue to acquire small hydropower plants. CHC has recently acquired two plants, one of which has yet to begin construction.

**With a roll-up growth strategy, ideally you want to see a clean balance sheet on ipo. Unfortunately that is not the case here. Post-ipo, CHC will have net debt of $194 million. Through the first nine months of 2009 debt servicing ate up 74% of operating profits. There is sort of a double whammy in effect here. CHC has done private stock placements to raise cash. They've also given equity considerations(in preferred shares) in a few of their acquisitions. This has led to a high share count on ipo leading to a sizable $800+ million market cap on a $16 pricing. However they've still run up sizable debt in their acquisitions. So sizable, that at least for the present, the debt load is eating into nearly all operating profits. This is not what you want to see in a roll-up strategy, not at all. Going forward CHC will continue acquiring and will need to do so by adding more debt to the bottom line as the cash flows are simply not there due to the current debt load. I do realize that revenues from recently acquired plants will grow year over year as CHC operates them for a full fiscal year. The point is not that CHC will not increase revenues or grow, it is that they are in a precarious balance sheet situation for a company implementing a roll-up acquisition strategy.

This is a very interesting niche with substantial potential. However this particular company is coming public with one hand already tied behind it's back. I would expect substantial share dilution here going forward simply due to the fact CHC still needs to raise a lot of money post-ipo.

Accounts receivables - Nearly 50% of CHC's revenue growth the first nine months of 2009 is sitting in the 'accounts receivables' line. Put another way, 30% of 2009's revenues have yet to be actually collected. Some of this very well may be a timing issue, however something to keep in mind and follow over the next few quarters. Along these lines, CHC GAAP wise shows a nice operating profit through the first nine months of 2009, however actually cash flows are negative.

**CHC ipo looks to be the 'wrong' deal in the 'right' sector. Hydropower in China is a growth business as the PRC looks to expand clean/renewable energy projects. Unfortunately, CHC's balance sheet gives me pause here as I have reservations about their ability to execute their growth plans over the coming years. This is a high risk deal that has a better than average possibility of 'blowing up' sometime in the future. Best case scenario here is ipo investors get massively diluted over the coming years as CHC does multiple equity offerings to fulfill roll-up growth strategy and clean the balance sheet.

2009 - Through the first nine months, full year revenues appeared on track for $42 million. Gross margins should be 63%, operating margins 43%. Plugging in debt servicing and taxes, net margins should be 9%. Earnings per share of $0.07.

Conclusion - The low EPS here does not bother me, the growth plan coupled with the balance sheet and debt servicing costs do. I am interested in this sector, however with this particular deal I am not interested in range

February 17, 2010, 8:16 am

AMCF - solid little China microcap

AMCF - Andatee China Marine Fuel Services

AMCF - Andatee China Marine Fuel Services plans on offering 2.5 million shares at a range of $6-$8. With over-allotments the deal size will be 2.875 million shares. Rodman & Renshaw is leading the deal Newbridge co-managing. Rodman & Renshaw recently brought ZSTN public. Post-ipo AMCF will have 8.875 million shares outstanding for a market cap of $62.1 million on a pricing of $7. Ipo proceeds will be used for capital improvement, sales and marketing, research and development, funding possible future acquisitions as well as for general working capital purposes. Chairman, President and CEO An Fengbin will own 60% of AMCF post-ipo.

From the prospectus:

'We are engaged in the production, storage, distribution and wholesale purchases and sales of blended marine fuel oil for cargo and fishing vessels with operations mainly in Liaoning, Shandong and Zhejiang Provinces in the PRC.'

Chinese marine fuel stations. Facilities include storage tanks, vessels berths, marine fuel pumps, blending facilities and tankers. Note that AMCF refines their own fuel blends as well as sells them. AMCF's blend is a close substitute for diesel. Primary raw materials for AMCF's blended fuels are oil refinery by-products.

Marine oil for fishing boats account for 70%-80% of revenues, with marine oil for cargo vessels accounting for the other 20%-30%.

AMCF generally is able to pass-through oil price fluctuations to end customers. Total revenues will be impacted by the fluctuations in the price of oil, however margins should remain relatively consistent assuming AMCF remains successful passing through those fluctuations.

AMCF's primary business lies in the historical fishing towns of northern China, Dandong, Shidao and Shipu. AMCF has a 25% market share in the Bohai Bay.

As is customary in Chinese business, most of AMCF's revenues are derived from distributors who then sell to the end customers. Approximately 15%-30% of AMCF's revenues are derived from direct sales to retail customers, the rest is derived via sales to distributors. AMCF's margins are higher on direct sales, lower on sales to distributors.

Sector - Fragmented market in servicing fuel needs of small and medium size vessels. Characterized by intense price competition and uneven product/service quality. AMCF's own research has concluded that vessel operators are willing to pay a premium to berth with a service provider with consistently high fuel quality. AMCF believes they charge a premium for their consistent services.

Providing fuel has always been a low margin business and fuel to fishing/cargo vessels in China is no different. Gross margins through the first nine months of '09 were 12%.

Seasonality - The Chinese government prohibits fishing vessels from fishing from 6/15-9/15 annually, the breeding season for many fish. AMCF annually sees a 15% or so drop in revenues during this three month period. Due to this, 3rd quarter annually is the the weakest.

Growth - AMCF expects to grow primarily via acquisitions. As this sector is highly fragmented, expect AMCF to acquire a number of smaller competitors over the next few years. AMCF is setting aside 35% of ipo monies for future acquisitions. Notably AMCF plans to explore future growth in Southern China, an area they've just recently entered in 12/08.


AMCF will have approximately $1 per share in net cash on hand post-ipo. This number takes into account the $10 million short term debt AMCF has on the books post-ipo.

VAT - AMCF's fuel sales are subject to a value-added tax(VAT) of 17% across the board. AMCF's reported revenues are net after this VAT.

AMCF has no accounts receivables issues. They generally get paid upon purchase and delivery of fuel.

2010 fuel volumes increased an impressive 64% driven by acquisitions into southern China and expansion in their core market, Bohai Bay. Fuel volume is the metric to keep an eye on here more so than revenues. Revenues for AMCF will fluctuate with the price of oil, however margins on volume should stay rather consistent due to pricing pass throughs. A jump in volumes will lead to more net earnings, more so than a jump in revenues from just a rise in the price of oil.

AMCF is committed to investing in growth via acquisitions. As such, expect much of AMCF's operating cash flows to be used to invest in and expand the business.

2009 - Based on first nine months, revenues should be $118 million. Again the key metric here is that AMCF increased fuel volumes strongly in 2009, 64%. Gross margins 12%. As noted above this is a rather low margin business. With the volume increases, AMCF was able to improve gross margins significantly in 2009. Operating expense ratio of 4%, operating margins 8%. Taxes are in the 25% ballpark. Plugging in taxes, short term debt and non-controlling interests, net margins should be 5 1/2%. Earnings per share of $0.73. On a pricing of $7, AMCF would trade 9 1/2 X's 2009 earnings.

2010 - With the ipo, AMCF has cash on hand to continue growing business via small acquisitions. I would fully expect fuel volumes to increase nicely in 2010, even in a sluggish cargo ship environment. Keep in mind the bulk of revenues here are derived from fueling fishing vessels. As I tend to do, I want to be conservative here when plugging in volume growth. As AMCF's large recent acquisitions occurred in 12'08, I would not expect another 64% fuel volume increase in 2010. However I would expect at least a 25% increase directly due to expansion/acquisitions. The overall revenue number will depend on the price of oil/fuel, but a 25% volume increase along with small margin increases would put 2010 eps in the range of $1 per share.

Conclusion - 2009 was not an ideal year for fueling ships anywhere in the world. The economic slowdown impacted marine vessels worldwide, including the cargo industry in China. AMCF also notes that the fishing industry in China was also negatively impacted by the worldwide economic slowdown, although that sector is less economically sensitive than cargo. Still, AMCF was able to expand their business, open operations in the south of China and impressively grow volumes and expand the bottom line. This is another solid looking China microcap ipo that looks good in range. Coming 7 X's 2010 estimates(on a pricing of $7) with a good balance sheet, this one should work in range.

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January 24, 2010, 11:49 am

SYA - Symetra Financial

Disclosure - We've no position in SYA currently. Piece was available to subscribers of tradingipos.com 1/16/10.

SYA - Symetra Financial

SYA - Symetra Financial plans on offering 28 million shares at a range of $12-$14. Insiders are selling 9.7 million shares in the deal. BofA Merrill Lynch, JP Morgan, Goldman Sachs and Barclays are leading the deal, UBS, Wells Fargo, Dowling, KBW, Sandler O'Neill and Sterne Agee co-managing. Post-ipo SYA will have 114.1 million shares outstanding for a market cap of $1.483 billion on a pricing of $13.

Ipo proceeds will be used for general corporate purposes, including contributions of capital to insurance business.

Berkshire Hathaway will own 21% of SYA post-ipo.

From the prospectus:

'We are a life insurance company focused on profitable growth in select group health, retirement, life insurance and employee benefits markets. Our operations date back to 1957 and many of our agency and distribution relationships have been in place for decades.'

SYA is coming public right about at book value. Return on equity for the 12 months ending 9/30/09 was 13.9%.

SYA operates through four segments:

Group - Medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 5,000 individuals.

Retirement Services - Fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans.

Income Annuities - single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements.

Individual - Term, universal and variable life insurance as well as bank-owned life insurance, or BOLI.

Annuity and life insurance products are distributed through approximately 16,000 independent agents, 26 key financial institutions and 4,300 independent employee benefits brokers. SYA was a top-five seller of fixed annuities through banks in the first nine months of 2009.

Ratings by the credit agencies are solid across the board.

Market opportunities:

1 - Increasing need for retirement savings and income. 76.8 million baby boomers are approaching retirement age. In addition there 61.6 million Generation X'ers, most of whom will be funding retirement from personal savings/plans.

2 - Continued demand for affordable health insurance. Health insurance premiums in the United States increased 131% from 1999 to 2009. 75 million people in the United States under the age of 65 receive their benefits through self-funded plans, including 47% of workers in smaller firms and 76% of workers in midsize firms. SYA plans to grow their business by offering affordable health plans through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses that self-fund their medical plans.

SYA's asset portfolio has little subprime exposure, less than 1% invested in Alt-A mortgages and no exposure to ARM's.

SYA's strategy is to provide simple to understand products without adding product features that create liability-side balance sheet volatility.


SYA plans on paying a $0.05 dividend per quarter. On an annualized $0.20, SYA would yield 1.7% on a pricing of $13.

$20 billion in investments, $22 billion in assets.

**Book value of $12.42 on ipo. SYA is going to be priced right around book value which should allow this deal to price/work in range.

As with most financial institutions, 2008 was a disaster for SYA with $158 million in net realized investment losses. SYA did manage a bottom line gain in 2008 however. 2009's numbers appear as if SYA is heading back on track to normalized investment gains/losses with net investment losses of $29 million through 9/30. Historically these are still quite large, compared to 2008 though a vast improvement.

Big risk here is the obvious - Potential for future investment losses. SYA really does not invest much of their asset base in Treasuries, instead preferring corporate securities. These include corporate bonds, equities, preferred shares and private placements. Fully 2/3's of their investments are in corporate securities leaving SYA vulnerable to the broader economy as a whole. That they survived the 2008 meltdown intact is a positive here as it is doubtful a similar situation will arise again in the near term. Real estate risk: SYA does have 20% of their investments in residential mortgage backed securities and 10% in commercial mortgage backed securities. SYA sums it up well in the prospectus: 'If the current economic environment were to deteriorate further, it could lead to increased credit defaults, and additional write-downs of our securities for other-than-temporary impairments.'

2009 saw growth in SYA's fixed deferred annuity products and sales in single premium life insurance products.

In 2009, SYA's Group insurance line had a 92% ratio, anything below 100% indicates profitability.


Through the first nine months total 2009 revenues appear on track for $1.75 billion. This number does include writedowns and net investment losses. Operating expense ratio of 89%, operating profits 11%. Operating expenses include policyholder benefits/claims, interest credited to accounts, policy amortization, interest expense and general operating expenses. Net income 7 1/4%. Earnings per share of $1.10. On a pricing of $13, SYA would trade 12 X's 2009 earnings.

2010 - Assuming SYA's investment losses subside and performance of investment portfolio returns to normalcy, SYA should be able to add to the bottom line. The wild cards are numerous: 1) The current Federal government health plan overhaul and effect on health insurance plans are still unknown; 2) The performance of corporate bonds in 2010, of which SYA is heavily invested; 3) The performance of residential and commercial real estate, of which SYA has approximately 30% of investments.

A few things to keep in mind here. While the bulk of SYA's investment's are marketable/fixed and do have fair value pricings and/or pricing methods, SYA does have alternative and/or hard to price investments. We are in a position of 'taking SYA's word' for the value and impairments of those investments.

Conclusion - Overall a solid and well rounded insurance and retirement company. Coming book value(assuming SYA's investment marks on on target), SYA was able to generate positive cash flows in a difficult 2008 environment and appears poised to do quite well assuming a 'normalization' of the US economy and financial system. The key here is SYA's investment portfolio, and as long as those investments perform as SVA expects this deal should work short term and longer term. Priced to work in range

December 26, 2009, 11:21 am

TMH - Team Health Holdings

This piece was done for subscripers on 12/8. TMH eventually priced below range at $12. Disclosure: I am currently long TMH at an average price of approximately $12.6.

TMH - Team Health Holdings

TMH - Team Health Holdings plans on offering 20 million shares at a range of $14-$16. BofA Merrill Lynch, Goldman Sachs, Citi and Barclays are leading the deal, five firms co-managing. Insiders(Blackstone) will be selling 9.3 million shares in the deal. Post-ipo TMH will have 61.4 million shares outstanding for a market cap of 921 million on a pricing of $15. Ipo proceeds will be used to repay debt.

Post-ipo Blackstone will own 54% of TMH post-ipo. Yet another private equity related ipo. Blackstone purchased TMH in 2005 in a leveraged buyout. The deal laid substantial debt onto the back of TMH, most of which will still be in place post-ipo. TMH will have $400 million in net debt on the books post-ipo. Note too that not only is Blackstone selling 9.3 million shares in the deal, they are also grabbing $33 million in cash off the balance sheet on ipo.

From the prospectus:

'We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States.'

TMH serves approximately 550 hospital clients and their affiliated clinics in 46 states with a team of approximately 6,100 healthcare professionals, including physicians, physician assistants and nurse practitioners.

Traditionally TMH has focused on staffing hospital emergency rooms and also branched out to include staffing services for hospital medicine (hospitalist), radiology, and pediatrics. Emergency rooms and hospitalist staffing accounted for 79% of 2008 revenues.

**Essentially a combination outsourced emergency room management company coupled with a hospitalist operator akin to recent ipo IPCM.

In 2008 TMH provided services to over 7.6 million emergency room patients. Emergency rooms are a growth business within hospitals, TMH has seen 9% annual revenue growth from their emergency rooms over the past 5 years. TMH focuses on high volume larger hospital emergency rooms which tend to be in larger urban areas.

Most recent 12 month hospital emergency department renewal rate was 98% with a 95% physician retention rate.

TMH's services include:

*recruiting, scheduling and credential coordination for clinical and non-clinical medical professionals. This include providing medical directors;

*coding, billing and collection of fees for services provided by medical professionals;

*administrative support services, such as payroll, professional liability insurance coverage, continuing medical education services and management training;

Sector - Outsourced healthcare staffing is estimated at $50 billion. Emergency departments represent a majority of admissions for key medical services. TMH believes the numbers of emergency room visits is increasing as the overall number of emergency rooms across the US is decreasing. As the baby boomers and older generations above 55 years represent a larger percentage of the population (approximately 23% in 2008 and projected to be approximately 29% in 2020, according to the U.S. Census Bureau), the demand for ED services is likely to increase.

Growth strategy - Other than winning new contracts, TMH expects to grow via acquisitions. TMH estimates that 75% of emergency department outsourcing is done by smaller regional companies leading to many potential acquisitions targets among the regional outsourcing providers.

CMS - For 2009 the CMS total increase for emergency room reimbursement was 4% for services most commonly provided by emergency physicians. Currently it appears emergency room physicians may be seeing a hefty cut in Medicare reimbursement in 2010. The final rule for 2010 includes a 21.2% rate reduction in the Medicare Physician Fee Schedule for 2010. There is a chance Congress will roll this hefty cut back before implementation in 2010. If not, TMH will not be growing revenues in 2010. Note that TMH will pass through much of the cuts to physicians themselves, however a 21% cut in physician reimbursements would mean TMH will feel the effects on the top and bottom line to some degree. **Note that 22% of 2008 revenues were derived from Medicare.

Florida and Tennessee account for approximately 16% and 17% or revenues respectively.

67% of emergency rooms outsource to a national, regional or local emergency physician group. Of these hospitals that outsource, approximately 52% contract with a local provider, approximately 23% contract with a regional provider and approximately 25% contract with a national provider.


Approximately $397 million in net debt-post ipo. TMH will have $475 million of debt on the books post-ipo and $78 million in cash. Expect TMH to utilize their cash to acquite smaller companies.

12% of revenues are derived from contracts with the military. TMH recently won a renewal on their military contracts for 2010.

Uncollectables run about 8%-9% annually.

Revenue growth has been driven by new business, organic growth in emergency room visits and acquisitions.

2009 - Revenues should be $1.43 billion, a 7.5% increase over 2008. As a 'middle man' operation, margins are not particularly strong. Gross margins should be 23%. Operating expense ratio of 12%, operating margins of 11%. Debt servicing should eat up 18% of operating profits in 2009. Plugging in taxes(38%), net margins should be 5 1/2%. Earnings per share should be $1.25. On a pricing of $15, TMH would trade 12 X's 2009 earnings.

Primary public comparable is Emergency Medical Services(EMS). We'll take a quick look at EMS as well as recent hospitalist ipo IPCM.

2010 - Tricky to forecast as the forecast CMS cuts loom. Odds are Congress will push out those cuts, however they have yet to do so. I will instead take a cue from the analysts estimates on competitor EMS forecasting growth similar to 2009. TMH will most likely make an acquisition or two the first half of 2009 and has shown an ability to win new contracts. Revenue growth the past three years has been 9%, 12% and 7.5%. 7% revenue growth for 2010 appears to be nicely conservative. If the 21% cuts to Medicare physician reimbursement stay, revenue growth would be cut in at east half down to 3% or so. 7% revenue growth would be $1.53 billion. Margins should remain consistent to slightly lower, with debt servicing eating up 17% of operating profits putting net margins in the same 5 1/2% ballpark. Earnings per share would be $1.40. On a pricing of $15, TMH would trade 11 X's 2010 earnings.

EMS - $2.04 billion market cap with $120 million in net debt. Currently trades 17 X's 2010 earnings with an expected 6% revenue growth rate. Net margins slightly lower than TMH due to lower margin emergency transportation segment.

IPCM - $511 million market cap with a small net cash position on books. Currently trades 22 X's 2010 earnings with an expected 20% revenue growth rate. Net margins with slightly better net margins than TMH.

Conclusion - Seems priced to work. Large successful company with strong cash flows operating in a growth segment of the health and medical field. Negatives here the LBO related debt on the books and the looming potential large cuts in Medicare physician reimbursement. However at just 11 X's 2010 earnings, this deal is priced to work mid-term. I usually avoid LBO related ipos, however the debt servicing is below the 20% 'avoid' threshold here and the multiple for a strong operation is cheap. I like this deal.

Note - Blackstone has announced plans to ipo at least eight of their portfolio companies in the near future. As TMH is the first in the pipeline it appears to me Blackstone wants a successful offering and has agreed to set the range at a level that should work short and mid-term.

December 2, 2009, 10:23 am

SVN - 7 Days Group

SVN - 7 Days Group

SVN - 7 Days Group Holding plans on offering 10 million ADS at a range of $9-$11. If the over-allotment is exercised the total deal size will be 11.6 million ADS. JP Morgan and Citi are leading the deal, Oppenheimer is co-managing. Post-ipo SVN will has an ADS equivalent of 50.6 million shares for a market cap of $506 million on a pricing of $10. Ipo proceeds will be utilized toi repay debt and for general corporate purposes.

  Founder and Chairman of the Board Boquan He will own 25% of SVN post-ipo.

From the prospectus:

'We are a leading and fast growing national economy hotel chain based in China. We convert and operate limited service economy hotels across major metropolitan areas in China under our award-winning "7 Days Inn" brand.'

Hotels focusing on value-conscious business and leisure travelers.

Third largest economy hotel chain in China with 283 hotels in operation, 48 of which were managed hotels, with 28,266 hotel rooms in 41 cities, and an additional 77 hotels with 7,476 hotel rooms under conversion. Once those hotels are completed, SVN will have a presence in 59 cities. SVN has eight million people registered with their rewards '7 Days Club'. SVN also has the top ranked website for Internet traffic among Chinese economy hotel chains.

As opposed to new construction, growth has been spurred by leasing and converting existing properties into 7 Days Inns. SVN does not own the property of any of their hotels. Growth has been swift: 5 hotels in 2 cities as of the end of 2005, to 24 hotels in 7 cities as of the end of 2006, to 106 hotels in 20 cities as of the end of 2007, to 223 hotels in 33 cities as of the end of 2008 and to 283 hotels in 41 cities as of September 30, 2009.

Leading city locations are Beijing (34 hotels), Guangzhou (31 hotels), Shenzhen (31 hotels), Shanghai(23 hotels), and Wuhan (17 hotels).

Average occupancy rates were 88.1% and 88.4% for the year ended December 31, 2008 and the nine months ended September 30, 2009, respectively. Revenue per available room approximately $20 US.

Sector - China's lodging industry has grown an average of 16% annually the past four years. The economy hotel niche has grown much swifter with 80% annual growth this decade. The top ten economy hotel operators in Chinahad opened 1,736 hotels with 213,789 hotel rooms by the end of 2008. SVN believes there is still plenty of room for growth with 0.3 economy hotel rooms per 1,000 people in China in 2008, as compared to 2.5 economy hotel rooms per 1,000 people in the United States.


By paying debt off on ipo, SVN will have approximately $0.50 per share in net cash post-ipo.

Tax rate appears as if it will be in the 25% ballpark.

2009 - Numbers are pro forma as if SVN used ipo monies to pay down debt on 12/31/08. This gives us a better idea of how SVN is performing as they will look post-ipo. Revenues should be $170 million, a strong 66% increase over 2008. Growth is being fueled by aggressive growth in number of hotels under operation. Operating margins should be 8%, net margins 6%. Earnings per share should be in the $0.20 ballpark.

SVN is trending strong, improving operating expense ratios quarterly as they grow revenues through new hotels. 2010 is shaping up to be a solid year for SVN.

2010 - Revenues should grow to approximately $235 million, a 38% increase over 2009. Operating margins should improve sharply to 13%. Net margins plugging in a 25% tax rate should be a shade under 10%. Earnings per share should be $0.45. On a pricing of $10, SVN would trade 22 X's 2010 earnings.

Main public comparable here is HMIN. A quick look at each.

HMIN - $1.41 billion market cap. Currently trading 45 X's 2010 estimates with a 20% revenue growth rate.

SVN - $506 million market cap at $10. Would trade 22 X's 2010 earnings with a 38% revenue growth rate.

SVN really helped themselves paying off substantially all debt on ipo. By removing debt servicing we get a much clearer picture of an operating trending very well into ipo. Revenue are growing nicely, SVN is expanding without harming occupancy rates and margins are improving quarterly. SVN looks to be coming public very reasonably valued compared to public rival HMIN, one of the more successful China ipos this decade. Easy recommend in range, SVN should be a good deal and work short and mid-term off of range.

November 12, 2009, 5:26 pm

H - Hyatt Hotels

Piece was available to subscribers: 11-01-2009
H - Hyatt Hotels

H - Hyatt Hotels plans on offering 38 million shares at a range of $23-$26. Insiders are selling all shares in the deal. If over-allotments are exercised H will be selling 5.7 million shares and the total deal size will be 43.7 million shares. Goldman Sachs is lead managing the deal, nine firms are co-managing. If the over-allotment is exercised, H will utilize the ipo proceeds for working capital and other general corporate purposes. Post-ipo H will have 173.7 million shares outstanding for a market cap of $4.256 billion on a pricing of $24.5.

Thomas J. Pritzker, H's Executive Chairman, and his family will own 60% of H post ipo. Mr. Pritzker is the selling shareholder in this deal. **Note there will be separate share classes here to ensure the Pritzker family retains controlling voting interest in H even if their interests drop below 50%. Expect to see a secondary here sometime the first year. The Pritzker family has agreed not to sell more than 10 million shares the first year public and will still having voting control even if they own only 15% of outstanding shares. This ipo appears to me to be an exit strategy for the Pritzker family, while still retaining voting control over H. The structure of the voting shares is really unfair for non Pritzker Family shareholders. Expect a number of secondaries here over the next few years as the Pritzker family divests stock while still controlling H.

Goldman Sachs will own 7% of H post-ipo. Goldman invested their stake approximately two years ago, and on paper, have lost half that investment on an ipo pricing of $24.5.

History - Hyatt was founded by Jay Pritzker in 1957 when he purchased the Hyatt House motel adjacent to the Los Angeles International Airport. Over the following decade, Jay Pritzker and his brother Donald Pritzker, working together with other Pritzker family business interests, grew the company into a North American management and hotel ownership company, which became a public company in 1962. In 1968, Hyatt International was formed and subsequently became a separate public company. Hyatt Corporation and Hyatt International Corporation were taken private by the Pritzker family business interests in 1979 and 1982, respectively.

From the prospectus:

'We are a global hospitality company with widely recognized, industry leading brands and a tradition of innovation developed over our more than fifty-year history.'

Hyatt Hotels, pretty self explanatory we do not need a long definition of what H does. H's full service hotels operate under four brand names: Park Hyatt, Grand Hyatt, Hyatt Regency and Hyatt. H recently introduced a 5th brand, Andaz.

Grand Hyatt - Features large-scale, distinctive hotels in major gateway cities and resort destinations. Presence around the world and critical mass in Asia.

Hyatt Regency - Full range of services and facilities tailored to serve the needs of conventions, business travelers and resort vacationers. Properties range in size from 200 to over 2,000 rooms.

Hyatt - Smaller-sized properties located in secondary markets in the United States, ranging from 150 to 350 rooms.

As of 6/30/09 H's worldwide portfolio consisted of 413 Hyatt-branded properties (119,509 rooms and units) in 45 countries, including:

* 158 managed properties (60,934 rooms), all of which H operates under management agreements with third-party property owners;

* 100 franchised properties (15,322 rooms), all of which are owned by third parties that have franchise agreements with H and are operated by third parties;

* 96 owned properties(25,786 rooms) and 6 leased properties (2,851 rooms), all of which H manages;

A little surprised H owns outright only 96 of the 413 Hyatt branded properties. 38% of Hyatt properties are owned by third parties and managed by H.

Properties in which H manages for third party owners: H derives management fee revenues and a percentage of profits, usually under 20%

Franchised: H does not share in profits of these properties, instead collects franchise and royalty fees.

80% of revenues are derived from United States properties. 54 properties received the AAA four diamond lodging award in 2009. H operates in 20 of the 25 most populous urban centers around the globe.

In addition to four full service brands, H also operates Hyatt Summerfield Suites an extended stay brand.

Through first nine months of 2009, daily revenues per available room were $101, with international rooms having $116 per available daily room. **Note that this is a dip of approximately 20% from 2008. Reason for drop has been the worldwide economic slowdown. Should also note that for the quarter ending 9/30/09, both overall revenues per room and international revenues per room increased slightly from 2009 average.

Expansion - For a mature hotel chain, H actually has a solid balance sheet. Post-ipo H will have $1.34 billion in cash with $858 million in debt. Balance sheet wise H has plenty of flexibility to acquire and/or develop new properties. I would expect them to do so going forward. H can use cash, credit line, stock or a combination of all three to go after acquisitions or new property development once public. Expect H to be fairly aggressive in looking to acquire properties going forward, especially as a number of other brands currently have credit issues. H expects to focus expansion efforts on India, China, Russia and Brazil, where there is a large and growing middle class along with a meaningful number of local business travelers.

Cyclical - H has seen revenues decrease sharply each of the past two recessions('01-'02 & '09). H notes that their revenue per available room decreased more sharply during this recent slowdown than in 2001 and 1991.

Debt defaults - H not only manages Hyatt properties owned by third parties, they also have financed a number of third party Hyatt facilities. For example in 2008 H made a $278 million loan to an entity in order to finance its purchase of the Hyatt Regency Waikiki Beach Resort and Spa. As hotels have seen less revenue in 2009 than forecasts, default can be a possibility.


With $1.34 billion in cash post-ipo and $858 million in debt, H will have slightly less than $3 in net cash per share post-ipo.

H does not plan on paying dividends.

As noted above, H has seen a significant decline in revenues in 2009. Revenue per available room dropped 20%+ in 2009 as compared to 2008. Total revenues decreased 18% for the 6 months ending 6/30/09 compared to the six months ending 6/30/08.

Owned and leased hotels account for 53% of revenues, management/franchises account for 41%.

Occupancy rates for all US properties the first 6 months of 2009 was 64%, for international properties 57%.

**H is coming public in range below book value.

2009 - Revenues should be approximately $3.3 billion, an expected 13% drop from 2008. Operating expense ratio should be 96%, a drop from 2008's 91%. H has attempted to cut costs in 2008, however occupancy rates and room rates declined so significantly it severely impacted operating expense ratio. Operating margins should be 4%. There are a few one-time charges here that need to be folded out so the eps below will differ from GAAP for 2009. Factoring in non-operating charges and income plus taxes, net margins should be 3%. Earnings per share should be approximately $0.60. On a pricing of $24.5, H would trade 41 X's 2009 estimates. Note that in the previous five years, H earned substantially more on the bottom line than '09 estimates. While the P/E ratio looks pricey here, this is a bit of a 'trough valuation' on ipo assuming the bottom line will pick-up once again beginning in 2010. Until we begin to see a pick-up again in operating margins, forecasting 2010 here is quite difficult.

Marriott(MAT) and Starwood(HOT) are H's two closest public comparables. A quick look at all three.

H - $4.26 billion market cap at a pricing of $24.5. Below book value with a little under $3 in net cash per share on hand. Revenues of $3.3 billion trading $41 X's '09 estimates with an expected 13% annual revenue decline.

MAT - $6.9 billion market cap. 2.7 X's book value with $650 million in net debt. Revenues of $5.44 billion trading 15 X's '09's expected estimates with an 8% revenue decrease.

HOT - $5.69 billion market cap. 3 X's book value with $3.7 billion in net debt. $4.7 billion in expected revenues trading 45 X's '09 estimates with a 20% expected decrease in revenues.

Conclusion - Brand name coming book value with net cash in the bank has to be a recommend in range. A few issues here also though that prevent this from being an enthusiastic recommend. First of all the company structure is awful for new investors as it favors the Pritzker family heavily. The issue here is that the Pritzker family can unload a large percentage of their holdings onto the market over the next few years and still control H as long as they retain a 15% overall interest. Second, again here we are seeing a large ipo coming public without fully discounting the nasty recession and operational slowdown. In essence we still are not seeing 'deals' in the ipo market that reflect the economic reality of the past year. H is being priced/valued as if business will return to normal sometime in 2010. If it doesn't, H is not being priced at a rock bottom valuation. Having written that, I do like their balance sheet is in much better shape than the competition and they are coming public right around book value. Recommend here in range.

October 26, 2009, 2:13 pm

RA - RailAmerica

RA - RailAmerica

RA - RailAmerica plans on offering 21 million shares at a range of $16-$18. Majority owner Fortress will be selling 10.5 million shares in the deal. If over-allotments are exercised, the deal size will be 24.15 million shares. JP Morgan, Citi, Deutsche Bank, and Morgan Stanley are leading the deal, Wells Fargo, Dahlman Rose, Lazard, Stifel and Williams Trading co-managing. Post-ipo RA will have 56 million shares outstanding for a market cap of $952 million on a pricing of $17. IPO proceeds will be utilized primarily to repay debt.

Private equity firm Fortress will own 53% of RA post-ipo. Fortress purchased RA in a 2006 leveraged buyout of $1.1 billion. At the time RailAmerica was a publicly traded company. It appears the Fortress led buyout doubled RA's debt levels, par for the course during the LBO heydays of 2003-2007. As a result of that leveraged buyout frenzy we are seeing solid businesses come public loaded with debt. RA is the latest.

Assuming RA utilizes all ipo proceeds to repay debt, there will be approximately $550 million in debt on the books post-ipo. Plugging in debt paid off on ipo, debt servicing the first 6 months of 2009 ate up a whopping 58% of operating profits.

From the prospectus:

  'We believe that we are the largest owner and operator of short line and regional freight railroads in North America, measured in terms of total track-miles, operating a portfolio of 40 individual railroads with approximately 7,500 miles of track in 27 U.S. states and three Canadian provinces.'

In 2008 RA's railroads transported over one million carloads of freight for approximately 1,800 customers. For the six months ended June 30, 2009, coal, agricultural products and chemicals accounted for 22%, 14% and 10%, respectively, of RA carloads. RA's 40 railroads are located fairly evenly across all regions of the US.

Short-line railroad: railroads that transport freight between a customer’s facility or plant and a connection point with a Class I railroad. Essentially short lines are the connectors from a company to a long haul railroad. In North America there are 550 short line and regional railroads operating approximately 45,800 miles of track. Short line railroads make up just 4% of railroad revenues in the US.

That RA's railroads are often integrated into their customer's facilities meaning leading to a stable and predictable customer base. The only issue is volume. RA has seen a pretty significant dip in usage of their railroads the past year due to the economic slowdown.

Railroads carry more freight tonnage wise than any other mode of transportation in North America. In 2006, railroads carried 43% of total ton-miles (one ton of freight shipped one mile) of freight transported in the U.S.

Freight revenues make up 87% of total revenues with non-freight revenues making up 13%. Non-freight revenues include switching (or managing and positioning railcars within a customer’s facility), storing customers’ excess or idle railcars on inactive portions of our rail lines, third party railcar repair, and car hire and demurrage.


$550 million in net debt post-ipo, assuming all ipo proceeds are utilized to pay down debt.

In the first six months of 2009 freight revenues decreased 25% from first 6 months of 2008. This was primarily due to a decrease in carloads. Total carloads during the six month period ending June 30, 2009 decreased 25.6% to 414,303 in 2009, from 556,689 in the six months ended June 30, 2008. In contrast non-freight revenues grew 25% the first 6 months of 2009, primarily as a result of storing customers unused freight cars. RA makes a lot more off of freightcars hauling on their tracks than they do storing those unused freightcars so this is not an ideal trend.

Through first 6 months of 2009 fuel costs were 7% of revenues.

Slim margin operation as operational expense ratio was 83% in 2008 and 78% through the first 6 months of 2009. Combination of hefty debt and low margins is never ideal.

Taxes - RA has substantial tax loss carry-forward, $120 million not expiring until 2020-2027. RA also has $95 million in short line tax credits available through the next 20 years. RA's tax rate looks to be approximately 15%-20% for the foreseeable future.

RA does not plan on paying a dividend. This is a bit unusual as this is a classic low growth, predictable cash flow type business. RA however is not planning on returning any cash flows to shareholder, most likely due to the high debt levels. I would expect RA to use any cash flows to pay down debt levels.

2008 - Revenues were $508 million. Operating margins 17%. Debt servicing(adjusted for post-ipo) ate up over 50% of operating profits. Plugging in 15%-20% taxes, net margins were 7 1/2%. Earnings per share were $0.65-$0.70.

2009 - RA has had a difficult past 9 months. This is reflected in the '09 results through 6/30. Lower economic activity means less tonnage passing along rail lines. RA should pick up earnings per share in either 2010 or 2011, so the key here is not the high PE on ipo. The key here unfortunately is debt servicing eating up a very large portion of a fairly slim margins business to begin with. Revenues for the full year should be approximately $440 million, a 13% decrease from 2008. A portion of this decrease is due to lower fuel costs, however as noted above carloads decreased 25% year over ear through 6/30/09. Operating margins should improve to 21%. A portion of this is due to lower pass through of fuel costs, although RA does not management has created efficiencies to combat economic slowdown. After plugging in debt servicing and 20% taxes, net margins should be 9% Earnings per share should be $0.70. On a pricing of $17, RA would trade 24 X's 2009 earnings.

Conclusion - Much like recent ipos EDMC and SEP, RA is a former public company taken private past five years via a leveraged buyout. The newly public RA, much like SEP/EDMC, will simply have too much debt. Operationally 2009 should be as bad a year as RA will have over the next few years. I would expect earnings per share to tick up in both 2010 and 2011. Even so, with debt servicing eating up so much operating profit here, RA looks fully valued to me in range. Skip this deal

October 16, 2009, 6:55 am

VRSK - Verisk Analytics

As always, piece was available to subscribers well before pricing and open.

VRSK - Verisk Analytics plans on offering 85.25 million shares in a range of $19-$21. Insiders will be selling all of the shares in this deal, VRSK will receive no monies. If over-allotments are exercised, insiders will be offering 12.75 million shares bringing the total deal size to 98 million shares. BofA/Merrill Lynch and Morgan Stanley are leading the deal, JP Morgan, Wells Fargo, William Blair, Fox-Pitt Kelton and KBW co-managing. Post-ipo VRSK will have 180 million shares outstanding for a market cap of $3.6 billion on a pricing of $20.

Travelers Insurance will own 15% of VRSK post-ipo, Berhshire Hathaway 10%. A number of insurance companies own a piece of VRSK stock. In addition VRSK's employee stock ownership plan will own 20% of VRSK post-ipo.

From the prospectus:
'We enable risk-bearing businesses to better understand and manage their risks. We provide value to our customers by supplying proprietary data that, combined with our analytic methods, creates embedded decision support solutions.'

VRSK is the largest aggregator and provider of detailed actuarial and underwriting data pertaining to U.S. property and casualty, or P&C, insurance risks. Insurers utilize VRSK to make better risk decisions and to price risk appropriately.

VRSK insurance risk management framework: 1)Prediction of Loss; 2)Selection and Pricing of Risk; 3)Detection and Prevention of Fraud, and 4)Quantification of Loss.

Two segments Risk Assessment and Decision Analytics.

Risk Assessment - The leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Largest P&C insurance database includes over 14 billion records, and, in each of the past three years, VRSK updated the database with over 2 billion validated new records. VRSK uses this data to create industry standard policy language and proprietary risk classifications and to generate prospective loss cost estimates used to price insurance policies. </p>
Decision Analytics - VRSK has a data set that includes over 600 million P&C insurance claims, historic natural catastrophe data covering more than 50 countries, data from more than 13 million applications for mortgage loans and over 312 million U.S. criminal records. Customers utilize this data, along with VRSK's proprietary algorithms, to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. VRSK is at the leading developer of catastrophe and extreme event models.

**Not only are nearly all the major US property & casualty insurers shareholders, VRSK's solutions are actually embedded into their customer's critical decision processes. VRSK is pretty much the only game in town when it comes to risk management for US property and casualty insurance firms. Would be an understatement here to state barriers to entry are high.

VRSK also has a large presence outside of property and casualty:</p>
U.S. customers included all of the top 100 P&C insurance providers, four of the 10 largest Blue Cross Blue Shield plans, four of the six leading mortgage insurers, 14 of the top 20 mortgage lenders, and the 10 largest global reinsurers. Over the past three years, VRSK has retained 98% of all customers.

97% of top 100 customers had been customers for each of the past five years. VRSK's revenue growth from these top 100 customers has averaged 12% annually the past five years.

72% of revenues are derived from annual subscriptions or long-term agreements, which are typically pre-paid. 60% of revenues are from the US P&C insurance industry.

Acquisitions - VRSK has made 9 acquisitions over the past three years, all in their Decisions Analytics segment. the acquired companies provide fraud identification and detection, loss prediction and selection solutions to the healthcare market. **VRSK's fraud identification and detection business is their fastest growing niche.

**Large, very successful insurance risk management operation embedded in the US P&C insurance sector with large proprietary databases, datasets and algorithms. Really the issue here is not whether VRSK is investable, it is 100% a matter of valuation on ipo. We'll take a look at this below.


Debt - There is a bit of net debt here post-ipo, $689 million. It appears much of the debt has been taken on as a result of the 9 acquisitions over the previous three years.

VRSK has steadily grown annually over the past five year. This has been a result of organic growth coupled with acquisitions. Revenues have grown quarterly for at least 8 Q's in a row.

Gross margins and operating expense ratios have remained steady the past 4 years. Result is VRSK is filtering revenue growth to the bottom line at roughly the same dollar for dollar amount over the years.

2008 - Revenues were $893 million. Gross margins were 57%. Operating expense ratio 22%. Operating margins a strong 35%, indicative of an automated/embedded type operation. Debt-servicing ate up 10% of operating profits. Plugging in taxes, net margins were 19%. Earnings per share were $0.92.

2009 - through first 1/2 of year, revenues appear on track for $1.04 billion, a strong 16% increase over 2008. Gross margins look to be 56%-57%, operating expense ratio 21%. Operating margins should once again be in the 35% ballpark. Debt servicing should eat up close to 9% of operating profits. After tax net margins should be 19.5%. Earnings per share should be approximately $1.10. On a pricing of $20, VRSK would trade 18 X's 2009 revenues.

Conclusion - Blue chip ipo coming at a very attractive valuation. Years of revenue growth, strong operating margins and extremely high barriers to entry. This is a large 98 million share deal(assuming over-allotments) with all shares coming from insiders. Because of this, VRSK may trade a bit heavy early on any opening pop. Anywhere near $19-$21 range however and this is a keeper. Strong recommend here in range for mid-term.

September 24, 2009, 9:42 am

VITC - Vitacost.com

Note: piece was available to subscribers 9/17. Tradingipos.com is currently long VITC at an avg price of $11.40

VITC - Vitacost.com plans on offering 11 million shares at a range of $11-$13. Insiders will be selling 6.6 million shares in the offering. If the over-allotments are exercised the deal size will be 12.6 million shares offered with insiders selling 7.6 million shares. Jefferies and Oppenheimer are leading the deal with Needham and Roth Capital co-managing. Post-ipo VITC will have 28.1 million shares outstanding for a market cap of $337 million on a pricing of $12. Approximately 50% of ipo proceeds will be used for capital expenditures, the remainder for debt repayment and general corporate purposes.

Founder and former CEO Wayne Gorsek will own 17% of VITC post-ipo. Mr. Gorsek is selling approximately 40% of his stake in the company on ipo. Note that the SEC found Mr. Gorsek liable for security fraud in 2003 in connection with the promotion of penny stocks. For VITC to be listed on the Nasdaq, Mr. Gorsek had to give up his role of CEO and Chairman of the Board. Mr. Gorsek is still a paid consultant for VITC. </p>
From the prospectus:

'We are a leading online retailer and direct marketer, based on annual sales volume, of health and wellness products, including dietary supplements such as vitamins, minerals, herbs or other botanicals, amino acids and metabolites (which we refer to as "vitamins and dietary supplements";), as well as cosmetics, organic body and personal care products, sports nutrition and health foods.'

Online discount vitamin and health & wellness product retailer. </p>
Founded in 1994 as a catalog third-party retailer of vitamins. In 1999 VITC launched website Vitacost.com and since has done bulk of sales via that site.

VITC offers 23,000 SKUs from over 1,000 third-party brands, such as New Chapter, Atkins, Nature’s Way, Twinlab, Burt’s Bees and Kashi. In addition VITC has their own brands Nutraceutical Sciences Institute (NSI), Cosmeceutical Sciences Institute (CSI), Best of All, Smart Basics and Walker Diet. VITC completed construction of manufacturing facility in North Carolina and now manufactures most of their own labeled products.

VITC claims prices on their website are 30%-60% lower than manufacturers suggested retail prices. While technically this may be true, a quick run through their website would seem to indicate third party products are roughly in-line with the big box stores. In this day and age it is hard to undercut the large grocery chains, Target and Wal-Mart. What VITC does offer is a large selection in one online spot with click to buy ordering as well as their own label brands.

As of 6/30/09, VITC has approximately 957,000 active customers, an increase of 37% year over year. VITC defines 'active customer' as a customer who has made a purchase from VITC in the prior 12 month period. On average, active customers make purchases 2-3 times a year with average ticket between $72-$77. Approximately 50% of visitors to Vitacost.com arrive via non-paid sources. average conversion rate per visitor to site in 2008 was 15%, which seems to me to be rather solid.

VITC's margins are far stronger on sales of their own label products. Sales of VITC labels had gross margins in '08 of 53% on while gross margins were just 24% on sales of third-party products.

Sector - Even as the US economy slowed, online sales continued to grow as more and more people become comfortable with ordering/purchasing online. US online retail sales were $141 billion in 2008 and expected to grow 11% in 2009. Also US sales overall of dietary supplements are expected to grow 5% year over year through 2013. Sales of dietary supplements through the Internet grew 24.8% in 2007 and are expected to grow double digits over the next few years.

86% of orders placed online via VITC's website. 98% of revenues are generated from US customers.

Customer acquisition costs are $10.16. In 2008, 74% of orders were from repeat customers.

VITC has the capability to ship 20,000 orders per day. 93% of orders are shipped same day.

Competition is fierce. Retailers include GNC, Vitamin World, Vitamin Shoppe,Walgreen’s, CVS, RiteAid, Wal-Mart, Target and supermarket chains. Online competitors include Amazon.com and Drugstore.com.


$1 per share in cash (minus debt) post ipo.

Revenue growth has been very strong. VITC even notes in the prospectus: 'To date, we have not been adversely effected by the current recession and resulting downturn in consumer confidence and discretionary spending.' Quarterly revenues have shown a sequential increase for at least eight quarters in a row.

VITC's own label products accounted for 33% of product sales through the first six months of 2009.

VITC has been operationally profitable since 2006. In 2009 however VITC has been able to increase the bottom line significantly due to growing customer base and very solid operating expense management. In a very competitive landscape, VITC has done an excellent job increasing revenues and profits.

2008 - Revenues were $143.6 million. Gross margins were 26.5%. Operating expense ratio was 25%. Operating margins were 1 1/2%. Net margins(after tax and debt interest) were 1/2 of 1%. EPS was $0.02.

2009 - VITC has had a fantastic first half of 2009 as they've increased revenues and margins sharply. Full year revenues should be $196 million, a 36% increase over 2009. VITC should achieve this growth while keeping sales/marketing expenses flat compared to 2008. For an online retailer this is impressive organic growth. Normally when you see sharp growth from an online retailer, it also comes with sharp increase in sales and marketing expenses notably internet advertising. That isn't the case here at all as it appears returning customers are creating a nice economy of scale here. VITC seems to be providing a quality service based on the numbers here. Gross margins should be 32%. Operating expense ratio should be 19%, putting operating margins at 13%. Net margins should be 8%. Earnings per share should be $0.56. On a pricing of $12, VITC would trade 21 X's 2009 earnings.

conclusion - The trends look strong for VITC. Nothing proprietary here but VITC is doing a very nice job of increasing customer base while holding down expenses. The result is a nice move into profitability in 2009, which should lead to increased EPS for '10. Customer base here has grown from 270,000 at the end of 2005 to approximately 957,000 as of June 30, 2009. This growth has come without ramping operating expenses. Solid vitamin/supplement manufacturer and online retailer definite recommend in range.

July 20, 2009, 7:25 am

MDSO - Medidata Solutions

MDSO - Medidata Solutions

MDSO - Medidata Solutions plans on offering 6.3 million shares at a range of $11-$13. All of the shares are being sold by MDSO. If the over-allotments is exercised however, insiders will be selling 945,000 shares. Citi and Credit Suisse are leading the deal, Jefferies and Needham co-managing. Post-ipo MDSO will have 22.4 million shares outstanding for a market cap of $269 million on a pricing of $12. IPO proceeds will be used to repay outstanding debt and for general corporate purposes.

Insight Venture Partners will own 21% of MDSO post-ipo. Insight also owned a significant chunk of recent ipo SolarWinds.

From the prospectus:

  'We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our customers include pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations, or CROs, and other organizations engaged in clinical trials to bring innovative medical products to market and explore new indications for existing medical products.'

On demand software platform for clinical trial data management. MDSO's software platform is designed to migrate clinical study data into one comprehensive online electronic point.

Customer base includes 22 of the top 25 global pharmaceutical companies. Since 2007, largest customers have been Johnson & Johnson, AstraZeneca, Amgen, Astellas Pharma and Takeda Pharmaceutical.

Medidata Rave is MDSO's principal revenue driving platform. MDSO derives the bulk of their revenues via multi-study arrangements from customers for a defined number of studies. The Rave platform integrates electronic data capture with a clinical data management system in a single solution that replaces traditional paper-based methods of capturing and managing clinical data. Designed for clinical trials of all sizes and phases, including those involving substantial numbers of clinical sites and patients worldwide.

Sector - Traditionally paper based manual entries into computerized form has been the primary data collection techniques in clinical trials. MDSO believes that while electronic data capture has become widely accepted, currently the majority of clinical trials still employ a form of paper based manual entry techniques. MDSO estimates that the total potential market for clinical trial electronic data capture is $1.4 billion annually worldwide.

The clinical trial space showed explosive growth from 2000-2007. Pharmaceuticals, biotechs and life science companies easily obtained the funding necessary to conduct clinical trials during this period. Access to public market funding was open, private equity firms and venture capital funds flowed and debt financing was easy to secure. Easy funding and the aging of Europe and North America led to unprecedented clinical trial testing for prospective new drugs. That came to a stop in 2008. One look at the charts and continued estimate cuts in the contract service organizations involved in clinical trials(CVD/PPDI/KNDL etc...) shows a trail of tears over the past year. Some of the stocks in the sector gave back nearly all of a 7+ year huge bull run. It has not been an easy sector backdrop for a company such as MDSO the past year or so. We shall see below how MDSO weathered this worldwide clinical trial slowdown.

MDSO solution - MDSO lists all the advantages of their software platform. We could delve into that for a few paragraphs I suppose. However essentially MDSO can be summed up as this: Real-time data from clinical trials from inception thru stages I, II, III and IV all on a single scalable electronic platform. A key feature is the ability to show real-time date for a clinical trial comprised of many different locations throughout the globe. Also MDSO's platform can be used in multiple languages simultaneously.

Hosting - MDSO hosts all client/customer data in one dedicated facility. MDSO is another example of the growing 'on demand' software and e-platform segment of the software business. This time with a data center twist. Client information is accessible online without the need to install extensive software at various sites worldwide.

Top 5 customers accounted for 46% of revenues in 2008. AstraZeneca accounted for 11% of '08 revenues and Johnson & Johnson 10%. For the first three months of '09, Takeda Pharmaceutical accounted for approximately 12% of revenues. Approximately 30% of revenues the past 13 quarters were from international clients.

Legal - Recently MDSO settled a patent infringement lawsuit claim for $2.2 million. The infringement suit was not directed toward MDSO, however it was directed to a company whose technology MDSO incorporated into their platform.

Accounting - pre-ipo, MDSO discovered their revenue recognition practices were not in line with approved accounting policies. This caused the restatement of 2006-2008 earnings statements. While this is fairly common with pre-ipo companies with small accounting staff, MDSO appears to have had more issues than is the norm.

Competitors include BioClinica, etrials Worldwide, eResearch, ClinPhone, Datatrak, Omnicom, Oracle Clinical and Phase Forward.


$2.50 per share in net cash post-ipo. Note that financials below assume debt on the books will be paid off on ipo, removing all debt expenses. With $2.50 in net cash post-ipo, MDSO will begin to have net interest revenues going forward instead of interest expenses.

In 3/08, MDSO acquired FastTrack a provider of clinical trial planning solutions. Purchase price was $18.1 million. The acquisition included substantial goodwill and intangible assets, the effect being added amortization and depreciation non-cash flow charges to MDSO's earnings statement the past four quarters. In addition to the GAAP charges going forward related to this purchase, MDSO also invested heavily in their data center capacity in 2006-2007. As MDSO will have $2.50 in net cash on the balance sheet post-ipo, these depreciation/amortization charges are not really pertinent to cash flows as there will be no debt drag from the investments. This is one of the rare cases in which I feel folding out this expense line gives a better idea as to the state of the operation.

Customer base has grown from 33 at 1/1/06 to 153 at 3/31/09. Customer retention rate was 87% in 2008. **MDSO did not lose any customer in the first three months of 2009.

MDSO recognizes their backlog as 'expected to be realized in current year' backlog. Backlog as of 1/1/09 was $116.7 million. As of 3/31/09, expected to be realized in '09 backlog was $91.6 million.

Impressive revenue growth since the first quarter of 2008. Revenues in the 12/07 quarter were $17,609 In the five quarters since beginning in 3/08 and ending in 3/09 revenues have been $20,979; $25,753; $27,810; $31,182; $33,602. This quarterly revenue growth performance is very impressive considering the dreary global economic climate over this period. At a sub $300 million market cap on ipo, a company laying on 10%+ quarter to quarter revenue growth is almost an automatic recommend. Factor in the very difficult clinical trial environment due to funding issues over the past year, and MDSO's rapid revenue growth is even more impressive. The issue here is not the growth, it is the bottom line.

Revenue growth is directly tied to substantial customer gains in 2008 and first quarter of 2009. MDSO either has a superior platform or they are significantly undercutting the competition in price.

The 12/08 quarter was MDSO's first profitable quarter on GAAP operational earnings. Again, MDSO's actual cash flows will be a bit stronger each quarter than GAAP earnings due to the amortization and depreciation charges from the FastTrack purchase. While MDSO booked a substantial GAAP loss in 2008, total cash flows were slightly positive.

MDSO has significant tax loss carryforwards and should pay minimal taxes in 2009-2011.

Approximately 70% of revenues is high margin application services revenues, 30% low margin professional services revenues. Think of the higher margins side as the software revenues and the lower margin side as the data service revenues.

2008 - Revenues were $105.7 million, a 68% increase over 2007. While MDSO did make an acquisition in 2008, nearly all the growth was organic and a result of increased customer base. Gross margins were 52%, an increase from 2007's 27%. Gross margins would be low for the software segment, except MDSO is not really a software operation. They are a combination on-demand software, data center, and electronic platform company. Operating expenses were staggering at 67% of revenues, an increase from 2007's 63%. If depreciation and amortization are removed, operating expense ratio was 59%. Folding out debt expense(as there will be no net debt post-ipo), MDSO's loss in 2007 was approximately $0.70 per share. This includes all depreciation, amortization and stock compensation expenses. As noted above, MDSO was slightly cash flow positive in 2009 overall, so this loss is a shade misleading. **To get a clearer picture here, one should fold out the depreciation and amortization expenses. Doing so, puts the net loss at $0.25 per share.

2009 - MDSO gives a very good '09 blueprint thanks to their 'expected to realize in '09' backlog count. Using that and first quarter results, total revenues for 2009 should be in the $140 - $150 million ballpark. This would be a strong 38% increase over 2008. MDSO continues to improve gross margins in their lower margin 'professional services' side as they add customers. Gross margins should increase to 64% for 2009, an increase from '08's 52%. As revenues have increased strongly, operating costs have remained flat the past four quarters. This is a nice positive as MDSO has been running 'hot' on GSA expenses the past few years as they've invested in growing their business. Total operating expense margin(including depreciation & amortization) should be 56%, a nice decrease from '08's 67%. Operating margins should be in the 8% ballpark. Due to the loss carryforwards noted above, MDSO's tax rate will be approximately 10%. Net margins should be 7% with earnings per share of $0.45. On a pricing of $12, MDSO would trade 27 X's 2009 earnings.

As noted previously, this to me is a case in which folding out depreciation and amortization charges give us a better idea of overall cash flows. Folding out those charges(but keeping in stock compensation), earnings per share would be $0.88. If we normalized taxes (instead of the 10% rate), earnings per share folding out these charges would be $0.64. To me this number gives us a better picture of MDSO's 2009 operations.

MDSO is sort of a stealth ipo. Growth has been phenomenal over the past year amidst a sharp overall slowdown in the worldwide clinical trials segment. The GAAP earnings though look horrific for 2007 and 2008. However, MDSO is trending strongly in revenues, gross margins, operating margins and net margins each and every quarter and is quickly approaching a spot in which net earnings should look far better than the past. Factor in their actual cash flows are disguised a bit due to non-cash flow charges and this one has strong sleeper potential.

Biggest negative here is that the sector has not been strong and on the surface, first glance MDSO looks unimpressive.

Quick glance at MDSO's closest public comparable PFWD. PFWD is not a true pureplay comparable as their clinical trial offerings are just a segment of the overall business. Also ERES has a segment that competes with MDSO, however ERES has seen their business falter significantly overall the past few quarters unlike PFWD/MDSO.

PFWD - $675 million market cap. $3.5 per share in cash. PFWD currently trades 30 X's 2009 earnings estimates with an expected revenue growth rate of 24%.

Conclusion - I like this ipo. MDSO is trending very strongly on all metrics the past 6 quarters in a difficult environment for the clinical trials sector. If trends continue (and the sector just normalizes) MDSO will have a banner 2010. As always, this is a young company that spends heavily on operating expenses each quarter so any hiccup will be greatly magnified. However cash flows here are increasing impressively each quarter, and at a sub $300 million market cap, this is an easy recommend in range. Stealth ipo, looks unimpressive first glance but is trending very nicely into ipo.

June 29, 2009, 10:38 am

DGW - Duoyuan Global Water

As has been the case for 4+ years now, we've a detailed analysis report on every deal before pricing/open at http://www.tradingipos.com

DGW - Duoyuan Global Water

DGW - Duoyuan Global Water plans on offering 5 million ADS at a range of $13-$15. The offering will be 5.75 million ADS if the over-allotment is exercised. Piper Jaffray is leading the deal, Oppenhemier and Janney Montgomery co-managing. Post-ipo, DGW will have 21.3 million ADS equivalent shares outstanding for a market cap of $298.2 million on a pricing of $14. IPO proceeds will be used to build and upgrade manufacturing facilities and production lines as well as R&D.  

Director, Chairman and CEO Wenhua Guo will own 58% of DGW post-ipo.

From the prospectus:

'We are a leading China-based domestic water treatment equipment supplier. Our product offerings focus on addressing the key steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis.'

Water treatment products in China. Customers include wastewater treatment plants, water works facilities, manufacturing plants, commercial businesses, residential communities and individual customers.

DGW offers 80 products in three categories. 35 of these products were introduced in 2008.

Circulating Water Treatment Equipment - Electronic water conditioners, fully automatic filters, circulating water central processors, cyclone filters and water softeners, used in the process of treating water and removing buildup in circulating water systems. DGW derived 41% of their 2008 revenues from this segment.

Water Purification Equipment - Products for residential and commercial end-users utilizing ultraviolet, ozone, membrane-based and electrodeionization, or EDI, technologies. 21% of 2008 revenues were derived from this segment.

Wastewater Treatment Equipment - Products to treat municipal sewage and industrial and agricultural wastewater. DGW derived 38% of their 2008 revenues from this segment.

As with most companies in China selling a product, DGW utilizes distributors and not a direct sales staff. DGW's distribution network consists of over 80 distributors in 28 Chinese provinces.

Sector - As China becomes more industrial and urban, clean non-polluted water has become a precious commodity. China's government has promoted and investing in water treatment projects turning the sector into a growth industry in the country. The demand for water treatment products in China is estimated to increase nearly 15.5% annually through 2012. Growth drivers are rapid population growth, industrialization and urbanization, and more recently, the economic stimulus plan being implemented by the Chinese government.

Seasonality - DGW derives lower revenues in the winter months due to slowdown in construction as well as Chinese New Year. The 3rd quarter of the year tends to be the strongest, with the first quarter the weakest.


$4 per share in cash post-ipo. Note that DGW plans on spending a significant chunk of this cash on capacity expansion, including building new manufacturing facilities and production lines. In addition DGW plans on spending $10 million on a new R&D facility.

DGW has been profitable since at least 2005.

Taxes - DGW will be taxed at a 25% rate beginning 2009.

Gross margins were 45% in 2008 a strong improvement over 2007's 37%. The increase was due to the sharp drop in commodity prices the back half of 2008. DGW expects favorable pricing on their commodity purchases in 2009 due to long term supply agreements. Expect 2009 gross margins to remain in the 45% ballpark.

2008 - Revenues grew 40% in '08 to $86.8 million. As noted above, gross margins were 45%. Operating expense ratio was 15%, putting operating margins at 30%. Plugging in the 25% post-ipo tax rate, net margins were 22.5%. Earnings per share were $0.91. On a pricing of $14, DGW would trade 15 X's 2008 earnings.


First quarter is DGW's slowest annually. However DGW grew revenues by approximately 38% year over year in the 3/09 quarter keeping pace with 2008 growth rates.With continued strong gross margins due to supply agreements in place through '09, DGW is off to a solid start for 2009. DGW has also done a nice job keeping expenses in line the past two years, allowing for economies of scale. They appear to be selling more with roughly the same expense outlays.

Revenues for 2009 should be in the $110 million range, a 26% increase over 2008. I was conservative here in estimating as DGW had a huge 3rd quarter of 2008 that may be difficult to duplicate. If the third quarter inproves year over year on the '08 Q, the $110 million estimates will be a little low.

Gross margins should be 45%. Operating expense ratio should dip to 13%, putting operating margins at 32%. Plugging in a 25% tax rate, net margins should improve to 24%. Earnings per share should be $1.25. On a pricing of $14, DGW would trade 11 X's 2009 earnings. Note too that these are 25% taxed earnings and not the usual China ipo low to no taxed earnings per share.

Conclusion - Nothing real proprietary here it appears, although DGW does devote substantial resources to R&D to stay current with worldwide water treatment technologies. I have seen this compared to ERII, but not quite. ERII is a water tech company that is involved in large water projects worldwide. DGW is a pureplay on Chinese population, infrastructure and urbanization growth which brings about a greater demand for clean water. Growth here has been very strong and the multiple does not look extreme at all. Good growth, low multiple, wind at back due to China internals, plus factor in the huge recent China stimulus package. DGW should not be a high multiple stock due to it 'nuts and bolts' type business. However the multiple here with the strong growth makes for an easy recommend in range. good growth and low multiple = strong recommend in range.

May 19, 2009, 5:54 am

DGI - DigitalGlobe

DGI - DigitalGlobe

DGI - DigitalGlobe plans on offering 17 million shares(assuming over-allotments are exercised) at a range of $16-$18. **Note that insiders are selling 13.33 million shares in this deal, DGI will be selling only 3.6 million shares in this 17 million share deal. Morgan Stanley and JP Morgan are leading the deal, Citi, Merrill Lynch and Jefferies co-managing. Post-ipo DGI will have 47 million shares outstanding for a market cap of $799 million on a pricing of $17. IPO proceeds will be utilized for general corporate purposes.

Morgan Stanley, the lead underwriter in this deal, will own 30% of DGI post-ipo.

**DGI will have $200 million in net debt post-ipo. Actual debt will be $341 million, while cash on hand post-ipo will equal $140 million assuming over-allotments exercised. DGI would be a much stronger company post-ipo were insiders not making up the bulk of this deal. DGI participates in a hefty capital expenditure sector, launching and operating satellites. I would much prefer to see a debt free DGI post-ipo than one with debt on the books. Had insiders waited until the lock-up to begin selling, it would have allowed DGI to offer the bulk of shares in this deal and pay off some of the debt on the books. That is not the case however.

From the prospectus:

'We are a leading global provider of commercial high resolution earth imagery products and services. Our products and services support a wide variety of uses, such as defense and intelligence initiatives, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management.'

High resolution satellite operator helping companies and governments map the physical world.

DGI currently operates two high resolution imagery satellites which produce DGI's earth imagery content which allows customers to map, monitor, analyze and navigate the physical world. DGI's imagery is currently used in location based applications including Google Maps and Microsoft Virtual Earth, and mobile devices from vendors such as Garmin and Nokia. DGI's satellites take both black and white, and multi-spectral imagery, which shows visible color and non-visible light, such as infrared. One million square kilometers of imagery is added/updated daily to DGI's image library. The image library currently houses more than 660 million square kilometers of high resolution earth imagery, an area greater than four times the earth’s land mass. **DGI believes their image library is the largest, most up-to-date and comprehensive archive of high resolution earth imagery commercially available.

**DGI will be launching their third satellite, WorldView-2, in October '09. The WorldView-2 will nearly double DGI's collection capabilities to nearly two million square kilometers per day. In addition it will enable intra-day revisits to a specific geographic area, including collecting up-to-date imagery in those areas of greatest interest to customers. The WorldView-2 will be the only commercial earth imagery satellite with 8-band multi-spectral capability, which has a more robust color palette and enables enhanced analysis of non-visible characteristics of the earth’s surface and underwater. It reads as if the WorldView-2 launch is designed to expand their governmental defense and intelligence based business.

Sector - Estimates peg the 'earth imagery' sector at $1.9 billion in 2007 with expectations of $3.2 billion in annual revenues by 2012. DGI would appear to have approximately a 10%-15% total market share in this segment. Growth drivers include: 1)increase in government reliance on unclassified earth imaging; 2) Growth of imagery usage to monitor economic development; 3) Consumer application growth including internet and GPS.

Barriers to entry are significant. DGI estimates launching a high resolution imagery satellite is a four year endeavor. Factor in the prohibitive cost of launching and maintaining the satellites, the licenses needed, and the inability to quickly replicate DGI's historical image library and you have a pretty significant entry barrier for new competitors. DGI does have one publicly trading pure-play competitor in GeoEye(GEOY). In the financials section, we will compare the two.

DGI's largest customer is the US government in the form of the National Geospatial-Intelligence Agency, or NGA. NGA accounted for 58% of 2007 revenues and 74% of 2008 revenues. 17% of revenues were derived internationally. Approximately 80% of 2008 revenues were derived from government defense and intelligence agencies, 20% from commercial clients. The bulk of DGI's government revenues comes from tasking orders. These would be up to date data directly from the satellites, often following specific directions from the agencies. Only 12% of government revenues are derived from use of DGI's image library. By contrast approximately 80% of DGI's commercial revenues are derived from their image library.

Capital expenditures - As one would surmise, this is a hefty capital expenditure sector. In the past three years, DGI has had capital expenditures of: $83 million in 2006; $238 million in 2007; $142 million in 2008.

Risks - Two large ones here:

1) The loss of government revenues. As most of the competition in the high res imagery satellite sector is non-US based, there is only one company that poses a serious threat to DGI's government related revenues stream. That one company is GeoEye, who recently commissioned a multi-spectral satellite into operations. GEOY's new multi-spectral satellite is anticipated to derive more US government business than their predecessor satellites. **Note** - It appears the US government remains intent on utilizing both GEOY and DGI's imagery. In fact in a recent long term plan from the Obama administration the government will increase its use of imagery from each of the two companies. Currently it appears to this analyst as if there is plenty of revenues from the NGA for both DGI and GEOY. In fact it seems the NGA prefers using two satellite imagery providers and not relying on one company. Of note, the US government has made a mess of their own plans to launch satellites, which has opened the door for strong revenues growth for both GEOY and DGI. There are long-range plans for the US government owned imagery satellites, however nothing is imminent at this time. That alone makes DGI/GEOY interesting public companies.

2) Failure of a timely launch for the WorldView-2 satellite. As DGI will be a public company when the launch is scheduled, any delay or launch mishap would harm the stock price. Should be noted that GEOY's recent satellite launch was delayed a number of times. DGI's first satellite is due to be decommissioned in 2010. Their second satellite(WorldView-I in operation since 11/07) is expected to remain operational until 2018.


A significant amount of debt on the books at $341 million. Post-ipo, DGI will also have a substantial amount of cash on hand, approximately $140-$150 million. Much of this cash will be utilized the remainder of 2009 on the launch of their new satellite Worldview-2. Most likely come early 2010, DGI will have $300+ million in net debt, compared to $200 million net debt post-ipo.

***Even with the substantial net debt on hand, DGI will only book $3-$5 million in net debt expense in 2009. Most of the current interest expenses will be capitalized under the construction of the new WorldView-2 satellite and will be expensed over the expected life of the satellite under depreciation & amortization. Once the satellite is launched and commissioned and final expenses are in however, future annual interest expenses will revert to that line item. Expect the interest expense line item to grow substantially by 2011.

Revenues have grown swiftly, kicking into another gear after the late 2007 launch of WorldView-1. Revenues in 2006 were $107 million, in 2007 $152 million and in 2008 $275 million. The swift 2008 growth was nearly all spurred by the US defense and intelligence agencies as commercial revenues only grew by 10% on the year. The launch of WorldView-2 in late 2009 should kick start 2010 revenues similarly. The issue with DGI however is 2009.

DGI became operationally profitable in 2006.

2008 - Revenues were $275 million, a whopping 81% increase from 2007. The reason as noted was the commissioning of the WorldView-2 satellite which brought with it a large increase in US government contractual revenues. Gross margins were 90%. The high gross margins are due to capital expenditures going on the depreciation & amortization line to be expensed down over the life of the satellites. Operational expense ratio was 56%, split evenly between depreciation & amortization and GSA expenses. Operating margins were a strong 35%. Factoring in normalized taxes and interest expense, net margins were 21%. **Note that DGI's taxes were at a higher rate in 2008 than they will be as a public company. It appears this was due in part to DGI taking a large tax credit in 2007. In 2008, DGI was actually a bit more GAAP profitable than the numbers appear. Earnings per share were $1.22 in 2008. On a pricing of $17, DGI would trade 14 X's 2008 earnings.

A couple of comments. First of all, DGI is able to legally hide a chunk of their interest expense annually by capitalizing it into the costs of their satellite launches. Unless the company plans another launch sometime in the 2011-2013 window, beginning in 2011 DGI will get hit with an increase in interest expense on their debt. In fact since much of their interest the past two years has been folded into their satellite costs, come 2011 they will be expensing actual debt servicing as well as the depreciating expense on 2007-2010 debt servicing. This is something that should serve to put a bit of a drag on those strong margins come 2011.

Also as DGI actually spent a far greater amount in 2007-2008 in actual capital expenditures than the depreciation & amortization expense lines, the GAAP earnings numbers look much better than actual cash flows. DGI is GAAP profitable, but due to these two accounting rules, DGI's margins look far stronger than the actual cash flows. This is a hefty capital expenditure business and launching two satellites in two years will have cost DGI over $600 million in actual monies. By spreading out the expenses over the expected life of the satellites, come 2011 DGI will actually have stronger cash flows than their GAAP numbers. Currently however, in their launch phase, the GAAP numbers are better than cash flows.

2009 - 2009 is going to be a small step back for DGI. The economic slowdown has slowed their non-contractual government business. Operating expenses however will grow briskly as DGI prepares for the launch and commissioning of their WorldView-2 satellite. While the first quarter 2009 numbers were not yet ready, DGI expects 1) a sequential decrease in quarterly revenues for the March '09 quarter; 2) A year over year decrease for the March '09 quarter; 3) lower profits for the March '09 quarter. In addition DGI is forecasting no revenue growth in 2009, but forecasting increased operating expenses. Yes, the reason is understandable. 2009 for DGI will be the 'in-between' year not benefiting from the commissioning of a new satellite as 2008 was and 2010 will be. I suspect however that the coming lackluster results for DGI in 2009 may be a surprise to some shareholders expecting continued growth. They just will not be seeing it this year. The good news is, the valuation in range factors this in as DGI is not overly pricey at all in range. A quick forecast for 2009:

Revenues should be stagnant again in the $275 million range. Gross margins should again be strong. DGI will see an increase in GSA and depreciation & amortization knocking operating margins to approximately 31%. Factoring in net interest expense and taxes, net margins should be 18 1/2%. Earnings per share for 2009 should be in the $1.05-$1.10 range. On a pricing of $17, DGI would trade 16 x's 2009 earnings.

A quick look at DGI and competitor GEOY.

GEOY: $492 million market cap with $250 million in debt. In 2009 GEOY expects revenues of $262 million and earnings per share of $0.78. GEOY currently trades at 34 X's 2009 earnings. GEOY recently launched/commissioned a new satellite and expects 2010 to be the year that revenues from said satellite begin to spur EPS growth.

DGI: $799 million market cap with $340 million in debt. DGI should have revenues of approximately $275 million in 2009 and earnings per share of $1.05-$1.10. On a pricing of $17, DGI would trade 16 X's 2009 earnings.

While DGI looks a bit hefty in comparison to GEOY on a price to revenue basis, DGI does sport better overall margins. Part of this may be explained by the difference in accounting as GEOY has opted for more a straight line 'expense as you go' approach while DGI has opted to capitalize and depreciate their direct satellite costs over the expected lifespan of that satellite. Both GEOY and DGI should post strong 2010 eps growth and an argument could be made each should trade at a similar market cap and not the disparity we should see if DGI prices in $16-$18 range.

Conclusion - 2009 should be a rather flat year of performance as the company prepares to launch and commission their new state of the art imagery satellite. Investors expecting continued swift growth in 2009 may be disappointed as DGI will go from 80% revenue growth in 2008 to stagnant revenue growth in 2009. The question here is whether or not that is built into the valuation in range. I believe it is, however be prepared for a potential cool reception to DGI's first few earnings reports in 2009 as they should lag 2008's earnings power. DGI is going to have a difficult 2009, however once the WorldView-2 is commissioned, the revenue and earnings picture in 2010 should resemble 2008's impressive year.

Yes debt is a drag here and I would far prefer DGI pay off debt on ipo than insiders cashing out. That is a significant negative here. The flat 2009 is another negative. However, for the potential payoff in 2010 and beyond, the valuation in range here does not appear out of line. This is an interesting ipo and a recommend in range. Note however, this is not an ipo to pay up for as there very well may be a negative reaction at some point this year to DGI's lackluster 2009 operational performance.

Even with the negatives noted, a unique ipo with hefty barriers to entry and a solid future trading 16 X's current year earnings is a definite recommend in range....shareholders though should definitely expect a choppy ride over the next year.

April 16, 2009, 2:33 pm

RST - Rosetta Stone

RST - Rosetta Stone

RST - Rosetta Stone plans on offering 7.25 million shares (assuming overallotments exercised) at a range of $15-$17. Insiders will be selling 4.125 million shares in the deal. Morgan Stanley and William Blair are leading the deal; Jefferies, Robert Baird, and Piper Jaffray co-managing. Post-ipo RST will have 20.3 million shares outstanding for a market cap of $325 million on a pricing of $16. The bulk of ipo proceeds will be used for general corporate purposes.

ABS Capital will own 25% post-ipo..ABS Capital is also the majority shareholder of 2007 ipo APEI.

From the prospectus:

'We are a leading provider of technology-based language learning solutions. We develop, market and sell language learning solutions consisting of software, online services and audio practice tools primarily under our Rosetta Stone brand.'

RST's language learning approach does not utilize the traditional second language approach of translation or grammar explanation. Instead RST utilizes audio & video to replicate the natural language learning ability that children use to learn their native language. RST calls their proprietary language learning approach 'Dynamic Inversion'. RST currently offers their self-study language learning programs in 31 languages.

Language Learning - Children learn their native language without using rote memorization or adult analytical abilities for grammatical understanding. They learn at their own pace through their immersion in the language spoken around them and using trial and error. They do not rely on translation. Traditionally the majority of second language learning programs in/out of the classroom have focused instead on translation, grammar and rote memorization. The majority of alternative second language courses have focused on in-country immersion and private study, both expensive alternatives to the traditional memorization approach. RST's solution brings the immersion approach to ones computer.

Rosetta Stone solution - As noted above, RST aims to replicate the process in which children learn their native language. The student learns at their own pace. The RST content library consists of more than 25,000 individual photographic images and more than 400,000 recorded sound files. Each language has 1-3 proficiency levels which can be purchased individually or bundled. Individual proficiency's (such as Spanish I) retail for approximately $250 while the complete language bundle (Spanish I, Spanish II, & Spanish III) retails for approximately $550. Each proficiency level offers approximately 40 hours of instruction. In addition RST offers an online peer-to-peer practice environment called SharedTalk, at www.sharedtalk.com, where registered language learners meet for language exchange to practice their foreign language skills. During 2008, RST had more than 100,000 active SharedTalk users.

Effectiveness - According to a self-commissioned study, after 55 hours of Spanish study using Rosetta Stone, the learning was sufficient to fulfill the requirements for one semester of university study.

Sector - RST generates 95% of revenues in the US. The US language learning industry generated $5 billion in revenues in 2007, of which $2 billion was for self-study. Assuming these numbers are correct, RST has approximately a 10% share of the self-study revenues in the US and is the far and away leader in their niche.


Consumer sales accounted for approximately 80% of 2008 revenues. Direct-to-consumer channel sales accounted for 58% of consumer sales. These are sales made via RST's website or or call centers. RST's 145 retail kiosks (located in airports and malls) accounted for 22% of consumer revenues and sales to retailers accounted for 21% of consumer revenues. The bulk of retailer sales were to Apple, Barnes & Noble, and Borders.

Institutional sales accounted for 20% of 2008 revenues. Primary/secondary schools represented 44% on institutional sales, government & armed forces 19%, homes schools 20% and businesses 10% and non-profits 5%.

60% of RST customers earn more than $75,000 annually with 44% earnings more than $100,000. In a self-commissioned study, 92% of respondents expressed satisfaction with RST products and 76% have recommended Rosetta Stone to others.

Growth potential - RST feels their growth prospects going forward lie in the international markets. In 2008, just 5% of RST's revenues were derived outside the US.

Risk - 80% of RST's revenues are derived from US consumers. The big risk here would be a recession negatively impacting consumer discretionary spending coupled with a slowdown in international travel. We've certainly seen the first with consumer discretionary spending falling off a cliff in mid-September 2008. As RST is the first consumer discretionary ipo in quite awhile, this is a definite concern. Lets look at RST's 4th quarter of 2008 and see if revenues were impacted. In the 4th quarter of 2008, RST booked their best quarter in operating history in terms of revenues while maintaining gross margins and dropping sales and marketing expense in terms of percentage of revenues(a positive). Now seasonality plays a factor here as the 4th quarter annually has been RST's strongest due to holiday spending. RST however booked very solid revenue growth in the 4th quarter of 2008, much as they did a year prior in the 4th quarter of 2007. Quarter to quarter revenue growth in the 4th quarter of 2008 was a strong 11%, compared to 4th quarter of 2007 quarter to quarter revenue growth of 24%. Factoring in a near doubling of the revenue base in 2008 coupled with the difficult consumer spending environment in late 2008, the 4th quarter of 2008 for RST looks strong to me.

Returns - RST offers a 6 months 'no questions asked' money back guarantee on their products. In 2008 approximately 6% of all revenues were returned.

Competition - Berlitz International, Simon & Schuster, Inc. (Pimsleur), Random House,(Living Language), Disney Publishing Worldwide and McGraw-Hill Education. There is no pure public comparable to RST.

Risk – As mentioned, 80% of customer base in 2008 were individuals. As a result RST revenues could be affected by any trend changes in discretionary consumer spending and retail shopping patterns. Slowdown in international travel too carries a risk due to sales from airport kiosks forming almost a fifth of consumer driven revenues.


$2.67 in cash per share post-ipo, no debt.

Growth has been very strong in the past two years. As is often the case with software related ipos, gross margins are also impressive. Revenue growth was 50% in 2007 and actually increased in 2008 by 52% more. Rarely do you see a company deriving significant revenues ($209 million in 2008) and accelerating revenue growth year to year. That RST did so in a tough consumer 2008 environment is very impressive. The revenue growth here the past two years with back to back 50%+ growth is easily reason enough to recommend this ipo.

Seasonality - RST's best quarter tends to be the 4th quarter annually as they derive holiday related revenues.

RST's first profitable year was 2007.

2008 - Revenues were $209.3 million, a 52% increase over 2008. Gross margins were fat at 86%. As one would expect, sales and marketing expenses make up the bulk of RST's operating expenses. While in 2008 sales & marketing expense ratio was 45%, it did mark a decrease from 2007's 48% and 2006's 50%. Good sign, all things being equal you want to see sales and marketing expenses growing slower than actual revenues, allowing a company to filter more of those revenues to the bottom line. Operating expense ratio is also decreasing annually, exactly what one wants to see. Fast growing revenues and declining operating expense ratios are the ingredients of a top notch ipo. Operating expense ratio in 2008 was 72%, compared to 79% in 2007 and 80% in 2006. This number is still quite high in 2008, however the trends are improving and if RST can continue at this pace over the next 2-3 years, they will become a very profitable operation.

2008 operating margins were 14%. Plugging in anticipated post-ipo tax rate of 37%, net margins were 9%. Earnings per share were $0.91. On a pricing of $16, RST would trade at 17-18 X's trailing earnings with a 50% trailing revenue growth.

2009 - I just do not feel comfortable forecasting another 50%+ jump in annual revenue for 2009. Having written that, RST is poised to have a very strong 2009. In what was a difficult environment in 2008 with consumer discretionary spending falling precipitously overall, RST shined. Looking at quarter to quarter revenue growth at the end of 2008 and factoring in seasonality with a much slow first half of the year for RST historically....I would project very conservatively that RST can grow revenues 20% in 2009 to approximately $250 million. Gross margins should remain strong and I would project operating expense ratios to continue to decline, increasing operating and net margins. On a $250 million run rate, with 86% gross margins, 16% operating margins and 10% net margins, RST would earn $1.23 in 2009. On a pricing of $16, RST would trade 13 X's 2009 earnings.


How has RST thus far managed to sidestep a massive consumer spending slowdown? 22% of RST buyers responded in a survey they did so based on the personal recommendation of another. That is pretty powerful word of mouth marketing when annual revenue tops $200 million. Digging into this ipo, the one constant appears to be customer satisfaction driving growth. You really could not ask for much more with a consumer based ipo. RST looks poised to grow strongly in 2009 and is trending well in every facet of their business. If RST is able to build on their United States success globally over the next few years, this could be a huge long term winner coming public at just a $325 million market cap (based on a $16 pricing).

RST is a unique, and difficult to value sector leader with fast growing revenues, strong gross margins and improving operating expense ratios. All this equals a top-notch ipo. If RST can continue current trends for even another 2-3 quarters, the range of $15-$17 here is far too low. This is a strong recommend in range and one to pay up for if need be. The CEO describes his company as a 'disruptive value proposition' in language learning. I agree

April 2, 2009, 7:36 am

CYOU - Changyou.com

CYOU - Changyou.com

CYOU - Changyou.com plans on offering 7.5 million ADS at a range of $14-$16. Note that 1/2 the ADS in this offering will be sold by parent company Sohu.com (SOHU). Credit Suisse and Merrill Lynch are leading the deal, Citi and Susquehanna Financial are co-managing. Post-ipo CYOU will have 51.25 million ADS equivalent shares outstanding for a market cap of $769 million on a pricing of $15. Ipo proceeds will be utilized for general corporate purposes.

SOHU will own 71% of CYOU post-ipo. CYOU's CEO Tao Wang will own 15% of CYOU post-ipo. Note that post-ipo CYOU will be paying SOHU a one-time dividend of $96 million.

SOHU - A Chinese internet portal operating since 1998. Sohu has a current market cap of $1.56 billion and currently has over 250 million registered accounts.

From the prospectus:

"We are a leading online game developer and operator in China as measured by the popularity of our game Tian Long Ba Bu, or TLBB. TLBB, which was launched in May 2007, was ranked by International Data Corporation, or IDC, for 2007 as the third most popular online game overall in China and the second most popular online game in China among locally-developed online games."

On-line multi-player role playing game company, this CYOU ipo is similar in that fashion to this decade’s ipos of SNDA/NCTY/PWRD/GA. Below we'll do a comparison of those four with CYOU.

Tian Long Ba Bu(TLBB) was developed and launched in house at CYOU, then a part of SOHU. In addition to TLBB, CYOO also has licensed and operated Blade Online (BO). For the three months ending 12/31/08, TLBB had 1.8 million active paying accounts and BO had 159,000 active paying accounts.

Tian Long Ba Bu - 2.5D martial arts game was launched in May of 2007. Multi-player means literally over a million players/characters can inhabit the game playing universe at the same time. In 3/09, peak concurrent users exceeded 800,000. CYOU has also licensed this game to third party operators who run the game in Taiwan, Hong Kong, Vietnam, Malaysia and Singapore. Game players may play for free, however they must purchase pre-paid game cards to buy virtual items such as gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks. As is customary in China, pre-paid game cards are sold through regional third party distributors who then distribute to Internet cafes and various websites, newsstands, software stores, book stores and retail stores.

Pipeline - CYOU has three games in various stages of development: Duke of Mount Deer, or DMD, Immortal Faith, or IF, and the Legend of the Ancient World, or LAW. Duke of Mount Deer is another martial arts game and is being developed in-house. The other two will be licensed properties. Rollout of DMD will be 4th quarter of 2009 with the other two coming in 2009 and 2010 respectively. It would appear CYOU is banking on Duke of Mount Deer to be their next hit and hoping that this release will pick up the slack from the eventual player slowdown in TLBB.

Market segment - China's online game players numbered an estimated 40 million in 2007 with revenues of $1.4 billion. Online game revenues are expected to continue to grow to $3.4 billion in 2012 at a compound annual growth rate, or CAGR, of 19.9%.

Growth - 94% of CYOU's revenues in 2008 were from the game Tian Long Ba Bu(TLBB). Launched less than two years ago, TLBB has been a huge success generating over $180 million in revenues in 2008 alone. This ipo is based completely on the success of this one game. While TLBB has generated massive revenues and profitability, online video games tend to have a distinct lifespan and popularity curve. TLBB's popularity seems to have peaked in late 2008, so future growth is going to depend on CYOU's pipeline of coming games. TLBB in the 12/08 quarter had 1,822 paying accounts which was down slightly from the 9/08 quarter. Quarterly revenue growth from TLBB has gone from stratospheric to somewhat flat. Beginning with the 12/07 quarter, following is the quarter to quarter revenue growth of TLBB: 12/07 +102%; 3/08 +76%; 6/08 +13%; 9/08 +11%; 12/08 +6%. Looking at the slowing growth from TLBB, we can clearly see that CYOU will have difficulty growing going forward without their 4th quarter 2009 launch of Duke of Mount Deer becoming a big hit. In fact I would expect TLBB to book negative revenue growth quarter to quarter by the end of 2009 just as their next in-house game is launched.

Risk - the obvious risk here is a significant market cap on ipo of $769 million (assuming a $15 pricing) is based on one on-line game. Looking at the above slowing quarter to quarter growth trends of this one game and the risk here is that unless CYOU's next in-house game (due to hit in late 2009) is a big hit, revenues and earnings power will decline significantly as TLBB sees its popularity wane. This is a significant risk, especially as their new in-house game has yet to have a track record. For me, this large a market cap based on one game carries enough risk that I can only be, at best, neutral on this deal in range as the popularity of TLBB is already baked into the market cap in range.


After paying SOHU a $96 million dividend, CYOU will have slightly under $2 per share in cash post-ipo with no debt.

Revenue growth has been swift since the release of the Tian Long Ba Bu game. Revenues in 2006 were $8.5 million, in 2007 $42 million and in 2008 $201.8 million.

2008 - Revenues were $201.8 million, a massive increase over 2007. Tian Long Ba Bu accounted for 94% of those revenues. Gross margins were an impressive 93%. Operating expense ratio was 36%. Operating profits were 57%. In 2008 Tian Long Ba Bu was a money making machine. Normalizing CYOU's tax rate as it will appear post-ipo, net margins were 50%. Earnings per share were $1.97. On a pricing of $15, CYOU would trade 7-8 X's trailing earnings.

2009 - As noted above, quarter to quarter growth will slow dramatically from 2007 and 2008. CYOU's money making game TLBB appears as if it has peaked in popularity, or at least should see much more constrained revenue growth. As CYOU's next in-house developed game will not hit until late 2009, CYOU's revenues should be rather stagnant on a quarter to quarter basis throughout 2009. Projected revenues for 2009 should be in the $230 million ballpark, an increase of 15% over 2008. Much of this growth will be due to favorable comparables in the 3/09 quarter compared to 3/08 period. Gross margins look to continue to be 90%+. Operating expense ratios should be slightly higher as CYOU ramps up product development and sales/marketing efforts to promote new games. Lets plug in a 37% operating expense ratio. Operating margins should be 55%. It appears that for 2009-2011, CYOU will have an approximate tax rate of 12.5%. Net margins then should be approximately 42.5%. Earnings per share should be approximately $2 per share. On a pricing of $15, CYOU would trade 7 1/2 X's 2009 earnings.

Lets take a glance at CYOU's public competitors.

SNDA - $2.6 billion market cap. Currently trading 13 X's '09 estimates with an anticipated revenue growth of 25%.

NCTY - $370 million market cap. Currently trading 9 X's '09 estimates with an anticipated revenue growth of 9%.

PWRD - $789 million market cap. Currently trading 7 X's '09 estimates with an anticipated revenue growth of 22%.

GA - $1.6 billion market cap. Currently trading 12 X's '09 estimates with an anticipated revenue growth of 5%

Stacking CYOU up with these four, it does appear to be priced within the valuations of the above. A positive for CYOU is that they do have an extremely popular game. The downside is that nearly all revenues are derived from this one game and, at this point, we do not know whether CYOU will be successful in diversifying their game base and revenue stream.


On a trailing basis the CYOU ipo looks dirt cheap. The problem however is the ipo and market cap are based on the huge success of their game TLBB. It appears to me that TLBB has, at the very least, come close to peaking by late 2008. With their next in house game not launching until late 2009, I would project CYOU to see pretty flat revenues for '09 actually. Looking forward this is a pretty hefty market cap for reliance on one single game which saw its best year in 2008 and should decline somewhat in popularity going forward. The valuation is not out of line however and if CYOU's next in house game is another big it, there is potential for share price appreciation. Problem however is currently we have no idea how CYOU's future games will be received. We do know that the current success of TLBB is most definitely in the market cap on ipo. Neutral here in range. Swift growth in '08 and reasonable PE ratio is appealing, the lack of revenue diversification however is a pretty big sticking point for me.

November 26, 2008, 3:03 pm

LOPE - Grand Canyon Education

disclosure - at date of posting for non-subscribers(11/26) tradingipos.com does have a position in LOPE from an average price of $10.60.

LOPE - Grand Canyon Education

LOPE - Grand Canyon Education plans on offering 10.5 million shares at a range of $14-$16. Credit Suisse and Merrill Lynch are leading the deal, BMO, William Blair and Piper Jaffray are co-managing. Post-ipo LOPE will have 43.1 million shares outstanding for a market cap of $646 million on a pricing of $15. The bulk of ipo proceeds will go towards paying a special distribution to corporate directors and pre-ipo shareholders. Very little of the ipo proceeds will find their way to LOPE's balance sheet post-ipo.

Endeavour Capital Fund will own 22% of LOPE post-ipo. Four venture capital firms combined will own approximately 50% of LOPE post-ipo.

From the prospectus:

'We are a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, business, and healthcare. In addition to our online programs, we offer ground programs at our traditional campus in Phoenix, Arizona and onsite at the facilities of employers.'

Online university focusing on post-graduate degrees education, business, and healthcare for working professionals. LOPE has increased enrollment from 3,000 students at the end of 2003 to approximately 22,000 students on 9/30/08. 62% of students enrolled were seeking masters degrees with 92% of students 25 or older.

LOPE began as a campus based college approximately 60 years ago. In February of 2004, investors turned LOPE into a for-profit university and focused on growing the online program. Currently 87% of enrolled students were in the on-line program with just 13% traditional on-campus students.

Tuition - Tuition for a full program would equate to approximately $15,000 for an online master’s program (non-MBA), approximately $47,000 for a full four-year online bachelor’s program, and approximately $62,000 for a full four-year bachelor’s program taken on campus. The eMBA program tuition is $44,000. LOPE raised tuition an average of 5% for the 2008/2009 academic year.

Sector - Approximately 18 million people are enrolled in postsecondary institutions generating approximately $385 billion in revenues. In the past decade online post-secondary education has been a nicely growing area as many working adults prefer the flexible schedules of an online accredited degree granting institution.

Approximately 70% of LOPE's revenues are derived from tuition financed under federal student financial aid programs. These programs include a myriad of federally funded and/or backed grants and loans.

Recession/Credit issues - We've two competing drivers here. During previous economic slowdowns we've seen post-secondary enrollments from adults (25+) rise as people go back to school to retrain and/or work towards a degree to compete in a slowing competitive economy. This current slowdown however is coupled with a freeze in available credit, including private student loans. 40% of full-time postsecondary students receive student loans. With LOPE's eMBA program costing $44,000, student loans are an important component in LOPE's revenues. While a portion of the student loan market is backed by low-interest government backed loans, as tuition costs have risen the private loan market has been an increasingly relied on method of paying for post-secondary education. In 2007, private student loans accounted for over 5% of LOPE's revenue. Also as credit conditions have tightened, fewer banks are participating in the Federal student loan program itself, making obtaining even these loans potentially more difficult. We've two competing trends here - 1) economic slowdown is generally good for postsecondary education with 2) tight credit making student loans more difficult to obtain. While the education group tends to be a nice counter cyclical play, the current credit issues mitigate somewhat the usual counter-economy trend.

Investigation - The Department of Education has issued subpoenas (8/08) to LOPE in an apparent investigation into whether LOPE improperly compensated enrollment counselors/managers in violation of Federal regulations. Investigation is still in infancy stage. LOPE is also facing a lawsuit by a former employer relating to incentive based compensation to enrollment counselors/managers.

Competitors - As more brick and mortar universities offer online programs, LOPE's competition includes thousands of on-line programs across the United States. There are however a few publicly traded on-line for-profit universities. These include CPLA, APOL, CECO, COCO, DV and ESI. Recent successful ipos LRN and APEI are also on-line education related, although neither is a direct comparable to LOPE. Below we look at how LOPE stacks up financially with those in this group.


$1 in cash, no appreciable debt.

Revenues have grown strongly while margins remain slim and net profits constrained. LOPE has been very aggressive in student recruiting the past two years and it has been reflected in overall enrollment and revenues. LOPE quadrupled enrollment counselor staff over the past two years.

Revenues in 2005 were $52 million, in 2006 $72 million, in 2007 $99 million and through 3 quarters on pace for $154 million in 2008.

Selling expenses have grown as a percentage of revenue, each of the past 3 years. This can indicate competition for new students has consistently grown as annually LOPE is paying more as a percentage of revenue to recruit a student, this even with the annual tuition increases. Even so, LOPE's revenue increase is impressive and a direct reflection of their success in expanding degree programs and recruiting students to fill these newer programs.

LOPE has been profitable since 2006.

Seasonality - LOPE's strongest quarters are the 3rd and 4th quarter annually. The 3rd quarter markets the beginning of their campus semester while online programs generally begin their academic year in both the 3rd and 4th quarter. 4th quarter annually has had the strongest revenues and margins.

2008 - Note that LOPE will be taking a nearly $9 million charge in the 4th quarter due to ipo related compensation charges. I have folded this out of projections as well as other post-ipo non-recurring charges and dividends. Revenues should be in the $154 million ballpark assuming LOPE has a strong 4th quarter as anticipated. Operational costs are high as instructional costs eat up approximately 32% of revenues and selling (student recruitment) eats up approximately 40% of revenues. Total operating expenses account for 89% of revenues, leaving operating margins for 2008 at a slim 11%. This is actually an improvement over 2007's 8%-9% as LOPE has kept their other non-selling costs in check. Factoring in short term debt/interest income as well as taxes, net margins should be in the 6% ballpark. Earnings per share for 2008 should be in the $0.20-$0.25 range. On a pricing of $15, LOPE would trade 66 X's 2008 earnings.

2009 - LOPE will increase revenues 55% in 2008. The big question here is this: Can LOPE continue their massive 2008 revenues growth? I suspect LOPE will not be able to approach 2008 revenue gains as this period coincided with regulatory approval that allowed LOPE to increase enrollments. Lets assume a more muted growth in the 25% range, which may be conservative. However two things should constrain rapid 2009 revenue growth- 1) the slowing economy should constrain tuition increases in 2009 from 2008's record 5% increase; 2) the ongoing credit issues may mute enrollment growth for the foreseeable future. A 25% revenue increase in 2009, would still put LOPE above the sector average. LOPE will never have strong operating margins due to operating expenses. They should be able to increase net margins slightly around the edges however. If we assume a $190-$200 million revenues run rate with slight margin expansion, LOPE should earn approximately $0.35 in 2009. This is a ballpark number and I would not be surprised be a number 10 cents to either side. The problem here is the very high sales expense that is preventing strong bottom line growth. That isn't going to change, so LOPE will most likely filter down revenue growth on a 1:1 level going forward, don't expect an economy of scale here on revenue growth. On a pricing of $15, LOPE would trade 42 X's 2009 earnings.

The online education sector has been a safe port in the 2008 market storm. comparable companies are performing relatively well with DV upon the year, APOL flat, CPLA down 23%, LRN down 10%, APEI flat, and COCO flat. Only CECO has underperformed the overall market. Even with the potential credit issues hampering growth, this sector has indeed been a counter-cyclical play in 2008 with online education stocks outperforming the market as a whole. **Just as important, forward earnings estimates for this group have remained stable throughout 2008, one of the few groups to do so.


LOPE - $646 million market cap on a $15 pricing. Growing revenues a very strong 55% in 2008 and coming public 66 X's 2008 earnings.

CPLA - $842 million market cap. Growing revenues 22% in 2008 and trading at 31 X's 2008 earnings.

APOL (which includes the largest US online university, University of Phoenix) - $10.8 billion market cap with 16% revenues growth in 2008 and trading 19 X's 2008 earnings.

APEI (not directly comparable due to focus on military veterans) - $690 million market cap with 53% revenues growth in 2008 and trading 48 X's 2008 earnings.

Conclusion - LOPE is a good candidate to break the ipo drought. Post-secondary education has traditionally been counter-cyclical, enjoying enrollment growth during difficult economic times. We certainly have difficult economic times. Looking at stock performance in 2008 for the on-line education group, they've most certainly heavily outperformed the market as a whole. In addition LOPE's revenue growth is impressive and, while growth should slow going forward, LOPE looks to outgrow the sector as a whole in 2009. Caution here for the following however: 1) IPOs in 2009 have performed abysmally and in this climate you do not want to pay up for anything; 2) Margins are slim here. They are on par with CPLA, but behind the rest of the group. With strong growth and lower margins, it appears LOPE is 'buying' some of their revenue growth. 3) PE ratio for this current climate appears high. With the revenue growth, a high pe is not a major concern. What is a concern is the market not willing to pay high multiples currently.

Slight recommend here in range. I like the sector here and I like LOPE's growth and prospects. There is enough for caution here and the lower LOPE prices, the more I am interested. Ideally I would like to see a pricing below range or at the low end of the pricing range. Two online education ipos in the past year have each not only held pricing, but are up nearly 100% (APEI) and 15% (LRN). In this ipo market, that is unusual and makes LOPE a good candidate to break the ipo drought and also hold a reasonable pricing.

July 28, 2008, 3:58 pm

ERII - Energy Recovery Devices

Following piece was available to subscribers on 6/28/08 at http://www.tradingipos.com

ERII - Energy Recovery Devices

ERII - Energy Recovery Devices plans on offering 14 million shares at a range of $7-$9. Insiders are selling 6 million shares in the deal. Citi and Credit Suisse are lead managing the deal, HSBC, Janney Montgomery and SEB Enskilda are co-managing. Post-ipo ERII will have 49.9 million shares outstanding for a market cap of $399 million on a pricing of $8. IPO proceeds will be used for working capital and general corporate purposes.

Arvarius will own 20% of ERII post-ipo. Arvarius (a Norwegian company) is selling 2 million shares on ipo.

From the prospectus:

'We are a leading global developer and manufacturer of highly efficient energy recovery devices utilized in the rapidly growing water desalination industry.'

Water desalination definition: 'The removal of salt, esp. from sea water to make it drinkable.'

ERII operates in the sea water reverse osmosis (SWRO) segment. With SWRO, high pressure is used to drive sea water through filtering membranes to produce fresh water. Historically this has been a very expensive endeavor, however technology is improving to make desalination more cost competitive. Companies such as ERII are driving the technology that recovers the energy used in the desalination process. After initial capital expenditures, energy consumption is the primary cost factor in the the SWRO process. ERII's main products do not actually filter the water. ERII's primary product, the PX Pressure Exchanger helps optimize the energy intensive SWRO process by recapturing and recycling up to 98% of the energy in the high pressure reject stream. ERII's PX devices reduce overall energy consumption in the SWRO process by 60%. ERII's products make SWRO more efficient, which in turn helps make the process more cost effective. The more cost effective desalination becomes, the greater the growth possibilities.

**Think of ERII as a company that makes a product that allows the formerly cost prohibitive water desalination process become much more cost effective. This ipo fits into exactly what has been working in the stock market lately. Energy efficiency focused on a sector whose growth going forward should be strong due to continued worldwide population growth.** Energy efficiency and built in sector demand growth, a very nice combination here. If the financials are at least decent, ERII is a definite recommend in range.

As of 3/31/08, ERII had shipped over 4,000 PX devices to desalination plants worldwide. ERII estimates they have reduced energy consumption at desalination plants by 300 megawatts annually relative to comparable plants with no energy recovery devices. In dollar terms ERII believes this represents an annual electricity cost savings of approximately $210 million. ERII's devices are in use in plants located in China, Algeria, Australia and India.


The world's population continues to grow, with much of that growth being in locations lacking in abundant fresh water sources. The United Nations expects the global consumption of water to double every 20 years. That is a pretty remarkable statistic and it means there is most likely not enough current freshwater sources in many locations worldwide to handle this expected demand growth.

There are an estimated 13,080 desalination plants worldwide. Desalination capacity is approximately 39.9 million cubic meters per day as of 12/05. Installed capacity is estimated to grow 13% annually over the next decade.

The SWRO market has been focused in geographic areas with a lack of freshwater sources, but extensive salt water nearby. The Middle East has been, by far, the market leader in desalination. Saudi Arabia's desalination plants account for about 24% of total world capacity. The world's largest desalination plant is in the United Arab Emirates. World-wide, 13,080 desalination plants produce more than 12 billion gallons of water a day. Saudi Arabia recently announced more than $12 billion worth of planned water and power projects that will supply an additional 2.24 million cubic metres of water per day and 2,750 mega-watts of power in the next few years.

US market - ERII's PX device is currently in use in the pilot program for a proposed desalination plant in Carlsbad, CA. If approved, this desalination plant would be the largest in the US.

By 2015, the five largest countries in water desalination based on planned capacity will be Saudi Arabia, United Arab Emirates, The United States, China, and Spain. ERII believes they've a foothold into the growth in China.

ERII strengths - ****Unique and efficient*** - From the prospectus: 'we manufacture the only commercially available rotary isobaric energy recovery device, which we believe is more effective at recovering and recycling energy than any other commercially available energy recovery device. The PX device incorporates highly-engineered corrosion resistant ceramic parts that require minimal maintenance, and a modular design that allows for system redundancy resulting in minimal plant shutdowns. Our rotary device has only one moving part and a continuous flow design, which complements the continuous flow of the SWRO process. We believe these unique benefits lead to lower life cycle costs than competing products.'

Geida accounted for approximately 25% of revenues the 15 months ending 3/31/08. Geida is a Spanish construction consortium involved in water desalination plants primarily in Algeria and Spain.

ERII has 5 current US patents and 9 international patents. In addition, ERII has applied for 2 new US patents and 14 new International patents.


1 - ERII currently does not receive residual revenues from their energy recovery devices. Eventually ERII will receive revenues from replacement devices, however as their installed base is fairly new that is still a ways off. To grow revenues, ERII needs water desalination capacity to continue to grow at a solid clip. Any factors slowing capacity growth would also slow ERII's revenue stream.

2 - Lumpy revenues. ERII has a greater risk than most young companies in missing revenues/earnings in any given quarter due to the structure/timing of their revenues. ERII's revenues are seasonal. Due to the cyclical nature annually of SWRO plant construction, ERII tends to see a seasonal increases in shipments of their PX devices in the fourth quarter annually. Also in any given quarter ERII depends on just 1-3 projects for the bulk of their revenues for said quarter. Backloaded annually depending on a few projects is a recipe for choppy revenues quarter to quarter even if the underlying business remains strong.

Competition - ERII's main competition is a private Swiss company, Calder AG. ERII believes their energy recovery devices have greater efficiency at 98% recovery than Calder's.


$1.20 per share in cash post-ipo.

ERII does not plan on paying a dividend.

Seasonality - As noted above ERII tends to generate greater revenues in the fourth quarter, expect annual revenues and earnings to be somewhat backloaded.

Revenues have steadily grown annually. In 2005 ERII booked $10.7 million in revenues, in 2006 revenues were $20 million and in 2007 revenues were $35.4 million.

Gross margins annually have been solid at 56% in 2005, 60% in 2006 and 58% in 2007.

ERII has been profitable annually since 2005.

Note that nearly all historical revenues are international and not derived from the US. ERII expects that trend to continue into the near future.

2007 - Revenues were $35.4 million, a strong 77% gain over 2006. Gross margins were 58%. Operating expense ratio was 31% (down from 41% in 2006), quite solid for a young fast growing company. Strong revenues growth coupled with solid gross margins declining operating expense ratios are exactly the trends you want to see. Operating margins were 27%. Net margins after taxes were 17%. Earnings per share were $0.12.

ERII is the type of ipo in which the trends and space are more important than the trailing PE. With an uncertain US economy, ERII is situated in a space that looks to grow worldwide over the next decade. Factoring in the strong revenue growth, solid gross margins and operating margin growth trends make the trailing PE of 67 X's earnings more palatable.

2008 - Again we note ERII's 2008 should be backloaded. Based on the first quarter and our usual somewhat conservative approach, ERII should grow revenues approximately 30% in 2008 to $47 million. ERII looks to continue to grow revenues without losing gross margins. Gross margins for 2008 should be in the 2006-2007 ballpark of 58%-60%. GSA expense increased significantly in the first quarter, for the most part due to increased personnel and legal/accounting expenses in preparation of the ipo. As such I am not plugging in any improvement in the operating expense ratio for full year 2008 and in fact would anticipate a slight slide to 26%. Due to increased cash on hand and added interest gains the second half of 2008, net margins should remain similar to 2007 at 17%. The flat net margins with strong revenue gains here look to be more a matter of added costs in being a public company. If ERII performs strongly the second half of 2008, there is the distinct possibility that my operating and net margin projections could be a little low. I'd rather err on the side of caution however. Earnings per share for 2008 should be $0.17. On a pricing of $8, ERII would be trading 47 X's 2008 earnings.

Conclusion - ERII is positioned well here. Water may very well be a huge story over the next decade or two. The world's population continues to grow and often in areas of the globe lacking sufficient freshwater sources to meet this growth. Desalination is a story we will be hearing much more from in the coming years. ERII has a unique product in a sector which should continue solid worldwide growth over the next decade. In this sector ERII creates greater energy efficiency by allowing energy use to be recovered through the desalination process. This uniqueness has allowed them to outgrow the sector annually while maintaining strong gross margins. Yes on a strict pe and price to sales basis, ERII looks a bit pricey on ipo. Keep in mind two things however: 1) ERII is one major project away from rapidly increasing revenues, and 2) ERII should regain operating margin growth momentum in 2009. As with any small and young company many things can occur to derail the story. However the potential positives going forward here outweigh the risks involved. This is a sector which should continue to see increased investor attention going forward and ERII in their short history has grown revenue rapidly with solid gross margins and impressive operating expense control. Definite recommend in range, even with the 'apparent' pricey initial valuation. ERII has the potential to be a 'story stock' down the line if all breaks right for the company and has all the makings of a strong ipo

June 28, 2008, 12:33 pm

FSC - Fifth Street Capital

following ipo piece was available to tradingipos.com subscribers prior to FSC pricing their ipo at $14. FSC is currently trading at approximately $10 1/4. Sometimes it is as important to save money by passing on ipos as it is on catching a 'hot' one. FSC has been a disaster and was one to avoid.

also we've a complete write-up for subscribers on this week's ipo ERII.


FSC - Fifth Street Capital

FSC - Fifth Street Capital plans on offering 10 million shares at a range of $14.12 - $15.12. Goldman Sachs and UBS are lead managing the deal, Wachovia, BMO and Stifel are co-managing. Post-ipo FSC will have 22.5 million shares outstanding for a market cap of $329 million on a pricing of $14.62. FSC will use the bulk of ipo proceeds to invest in small and medium size pre-ipo stage companies.

Toll Brothers(TOL) founder and former President Bruce E. Toll will own 9% of FSC post-ipo. Mr. Toll is the father in law of FSC CEO and President Leonard M. Tannenbaum. In addition Genworth Life and Greenlight Capital will each own 5% of FSC post-ipo.

From the prospectus:

'We are a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. We define small and mid-sized companies as those with annual revenues between $25 million and $250 million.'

FSC commenced operations in 2/07. FSC is a private investment operation that makes 'piggyback' investments in pre-ipo stage companies. We've seen a number of private equity 'quick flip' ipos this decade. Nearly all of them come saddled with hefty debt. Debt that was placed onto the back of the underlying entity to fund the purchase by the private equity operation. FSC helps fund these acquisitions by lending money to the underlying entity. That money usually ends up in the hands of the private equity firm to help fund the takeover.

FSC is managed by Fifth Street Management headed by 36 year old Leonard Tannenbaum. Mr. Tannenbaum has led the investment of approximately $450 million since 1998.

As of 3/08, FSC's portfolio totaled $192 million and comprised investment in 19 companies. The bulk of FSC's investment is debt based, usually straight first or second tier loans coupled with a samll($200k or so) equity investment. Average investment size is $5-$40 million. Their average annual yield on their debt investments is a substantial at 16.7%. The high yield on investments would appear to indicate that FSC's investments are placed with many companies unable to leverage themselves via normal credit routes. This fits with FSC's profile of doing deals in conjunction with private equity sponsored investments.

Note that if FSC prices in range it will increase FSC's assets under management by approximately 70%.

FSC's management fee structure mirrors that of a hedge fund. For the type of investments FSC makes and the return since inception the fee structure looks excessive. FSC is essentially a lender working with private equity operations. Yet they want public shareholders to pay them as if they're running a top tier high return and in demand hedge fund. FSC's management fee structure post-ipo will be 2% of gross assets annually as well as 20% of net investment income/capital gains. In other words, 2% of assets under management and 20% of any/all returns.

**FSC is essentially a 'high risk' lender, yet they want public investors to pay management fees akin to successful hedge and investment funds. In the prospectus FSC estimates that if they are able to generate a 5% annual return their first five years public investor fees/expenses would total $300 on a $1000 investment.

Portfolio companies - FSC's current portfolio companies can be found here: http://www.fifthstreetfinance.com/portfolio.html

Risk - All of FSC's originations have been first or second lien on the investment company's assets. However the bulk of FSC's investment portfolio are small to mid-size consumer discretionary operations, with the remainder all relying on US economic health in one form or another. That in and of itself is not really a negative even with the difficult current economic climate as long as solid due diligence is in place. the issue here is that FSC's investments/loans are in conjunction with private equity leveraged investments, meaning the underlying companies in which FSC invests are taking on significant debt in order to fund the private equity investment. High leverage always increases the odds of default down the line and FSC's business plan pretty much guarantees they will be making these type of investments going forward.

Note that FSC does plan on leveraging their investments. Prior ipo FSC had approximately $35 million in debt at an average interest rate of 4.15%. FSC does plan on borrowing at lower rates to lend at higher rates going forward. Again FSC mirrors a high risk lender more than a private investment fund.


FSC will have approximately $150 million in cash post ipo. This cash will be utilized to lend to and invest in small businesses in accordance with business plan.

Assuming a pricing of $14.62, book value post-ipo will be $13.80.

FSC does plan on distributing essentially all net income quarterly to shareholders.

Fiscal year ends 9/30 annually. FY '08 will end 9/30/08.

FSC marks their investment to market quarterly. For the six months ending 3/31/08, FSC's unrealized depreciation on their investments lost $2 million.

For the six months ending 3/31/08, FSC had interest and fee income of $12.3 million. Management and incentive fees totaled 22% of revenues. Other operating expenses totaled 13%. Factoring in depreciation on investment loss, net income per share was $0.25.

Going forward we can expect FSC to put the ipo monies to work which should increase FSC's interest income going forward. I would estimate, assuming no massive investment depreciation, net income for FY '08 will total approximately $0.60 per share.

Assuming again no defaults and no massive investment writedowns, I wold expect distributions shareholders to total $0.60-$0.75 FSC's first four quarters public. On a pricing of $14.62, FSC would yield approximately 4%-4 1/2% first year public. Conclusion - I don't see a compelling reason to own this ipo in range. This is essentially a high risk lender cloaked as a closed end investment fund coming public above book value. I'm not a huge fan of the hefty incentive fee structure here as well as the risky nature of FSC's investments assisting the funding of private equity buyouts. In a sluggish US economic climate lending at an average of 16.7% yield to companies loading up on leverage to fund private equity investments does not interest me.

May 13, 2008, 11:05 am

Colfax - CFX

Our pre-ipo piece on CFX available to subscribers 5/1/08. CFX priced at $18 per share on 5/8.

analysis pieces on all ipos available at http://www.tradingipos.com

three year anniversary and still going stong.

CFX - Colfax

CFX - Colfax plans on offering 18.8 million shares at a range of $15-$17. Insiders are planning on selling 11 million shares in the deal. Merrill Lynch, UBS and Lehman will be lead managing the deal; Robert Baird, BofA, Deutsche Bank, and KeyBanc will be co-managing. Post-ipo CFX will have 41.2 million shares outstanding for a market cap of $659 million on a price of $16. Approximately 1/3 of ipo monies will be used to repay debt, 2/3's will go to insiders in the form of bonuses, dividends and reimbursements.

Capital Yield Corporation will own 21% of CFX post-ipo. Capital Yield is the selling shareholder on ipo.

From the prospectus:

'We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves.'

CFX specializes in rotary positive displacement pumps. What is a displacement pump? According to wikipedia it is a pump that causes a liquid or gas to move by trapping a fixed amount of fluid and then forcing (displacing) that trapped volume into the discharge pipe.

The key to this ipo is CFX end market segment users which include commercial marine, oil and gas, power generation, global navy and general industrial. From previous ipo pieces we know that the next few years will bring unprecedented new ship builds spurred by commodity demand in places such as India, China and Brazil. Similarly the historical high oil and gas prices have spurred exploration which means more equipment is needed. Power generation infrastructure around the world is also in need of massive upgrades due to age and inefficiencies. CFX's end markets look solid even in a slowing world economy.

Pumps are marketing under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names.

CFX has production facilities in Europe, North America and Asia. Asia production facilities include operations in both India and China. Products are sold through 300+ person direct sales team and more than 450 distributors in 79 countries. **67% of 2007 revenues were derived outside the US** with no single customer accounting for more than 3% of revenues. Customers include Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world.

CFX has a large installed product base which leads to significant aftermarket sales and service revenues as well as eventual recurring replacement sales. In 2007 25% of revenues were derived from aftermarket sales and service.

Pumps (including pump aftermarket sales/service) account for 85% of revenues.

The worldwide pump and valve sector is highly fragmented. CFX believe their sector is ripe for consolidation and they've made numerous acquisitions and plan on making more in the future. Recent acquisitions include Zenith Pump in 6/04, Portland Valve in 8/04, Tushaco Pump in 8/05, Lubrication Systems in 1/07, and Fairmount Automation in 11/07.

A quick look at CFX end markets:

Commercial Marine/Naval - Fuel oil transfer; oil transport; water and wastewater handling;

Oil and Gas - Crude oil gathering; pipeline services; unloading and loading; rotating equipment lubrication; lube oil purification;

Power Generation - Fuel unloading, transfer, burner and injection; rotating equipment lubrication;

General Industrial - Machinery lubrication; hydraulic elevators; chemical processing; pulp and paper processing; food and beverage processing;

Looking ahead - In their S-1, CFX exudes a confidence in 2008 that is rarely seen in ipo filings. To quote from the S-1: 'We believe that we are well positioned to continue to grow organically by enhancing our product offerings and expanding our customer base in each of our strategic markets. During 2007, we experienced strong demand in the majority of our strategic markets, and we expect favorable market conditions to continue throughout 2008.'

CFX sees growth coming from the following core markets:

1) In the commercial marine industry, CFX expects growth in international trade and high demand for crude oil to continue to create demand for container ships and tankers;

2) CFX expects activity within the global oil and gas market to remain favorable as capacity constraints and increased global demand keep oil and gas prices elevated;

3) In the power generation industry, CFX expects activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects;

4) In the global navy industry, CFX expects that sovereign nations outside of the U.S. will continue to expand their fleets as they address national security concerns. In the U.S., Congress is expected to continue to appropriate funds for new ship construction for the next generation of naval vessels as older classes are decommissioned;

5) In the general industrial market, CFX expects that the continued economic development of regions throughout the world will continue to drive increased capital investment and will benefit local suppliers as well as international exporters of fluid handling equipment;

Asbestos - Two of CFX subsidiaries have substantial asbestos liability. CFX took an asbestos related charge annually from 2003-2006 averaging $25 million annually. They took the charge because one of their primary insurance carriers claimed it had exhausted resources to pay further asbestos claims. This changed CFX liability and they took a charge annually to include this increase in liability from the insurance carrier to CFX itself. In 2007, CFX actually gained approximately $50 million on the asbestos expense line thanks to a settlement with said insurance carrier. CFX will continue to book a gain or loss on annual earnings as their asbestos liability estimates shift. It appears that CFX may book another asbestos related accounting gain in 2008 as they continue to factor in less liability due to insurance settlement. Currently on the balance sheet CFX lists $376 million in asbestos liability with $305 million in insurance coverage for said liability. It appears CFX took on their insurance carriers and won. Barring a change in the 2007 settlement I would expect minimal additional asbestos charges for CFX going forward. As such I will be folding out asbestos charges and gains from earnings and projections.

**Assuming the financials appear promising, CFX looks to be a very nice way to play the Asian growth engine. Looking at their core markets, my first thought was that CFX is positioned very nicely. Reading the prospectus it is clear CFX feels the same as they essentially come out and write in an SEC filing they fully expect strong growth to continue in 2008.


$168 million in debt post-ipo. While not enough to derail operations, I would rather have seen insiders hold off on selling in this deal to allow CFX to repay more debt. CFX plans on acquiring companies going forward and a cleaner balance sheet would make those acquisitions far more accretive. In addition to the debt, CFX will have nearly $50 million in cash on hand post-ipo. I'd expect CFX to utilize this cash for future acquisitions. Overall for a company that has been rather aggressive acquiring over the past four years, the balance sheet here is in decent shape.

Revenues grew steadily from 2003-2006 and exploded in 2007. Revenues were $345 million in 2005, $394 million in 2006 and $506 million in 2007.

Gross margins were 36% in 2005, 35% in 2006 and 35% in 2007. In 2007 CFX was able to grow revenues by 28% while maintaining gross margins. Approximately 50% of that growth was organic from existing business with the remainder from acquisitions and currency benefits.

2007 - Revenues were $506 million a 28% increase over 2006. Gross margins were 35%. Operating expense ratio was 20%. Operating margins were 15%. Plugging in interest expense and full taxes, net margins were 7.5%. Earnings per share were $0.90. On a pricing of $16, CFX would trade 18 X's 2007 earnings. *note* Preceding numbers take into account debt paid off on ipo and fold out the $50 million in asbestos accounting gains for reasons noted above.

2008 - In the current S-1, CFX has preliminary first quarter revenue and operating earnings numbers. Operating margins were a bit light but there was no breakout of expenses so I'm going to assume there were some asbestos accounting charges in those numbers. We'll know more when CFX officially releases first Q '08 results. I'm going to be slightly conservative in projections however based on the lower operating margins in first quarter 2008. Based on first quarter numbers and CFX own enthusiasm for 2008 growth, I believe CFX can grow revenues 10%-15% in 2008. Assuming slightly lower operating margins, net margins should be in the same 7.5% ballpark due to lower debt servicing to revenue ratio. Earnings per share should be $1.05. On a pricing of $16, CFX would trade 15 X's 2008 earnings.

Conclusion - Very solid ipo. Too often this type of industrial solid cash flow business has come public laden with LBO debt. That isn't the case here. Yes insiders could be selling less stock to allow CFX to pay off more debt, but the balance sheet here is in solid shape. Ideally I'd like to see all debt wiped off on ipo instead of 25%-30%. The ipo driver here is the current boom in worldwide shipbuilds, oil & gas equipment manufacturing and power infrastructure. These three sectors look to continue to grow strongly over the next 3+ years with much of that growth coming outside the US. CFX is positioned perfectly for that growth and 15 X's 2008 earnings is a very reasonable multiple here. Definite recommend in range and a bit above, I like this ipo.

April 29, 2008, 7:29 am

AWK - American Water Works

Following piece was available to subscribers 4/11/08, well ahead of the 4/22/08 pricing date.


AWK - American Water Works

AWK - American Water Works plans on offering 64 million shares (75.6 million if over-allotment is exercised) at a range of $24-$26. **Note** - All shares in this deal are being sold by insiders. AWK will receive no monies from this ipo. Fact is AWK is heavily leveraged and they most certainly could use ipo monies to pay off debt. However that is not going to occur.

Goldman Sachs, Citi, and Merrill Lynch are lead managing the deal. Co-managing will be nearly every firm on the street other than Bear Stearns. There are thirteen co-managing firms in all.

Post-ipo AWK will have 160 million shares outstanding for a market cap of $4 billion on a pricing of $25.

RWE will own essentially all non-floated AWK shares post ipo, an approximate 60% stake in AWK post-ipo. RWE is the selling shareholder in this deal, selling all 64 million shares, 75.6 million if over-allotment is exercised. RWE, a German operation, is one of Europe’s leading electricity and gas companies and supplies 20 million customers with electricity and 10 million customers with gas in Germany, the United Kingdom and Central and Eastern Europe. RWE purchased the then public American Water Works in early 2003 for $4.6 billion in cash.

This is a classic spin-off ipo as RWE plans on divesting themselves of their 60% stake in AWK as soon as possible (meaning right around that 180 day mark). Expect heavy future overhang here as RWE Aqua will be divesting approximately 90 million more shares of AWK sometime in late 2008.

Note - American Water Works has always toted around substantial debt. As a utility, in this case a water utility, it is common to see substantial debt as cash flows from this type of operation tend to be fairly predictable and not effected by economic cycles. When RWE purchased American Water Works five years ago, AWK had approximately $3.3 billion in debt. The public AWK in 2008 will have $5 billion in debt. It appears that a portion of the increased debt over the past five years has been due to RWE laying debt onto the back of AWK in order to fund payouts to RWE. If we look at the increased debt levels, RWE purchased American Water Works in for a total cash and debt-load interest of $7.9 billion. Assuming a pricing of $25, AWK post-ipo will have a total market cap plus debt consideration value of $9 billion.

Personally, I don't care what business one is in I'm always uncomfortable with a debt to capitalization level in AWK's post-ipo ballpark. $5 billion in debt and an expected initial market cap of $4 billion is a highly leveraged operation. So before we even look at the company, this deal has two serious strikes against it: 1) heavily leveraged with at least a portion of the leverage coming due to cash-out to parent company; 2) future overhang of approximately 90 million shares as RWE plans to completely spin-off their entire ownership of AWK by the end of 2008. I would expect these shares to come in the form of a hefty secondary as RWE is traded in Germany making a tax free dividend of AWK shares to RWE shareholders unlikely.

All things being equal the above is enough for me to pass on this ipo right here. Let's take a look at AWK the company to see if something might make me change my mind.

From the prospectus:

'Founded in 1886, American Water Works Company, Inc., which we refer to, together with its subsidiaries, as American Water or the Company, is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served.'

AWK provides approximately 15.6 million people with drinking water, wastewater and other water-related services in 32 US states and Ontario, Canada. AWK treats and delivers over 1 billion gallons of water daily. AWK's primary water business is regulated as a utility by the Public Utility Commission (PUC). AWK's regulated business accounts for nearly 90% of overall revenues.

Residential water services account for 61% of revenues. Revenues from Pennsylvania and New Jersey account for approximately 45% of overall revenues.

Sector - In the US water and wastewater utility sector, government owned and operated entities make up the bulk of operators. Government owned systems account for approximately 84% of all United States community water systems and approximately 98% of all United States community wastewater systems. Commercially operated systems such as those run by AWK are in the minority. Overall there are an estimated 53,000 community water systems and approximately 16,000 community wastewater facilities in the United States. A strategy going forward for AWK will be to selectively acquire community based and run water and wastewater systems. For example in 12/07 AWK signed an agreement to purchase the water system assets of Trenton, NJ.

For our purposes, AWK is a water utility regulated in a very similar fashion as other utilities. Their utility business does provide a predictable and stable cash flow, however the prices AWK can charge for their services are highly regulated and controlled by the PUC.

Capital Expenditures - AWK spends a hefty amount on capital expenditures annually as they're required to continue to keep their infrastructure operating on a baseline level. As WK puts it in the prospectus: 'The water and wastewater utility business is capital intensive.' In 2007 AWK spent $759 million on capital expenditures.

Impairment charges - Since being acquired by RWE in 2003, AWK annually has listed hefty impairment charge losses on their earnings statements. This is directly related to the amount of goodwill on AWK's books due to the acquisition. As of 12/31/07 AWK was carrying approximately $2.5 billion of goodwill on the books. Annually AWK re-evaluates their goodwill and any lowered amount gets written down as an impairment charge on the earnings statements. AWK has had impairment charges of $396.3 million in 2005, $227.8 million in 2006 and $509.3 million in 2007. The large impairment charge in 2007 is due to lowered customer demand expectations going forward; their debt being placed on watch for a potential downgrade; the upcoming ipo and RWE's ownership divesture; and the continued high debt levels expected post-ipo. While these impairments are not cash flow losses, they do heavily impact the GAAP bottom line. I would expect continued hefty impairment loss expenses annually going forward.

Competitors include Aqua America (WTR), American States Water (AWR) and California Water Services Group (CWT).


Debt is the issue here. Utilities tend to be heavily leveraged and AWK is no exception. Debt post ipo will be approximately $5 billion in debt. A huge drag on this deal is that AWK will not be receiving any of the ipo monies. AWK could really use ipo cash to pay off debt and better position themselves for future acquisitions. However this ipo is nothing more than an exit strategy for parent company RWE. RWE will pocket all the ipo cash.

Dividend - AWK does plan on paying a quarterly dividend of $0.20. At an annualized $0.80, AWK would be yielding 3.2% on a $25 pricing.

Revenues have been rather flat the past three years. Utilities are generally not a growth industry, and again, AWK is no exception. Revenues in 2005 were $2.1 billion, in 2006 $2.1 billion and in 2007 $2.2 billion.

Due to the impairment charges noted above AWK booked a significant GAAP loss in 2007.

2007 - Revenues were $2.2 billion. Debt servicing expenses totaled nearly 13% of revenues. For a slim margin utility business, this amount of debt servicing expense will kill margins with or without impairment charges. Operating margins (pre debt servicing and impairment charges) were 24%. When plugging in debt servicing and the $509 million impairment charge, losses after tax were $2.13. To get a clearer picture of operations, we'll fold out that $509 million impairment charge. Folding that out AWK earned a fully taxed $1.00 per share. This latter number of $1 per share in earnings gives us a better picture of AWK's operation and valuation.

2008 - AWK will most likely take another impairment charge in 2008, so we'll see a much lower GAAP number than 'actual' earnings. Until AWK does their own internal assessment in the second half of 2008 we have no way of determining what that impairment charge may be, making GAAP earnings forecasts here next to impossible. We can however forecast AWK's business fairly easily as 2008 should look quite similar operationally as 2007. I would expect revenues to once again be in the $2.1 - $2.3 billion range with earnings per share in that $1.00 - $1.10 ballpark.

On a pricing of $25, AWK will be trading approximately 24- 25 X's 2007 and 2008 earnings and will be yielding 3.2%.

A quick look at '08 estimates and yield for AWK's three public competitors.

WTR - 23 X's '08 earnings, yielding 2.6% with $1.3 billion in debt and $2.6 billion market cap.

AWR - 21 X's '08 estimates, yielding 2.7% with $305 million in debt and a $650 million market cap.

CWT - 23 X's '08 estimates yielding 2.9% with $300 million in debt and a $834 million market cap.

Conclusion - For the amount of leverage and the spin-off nature of this ipo creating substantial share overhang, AWK is a pass for me. Valuation seems a bit aggressive for a water utility with substantial leverage. However we should note that on a PE/yield basis AWK is not coming public out of line with the sector at all. Note though that AWK's balance sheet is a bit more leveraged than the competition. Also we'll be seeing 90-100 million shares coming for sale later in 2008 as RWE completes their divesture. AWK's leverage and high annual capital expenses here will mute future acquisition related growth. Other than acquisitions, AWK will be hard pressed to substantially increase the bottom line. I just don't see much growth here over the next few years, quite similar to the past 3-4 years actually. 25 X's earnings for 2008 looks to be a bit steep. Not interested in range.

April 16, 2008, 7:47 am

four on the schedule

A 'massive' amount of ipos on the schedule for the week of 4/21, four! We've analysis pieces in subscriber section currently for American Water Works, Whiting Trust and Intrepid Potash and will have Digital Domain published for subscribers by Thursday evening.

subscribe for three day free trial here:


A few new filings as well so we should see the ipo pace pick up a bit for May. Tradingipos.com is still here analyzing ipos, the market and actively trading and posting in our site forum....and we'll be here through every tough market too.

March 19, 2008, 2:39 pm

V - Visa

Yes we're still here. The ipo market has been quite quiet in 2008 with the market turmoil, economic slowdown and credit crisis. For first time since tradingipos.com went live three years back we've had very few ipos to analyze over the past few months. Here is our piece on Visa that was published for subscribers on 3/1. Off pricing this is a good deal and one of few in '08 to grab all allocations possible. Aftermarket this morning I felt it opened a bit too 'hot' at $60+ in this climate and would look at a print near $50 to enter for those not allocated.

Tradingipos.com pre-ipo piece:

V - Visa

V - Visa plans on offering 446.6 million shares (assuming over-allotments) at a range of $37-$42. JP Morgan and Goldman Sachs are lead managing the deal, BofA, Citi, HSBC, Merrill Lynch, UBS and Wachovia co-managing. Post-ipo, V will have 849.2 million shares outstanding for a market cap of $33.54 billion on a pricing of $39.5.

If priced at $39.5, V's net proceeds (minus underwriter fees) from the ipo will be approximately $17.1 billion. V plans on utilizing ipos proceeds as follows: $3 billion placed in escrow to be used in possible litigation settlements; $10.2 billion to redeem class 'B' and class 'C' shares on ipo; $2.4 billion to redeem shares in 2008 (which will reduce overall share-count for V in '08); and the remaining $1.7 billion for general corporate purposes.

*Note - With share redemptions planned in 2008, V is forecasting a 10/08 share-count of 818 million total shares outstanding. At a price of $39.5, V will have a market cap of $32.3 billion come 10/08 assuming they fulfill their share redemption plans.

Post-ipo, JP Morgan Chase will own 8% of V and Bank of America will own 4%. JP Morgan Chase and Bank of America are Visa's two largest customers globally and each generates more than twice the issuing volume of Visa's next largest customer.

Until 10/07 Visa was organized into five separate entities Visa U.S.A., Visa International, Visa Canada, Visa Europe and Inovant. In 10/07, in preparation for this ipo, Visa reorganized, and all but Visa Europe came under one umbrella for the ipo Visa (V). Visa Europe opted to not become a subsidiary of the soon to be public V; instead remaining owned by a consortium of member financial institutions. Much of the planned share repurchased in 2008 will be shares owned by Visa Europe.

From the prospectus:

'Visa operates the world’s largest retail electronic payments network and manages the world’s most recognized global financial services brand. We have more branded credit and debit cards in circulation, more transactions and greater total volume than any of our competitors. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.'

Worldwide there are an estimated 1.5 billion cards carrying the Visa brand.

The direct comparable here is Mastercard (MA). MA and V's primary competitors are large banks that utilize the payment processing platforms for consumer credit cards, debit cards, prepaid credit and commercial payments. The business driver here is the ongoing worldwide shift from paper-based payments such as cash and checks to card based and other electronic payments. These card transactions globally have grown an average of 14% annually over the past 6 years. Over the next five years annual growth is expected to be 11%, led by strong growth projected in Asia.

Revenues are generated from card service fees, data processing fees and international transaction fees. As with Mastercard, Visa does not issue cards, set customer fees or determine credit card interest rates.

Visa has three core aspects to their business: transaction processing services, product platforms and payments network management.

Transaction processing services - Routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between Visa issuers, which are the financial institutions that issue Visa cards to cardholders, and acquirers, which are the financial institutions that offer Visa network connectivity and payment acceptance services to merchants.

Product platforms - These are actual cards with the Visa logo. Visa offers their platforms to financial institutions to brand with their bank name. Visa platforms include credit cards, debit cards, prepaid cards and business cards/accounts.

Payments network management - Visa's advertising segment to promote their transaction processing services and product platforms....in other words to promote the Visa brand name.

In 2006 Visa cardholders conducted over 44 billion transactions, nearly double Mastercard's $23.4 million transactions. Total transaction volume was $3.2 billion, well above Mastercard's $1.9 billion. A key to Visa's success has been grabbing the bulk of the debit card market from the large US financial institutions. Over the past decade as debit card use has increased annually at a rapid rate, Visa has been able to annually grow their market share in this niche.

In FY '07 Visa increased their number of transactions annually by 13%. Thus far in FY '08 that transaction growth rate has been 12%.

Thus far in FY '08 Credit cards accounted for 56% of dollar transaction volume, debit cards 32% of dollar transaction volume, and commercial(and other) 12% of dollar transaction volume. In the US debit volumes have surpassed credit volumes, however credit revenues dominate in V's International segment.

Visa makes an average of $0.07 per transaction. The US accounts for approximately 66% of annual revenues with Asia/Pacific accounting for 14%.

Top five customers account for 22% of annual revenues. Largest, JP Morgan Chase accounts for approximately 7% of annual revenues.


Since 2005, there have been approximately 50 class action and individual lawsuits filed by merchants over interchange fees. Interchange fees are the fees received by issuing financial institutions when one of their cards is used in a transaction. The fee is ultimately paid by the merchant with whom the transaction took place. Visa sets default interchange fees and acts as a 'middle-man' in collection and remittance of interchange fees. The suits allege that Visa setting their own interchange default rates violate federal and state antitrust laws.

Also American Express and Discover filed suit against both Mastercard and Visa claiming they restrained competition by prohibiting client banks from also offering Discover and American Express cards. In 11/07 Visa reached a settlement with American Express.

Visa is setting aside $3 billion of the ipo money for settlements and future judgments. Visa believes that insured coverage as well as the ipo money set aside will be sufficient to cover the above legal issues.


$5 per share in cash.

V intends to pay a quarterly dividend of $0.105 per share. At an annualized $0.42, V would yield 1.1% on a pricing of $39.5.

Historically V's fiscal year has ended 6/30 annually. With the reorganization it appears Visa has shifted their fiscal year to 9/30 annually. Financials in the prospectus have shifted to 9/30 so that is what we will go with.

Note - Much as with Mastercard, Visa does not have credit exposure. Visa derives their revenues from service and transaction processing fees. There is economic slowdown risk here as a slowing economy may mean less use of credit and debit cards. The overall organic shift to use of plastic instead of paper should mitigate some of that risk however. In addition, Visa is banking on the increased use of plastic in Asia/Pacific to fuel the majority of growth going forward.

As Visa recently consolidated their operations, historical comparisons are not valid. In the prospectus V does breakdown FY '06 and FY '07 'pro forma' as if the consolidation had occurred prior to FY '06. Going back further than FY '06 doesn't offer a valid comparison on the financials here.

V had a fantastic FY '07(ending 9/30/07). We'll look at V's financials for both FY '07 and FY '08. Note that these numbers are pro forma and take a look historically at the numbers as if V was structured then as they will be post-ipo. Also V had a litigation settlement charge in FY '07 concerning the American Express settlement that impacted the bottom line. I folded that out as it is a non-recurring charge and only serves to cloud V's operational picture post-ipo.

FY '07(ending 9/30/07) - V has a phenomenal fiscal year 2007. Revenues were $5.2 billion, a 33% increase over FY '06. Asia/Pacific and US debit card usage were the key growth drivers. V does issue volume and support incentives back to their financials customers and those rebates are included in the $5.2 billion number. For a middle man type business V had strong operating margins at 29%. The Visa brand name and worldwide market leadership play into the strong operating margins. In comparison, Mastercard's operating margins for FY '07 were 25%. Plugging in full taxes, net margins were a solid 19%. Operationally, EPS was $1.23 after taxes in FY '07. **Note the actual GAAP numbers show a loss for FY '07. This is due to the American Express litigation settlement set-aside.. On a pricing of $39.50, V would trade 32 X's trailing earnings.

FY '08(ending 9/30/08)

V's previous four quarterly revenue run rates: 3/07 - $1.19 billion; 6/07 - $1.36 billion; 9/07 - $1.46 billion; 12/07 - $1.488 billion.

The pace of V's growth has definitely slowed as the US economy has slowed in the back half of 2007. Still Visa has been able to grow quarterly sequential growth 7% in 9/07 and 2% in 12/07 amidst a more challenging environment. The growth again has been fueled by increased revenues in Asia/Pacific/Latin America and by continued shift to increased debit card usage. Those two factors should allow Visa to grow revenues in '08 even if V's US credit card segment slows.

Revenues for FY '08 should be in the $6 billion range. This would represent a solid 15% revenue increase over FY '07 and models in a very conservative figure for US revenue growth. Fueling revenues in FY '08 is a policy initiated in the second half of 2007- rolling out more aggressive fees outside the US. The new fees are specifically designed to maximize V's profit margins outside the US and look to favorably impact operating margins.

Operating margins look to increase driven by the increased non-US fees. Also Visa has aggressively implemented an outsourcing program and significantly reduced headcount throughout 2007. Visa has a nice double-shot here of pricing power internationally while able to keep operating expenses fairly stable due to outsourcing savings. V's strong margin quarter has historically been the 12/07 quarter as they tend to put on the books heavier advertising expenses in their last quarter of the fiscal year (9/30). Still based on the 12/07 quarter, combined with recent trends I could see V increasing gross margins in FY '08 to 34%, a strong gain on FY '07's 29%. Net margins should be 22%. Earnings per share should hit $1.60 driven by both solid revenue growth and the increased operating margins. On a pricing of $39.50 V would trade 25 X's FY '08 earnings.

A quick comparison with V and MA

MA - $24.9 billion market cap, currently trading 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.

V - On a $39.50 pricing, would have a 33.5 billion market cap and trade 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.

The pricing range here is not an accident. Visa is being priced to match Mastercard's valuation. The key difference and driver here is Visa is larger than Mastercard and has a stranglehold on the important US debit card market. Visa is also being very aggressive in both Asia and Latin America. While the US economic slowdown in '08 could slow V a bit in the short term, they're positioning themselves for strong worldwide growth into the foreseeable future. A market leading brand fueled by both international growth and the shift in the US to electronic payments, make 25 X's FY '08 earnings here on pricing very attractive. Visa should trade at a bit of a premium to MA in my opinion and in range it is being priced to match MA's valuation. Note too that my FY '08 V estimates are a bit conservative here due to the current cloudy US economic environment.

Blue chip ipo, strong recommend in range.

January 25, 2008, 10:27 am

RMG - RiskMetrics

RiskMetrics ipo'd this morning. following is our full pre-ipo analysis piece. This was available to http://www.tradingipos.com subscribers on January 15th.

Disclosure: Tradingipos.com does have a position in RMG.

RMG - RiskMetrics

RMG - RiskMetrics Group plans on offering 16.1 million shares(assuming over-allotments) at a range of $17-$19. Insiders are selling 4 million shares in the deal. Credit Suisse, Goldman Sachs and BofA are leading the deal, Citi, Merrill Lynch and Morgan Stanley are co-managing. Post-ipo RMG will have 59.9 million shares outstanding for a market cap of $1.078 billion on a pricing of $18. The bulk of ipo proceeds will go to repay debt.

General Atlantic Partners will own 22% of RMG post-ipo.

From the prospectus:

'We are a leading provider of risk management and corporate governance products and services to participants in the global financial markets. We enable clients to better understand and manage the risks associated with their financial holdings, provide greater transparency to their internal and external constituencies, satisfy regulatory and reporting requirements and make more informed investment decisions.'

RMG operates under two segments, risk management(RickMetrics) and corporate governance(ISS). RMG acquired their corporate governance segment ISS in January 2007 for $542 million in total consideration. RMG has 3,500 clients in 55 countries. Clients include asset managers, hedge funds, pension funds, banks, insurance companies, financial advisers and corporations. Among clients are 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, 41 of the 50 largest hedge funds and each of the 10 largest global investment banks.

RMG is a play on the growth of managed assets globally coupled with the ever increasing complication and intertwining of securities and derivatives.

RiskMetrics - Multi-asset, position-based risk and wealth management products and services. What does that mean? RMG's products help investment managers quantify portfolio risk across a broad range of security products, geographies and markets. Interestingly RMG utilizes transparent processes and algorithms to model risk and portfolio positions. RMG first published their processes in 1994 and continuously updates. Customers subscribe to RMG's applications, interactive analytics and risk reports based on consistently-modeled market data that are integrated with their holdings. RMG's database includes over four million active global securities across 150,000 issuers, spanning 200 countries, 220 exchanges, 11,000 global benchmarks updated daily. RMG believes their dbase covers nearly all equity, fixed income and derivatives in clients portfolios.

RMG's risk management products allow customers to:

1) measure their trading, credit and counterparty risk;

2) monitor and comply with internal or external exposure and risk limits;

3) deploy and optimize their use of capital;

4) communicate risk in a transparent fashion to regulators, investors, clients and creditors;

ISS - RMG's corporate governance segment acquired in January 2007. RMG offers an outsourced proxy research, voting and vote reporting service to assist companies with their proxy voting responsibilities. RMG's web based product offers a full proxy voting solution, from policy creation to comprehensive research, vote recommendations, reliable vote execution, post-vote disclosure and reporting and analytical tools. ISS growth in recent years has been derived from the increase in corporate regulatory oversight. In 2006 ISS provided proxy research and vote recommendations for more than 38,000 shareholder meetings across approximately 100 countries and voted approximately 7.6 million ballots on behalf of clients, representing almost 700 billion shares.

Revenues are derived primarily on an annual subscription basis. through the first nine months of 2007 93% of revenues were derived from annual subscriptions with a strong renewal rate of 91%. The high renewal rate leads to strong recurring revenues annually.

Customers breakdown is as follows: 35% investment managers; 21% alternative investment managers; 15% banking and trading; 6% mutual funds; 6% pension funds; 5% corporate; 5% custodians; 4% insurance and 3% other.

63% of revenues is US, 37% international.


In addition to the acquisition of ISS, RMG also recently acquired CFRA. To fund these acquisitions RMG took on debt. Post-ipo, RMF will have approximately $314 million in debt on the books.

RMG does not plan on paying dividends.

Revenues from both segments(RiskMetrics/ISS) are roughly equal. The bottom line in 2007 has really been negatively impacted from the ISS acquisition due to increased debt servicing and amortization costs. The acquisition doubled RMG's total revenue stream and in the long run should be beneficial. However as far as GAAP earnings go, the ISS acquisition will really put a damper on the bottom line in 2007 and beyond.

As ISS wasn't acquired until 1/07, we have to combine the two entities for historical revenues. Total revenues were $177 million in 2005, $205 million for 2006 and through the first nine months of 2007 on pace for $235-$240 million.

2007. Revenues are on pace for $235-$240 million, a 15% increase over combined pro-forma 2006 revenues. *Note that the expense numbers that follow take into account the removal of one-time acquisition expenses as well as debt paid of on ipo. Gross margins are a solid 66%. Operating expense ratio should be 38%, putting operating margins at 28%. So far, so good. the issue here is the debt laid on to acquire ISS and the amortization charges. Amortization charges(which do not impact cash flows) should eat up 1/4 of operating margins and debt servicing(which does impact cash flows) should eat up 1/3 of operating margins. Net margins after taxes then should be 7%. Earnings per share should be $0.25-$0.30. On a pricing of $18, RMG would trade 65 X's 2007 earnings. Removing the amortization charges related to the ISS acquisition would mean RMG would net between $0.45-$0.50 per share. In my opinion this second number is more indicative of RMG's cash flows and real earnings.

2008 - Both RMG's segments have a proven track record of 10%-15% organic growth and there is every indication that should continue into 2008. Risk management assessment and corporate governance are two segments that should not be negatively impacted by a slowdown in the financials or the worldwide economy. RMG's subscription fees are not based on assets under management. Assuming a 10%-15% revenues increase in 2008 to $270 million, RMG should be able to put $0.40 on the GAAP bottom line. RMG will continue to carry acquisition amortization expenses through 2008, folding those out would bring $0.60 on the bottom line.

Conclusion - RMG has 'GAAP handicap' due to the acquisition of ISS. The $300 million in debt-post ipo is a very real earnings drag here, however this debt was brought on to double RMG's revenues and bring in a new segment, corporate governance. As mutual and investment funds utilize both RMG's risk management products as well as corporate governance proxy services, the acquisition was a good fit overall for RMG. It does however negatively impact the bottom line. As separate entities, RMG/ISS would earn a combined $0.75-$0.80 in 2007. Together with the added debt/amortization, that number drops to $0.25-$0.30. The bottom line here doesn't really indicate the nice niche and strong underlying business of RMG. Based on the organic strength of each underlying segment and the estimated 2008 cash flows, RMG is a recommend in range. Keep in mind RMG will look expensive on a PE level over the next 2-3 years which in this environment is probably reason enough not to pay up here. However I like both segments here quite a bit and even with the debt on hand post-ipo this is a recommend in range. The two parts here are greater than the sum on ipo....I suspect eventually the 'sum' will catch up.

January 13, 2008, 11:17 am

VRAD - Virtual Radiologic

The 2008 ipo calendar kicks off this week with three new deals. As we've been doing annually, tradingipos.com will have full analysis pieces on every deal available to subscribers pre-ipo again in 2008. Wish everyone a profitable '08.

this week's free blog piece is an interesting medical ipo thst debuted bacin in November, VRAD. As has been the custom, we'll post 10-20 free analysis pieces on this blog post-ipo in 2008, while every analysis piece on every deal is available to subscribers pre-ipo. we also have a number of professional traders posting on our subscriber forum daily as well.


VRAD - Virtual Radiologic

VRAD - Virtual Radiologic plans on offering 4.6 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs is leading the deal, Merrill Lynch and William Blair co-managing. Post-ipo VRAD will have 16.4 million shares outstanding for a market cap of $279 million on a pricing of $17. Approximately 50% of ipo proceeds will be used to redeem debt, the remainder for general corporate purposes.

President and CEO Sean Casey will own 25% of VRAD post ipo.

From the prospectus:

'We believe we are one of the leading providers of remote diagnostic image interpretation, or teleradiology, services in the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States.'

The leader in this space is 2006 ipo NHWK, Nighthawk.

VRAD provides remote diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Customers include radiology practices, hospitals, clinics and diagnostic imaging centers. The differentiator with VRAD compared to NHWK appears to be that VRAD's radiologists can work remotely from anywhere in the US, while NHWK's US staff is all located at their facility in Idaho.

Digital diagnostic imaging is expected to grow 15% annually over the next three years. 500 million procedures are expected by 2009. Sector is being driven by an aging population, advances in diagnostic imaging technologies and the growing availability of imaging equipment in hospitals and clinics, as well as by more frequent physician referrals for diagnostic imaging. However the projected number of radiologists is expected to grow just 2% annually in the US. The slower pace of radiologist growth coupled with the 24/7 365 demand has pushed hospitals/clinics to outsource some of their radiologist needs.

VRAD has affiliations with 121 radiologists. Reads include computed tomography, or CT scans, magnetic resonance imaging, or MRI, and ultrasound. VRAD is compensated directly by their customers and does not directly depend on third party reimbursement. VRAD has provided services to 457 customers serving 787 medical facilities, which includes 736 hospitals, representing approximately 13% of hospitals in the United States. 98% of contracts up for renewal have been renewed.

Same site sales growth has been strong indication that once VRAD sells in their remote radiology services, the revenue stream per location grows. Same site growth for 2005 was 24%, 2006 was 20% and through first nine months of 2007 17%.

Legal - In 7/07 Merge eMed filed a patent infringement suit against VRAD. The suit claims VRAD infringed on Merge eMed's teleradiology patent. Case is in a very stage currently.


$2 per share in cash post-ipo, no debt.

Revenues have grown swiftly as VRAD has added new radiologists, sites and grown revenues in existing sites. Revenues in 2005 were $27 million, doubling to $54 million in 2006 and through first nine months of 2007 on pace for $90 million.

Eight straight quarters of sequential revenue growth. VRAD shifted into profitability in 2006.

2007 - Note that due directly to the fast rise in fair value of VRAD, they've booked pretty hefty stock compensation expenses in 2006/2007. VRAD does not have excessive options and this line will fall significantly post-ipo. I've smoothed out stock compensation expense a bit for 2007 numbers as if they were a public company at IPO price for all of 2007. Revenues on track for $90 million, a 67% increase over 2006. The largest expense line is physician cash expenses at 45%. As this is an operation that depends entirely on their physician radiologists, this expense line will always be significant at the 45% level of revenues. Operating margins which have been increasing annually should be 14%. Net margins should be 9%. Earnings per share of approximately $0.50. On a pricing of $17, VRAD would trade 34 X's 2007 earnings.

2008 - VRAD has shown an ability to grow revenues sequentially, I don't see why that should halt in 2008. If we assume conservative sequential quarterly growth through 2008, I would not be surprised to see VRAD hit $120-$125 million in revenues. This would be a 36% increase over 2007 and might be a tad conservative as VRAD has increased revenues 100% and 67% in '06 and '07 respectively. Still, I'd rather be conservative when forecasting. Operating margins should improve a bit as VRAD gets some economies of scale on SGA if not on physician radiologist cash expenses. At 16% operating margins, VRAD should earn $0.75 - $0.80. On a pricing of $17, VRAD would trade 22 X's 2008 estimates.

A quick look at NHWK and VRAD

NHWK - $664 million market cap. Trading 4.3 X's '07 revenues and 23 X's 2007 earnings with a 67% revenues growth rate in 2007. NHWK currently expecting a 40% growth rate in 2008 and trades 17 X's 2008 earnings.

VRAD - $279 million market cap at $17. Would trade 3 X's '07 revenues and 34 X's '07 earnings with a 67% revenue growth rate in 2007. VRAD conservatively should have a 36% revenue increase in 2008 and would trade 22 X's conservative 2008 estimates.

VRAD should book $125 in 2008 revenues compared to NHWK's $215. Both are solid operations filling an obviously desired/needed niche. I write obviously as the revenue growth for each has been been quick and fast. NHWK ipo'd in 2/06 at a $387 million market cap with an expected $0.50 in earnings and $90 million in revenues, exactly what VRAD will hit in 2007. VRAD is a recommend here. IPO here looks like a 'junior NHWK' except at a $100 million lower market cap in range than NHWK priced 18 months ago. I'd expect VRAD to follow a very similar path as NHWK and grow market cap into the $600 million range two years after ipo. Solid recommend in range.

December 14, 2007, 6:40 pm

XIN - Xinyuan Real Estate

Analysis on every deal every year at: http://www.tradingipos.com

XIN - Xinyuan Real Estate

XIN - Xinyuan Real Estate plans on offering 20.1 ADS (assuming overallotments) at a range of $13-$15. Merrill Lynch is leading the deal, JP Morgan and Allen & Company co-managing. Post-ipo, XIN will have 74.5 ADS equivalent shares outstanding for a market cap of $1.043 billion on a pricing of $14. Nearly all ipo proceeds will be used to acquire land use rights for future property development projects.

Chairman and CEO Yong Zhang and Director Yuyan Zang will jointly own a combined 42% stake in XIN post-ipo.

From the prospectus:

'We are a fast-growing residential real estate developer that focuses on Tier II cities in China, which are a selected group of larger, more developed cities with above average GDP and urban population growth rates.'

We've had one successful Chinese real estate ipo in 2007, EJ. Where EJ is a real estate services company, XIN is a real estate developer. Simplified, XIN builds housing developments, EJ markets and sells housing developments.

Unlike many China ipos, XIN has actually been around for awhile commencing operations in 1997. From '97-'05, XIN focused operations in Zhengzhou, the provincial capital of Henan Province. Since they've focused on expanding to other cities. In addition to Zhengzhou, XIN currently has operations in four other 'Tier II' China cities Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, and Suzhou in Jiangsu Province.

Approximately 40% of 2007 revenues have been derived in Zhengzhou.

XIN focuses on large scale residential projects typically multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings. Target buyers of their development come from the growing Chinese middle class. From the prospectus, 'We provide standardized mid-sized units, typically ranging from 50 square meters to 100 square meters in size, at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles.'

Land is generally acquired through public auctions. XIN focuses on unencumbered land auctions which allow them to commence construction quite soon after land acquisition. As of 9/30/07, XIN had seven active residential housing construction projects with a total gross floor area (GFA) of 770,781 square meters. In addition as of 9/30/07, XIN had in the planning stages an additional seven projects with a total GFA of 1,282,498 meters. This total does not include 12/4/07 governmental auction win for a parcel of land located in Kunshan Town of Suzhou City with a site area of 200,000 square meters.

To date XIN has completed 13 projects with a total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, 99.6% of which have been sold. Impressive sell rate, it would appear XIN is able to sell their projects out quite soon after completion.

The draw here is similar to many other Chinese ipos of the past few years targeting the growing middle classes. As XIN states, 'Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for quality housing in many cities across China.'

XIN plans to continue to expand operations to additional 'Tier II' Chinese cities they feel have an underdeveloped residential real estate market for the middle classes.

PRC - Recently the PRC has put in place initiatives to slow the booming Chinese real estate market. While most of these are directed at high end residential real estate, the PRC has also removed middle class residential construction from the 'encouraged' category. The latter will continue to be a 'permitted' type of investment. In addition for residences over 90 square meters total GFA, the down payment must equal 30% of the purchase price. XIN's residences tend to be smaller however, it should be noted that the PRC appears intent on cooling the hot China real estate market at least somewhat. XIN states in the prospectus: 'We believe that these policies have negatively affected our sales to a lesser extent than other property developers that focus on the luxury sector, because our business model focuses on the development of mid-priced housing, which is consistent with these policies'.


XIN funds a portion of their land purchases through debt. Post-ipo XIN will have approximately $233 million in debt. Compared to US homebuilders, the leverage here is fairly low. Going forward though keep an eye on XIN's debt situation. If their business slows, the debt levels will tend to rise.

XIN does not anticipate paying dividends.

On a pricing of $14, XIN will trade 3 X's book value.

Historically the cost of revenues for XIN has broken down to 1/3 land use rights and 2/3 construction costs.

Unlike many Chinese ipos we've seen, XIN is heavily taxed all along their various phases from land acquisitions through construction to sales. XIN annually pays a Corporate Income Tax, a Land Appreciation Tax, a Deferred Tax expense and an Uncertainty Tax expense. Reads a bit like a cable bill. Note that the 'Uncertainty Tax' expense is an accounting maneuver to attempt to better capture deferred taxes owed.

Revenues have grown briskly. Revenues in 2005 were $62 million, in 2006 $142 million and through 9 months on pace in 2007 for $310 million. XIN had a monster 9/30/07 quarter.

XIN has been profitable since at least 2004.

*Note* - Due to the nature of the business quarterly results have historically been quite choppy. This will definitely continue in the future making projections here quite difficult.

2007 - XIN is on pace for $310 million in revenues, a 118% increase over 2006. XIN has $120 million in revenues alone in the 9/30/07 quarter. Note that XIN completed construction on two major projects in the 9/07 quarter. I've factored in a sequential slowdown in Q4 and they still look to double 2006 revenues. Gross margins should be 31%, operating margins 25%. Plugging in debt servicing and taxes, net margins should be 15%. Earnings per share should be $0.65. On a pricing of $14, XIN would trade a fully (and heavily for a China IPO) 22 X's 2007 earnings.

2008 - Due to the choppiness factor, forecasting 2008 is somewhat challenging. However XIN has a significant amount of active construction projects of which they'll be deriving 2008 revenues. They've also substantial land already purchased and planned for construction. Assuming China's real estate market and economy continue to grow nicely, XIN is poised for a strong 2008. I would anticipate XIN's 2008 will more resemble the 9/30/07 quarter of $120 million in revenues than the 3/31/07 quarter of $23 million in revenues. Note that XIN's gross margins have not been nearly as strong in their newer geographic areas so I would not look for a gross margin increase in 2008. I would not be surprised to see XIN book $450 million in 2008 revenues. Note that this is conservative as it breaks down to $110-$115 million in quarterly revenues, below their $120 million in the 9/30/07 quarter. While XIN does pre sell a large percentage of their properties, they are not anticipating completion on any projects until the second half of 2008. Assuming $450 million in revenues, XIN could earn in the $1 per share ballpark. *Note* - this is nothing more than an educated guess because 1) XIN had an 'outside the box' strong quarter just prior to ipo and 2) they operate in a segment that is traditionally quite choppy quarter to quarter.

Conclusion - XIN is trending strongly right into their ipo. They booked a fantastic quarter just prior to this offering fueled by the completion of two major residential projects. China residential real estate has not seen the difficulties of the US real estate market, so it is entirely reasonable to expect XIN to have a solid 2008. Home construction is notoriously cyclical in the western world, there is definite reason to assume it will be at some point in China also. On ipo though, XIN is not all that leveraged and the balance sheet looks quite lean for the sector. XIN is one of the stronger ipos from China in 2007. Recommend in range and a bit above, good looking China real estate ipo.

November 30, 2007, 6:30 pm

ENSG - Ensign Group

Pre-ipo analysis on 200+ ipos a year before they price at http://www.tradingipos.com

disclosure: tradingipos.com does have a position in ENSG at an average price of 15 3/4's.

ENSG - Ensign Group

ENSG - Ensign Group plans on offering 4 million shares at a range of $18-$20. DA Davidson and Stifel are co-lead managing the deal. Post-ipo ENSG will have 20.5 million shares outstanding for a market cap of $390 million on a pricing of $19. Ipo proceeds will be used to acquire additional facilities, to upgrade existing facilities, pay down debt and for working capital and other general corporate purposes.

CEO and President Christopher R. Christensen will own 20% of ENSG post-ipo.

From the prospectus:

'We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho.'

ENSG owns or leases 61 facilities. All are skilled nursing facilities while four also are assisted living facilities. ENSG owns 23 facilities and leases 38 others. They've options to purchase on 16 of those 38. Current bed count is 7,400. ENSG has aggressively grown via acquisitions adding 15 new facilities since 1/1/06. 31 of 61 facilities are in California, 13 in Arizona and 10 in Texas. Total occupancy rates for 2007 has been 78%.

Sector - The senior living and long-term care industries consist of three primary living arrangement alternatives, independent living facilities, assisted living facilities and skilled nursing facilities. ENSG operates primarily skilled nursing facilities, those that require the most resident care. Skilled nursing facilities provide both short-term, post-acute rehabilitative care for patients and long-term custodial care for residents who require skilled nursing and therapy care on an inpatient basis. ENSG estimates the skilled nursing facility market in the US is a $100 billion segment annually. ENSG believes the skilled nursing facility segment stands to grow going forward due to increasing life expectancies and the aging population.

Medicare is a federal health age based program, Medicaid is a federal health needs based program. ENSG relies extensively on Medicaid/Medicare reimbursements.

Approximately 44% of all revenues are derived from Medicaid, 33% from Medicare. Simplified Medicare will generally cover skilled nursing facility stays up to 100 days annually. After day 100, patients’ payment is received from either the patient, private health insurance or Medicaid. With 44% of all revenues derived from Medicaid, it is fairly safe to state a large portion of ENSG's residents are shifted from Medicare to Medicaid at some point for the bulk of their annual stay. The Center for Medicare & Medicaid Services (CMS) sets the Medicare rates. Skilled nursing centers have fared relatively favorably with the CMS this decade, however payments rates have been frozen for FY '08 due to budgetary attempts to cut overall Medicare/Medicaid costs. Medicaid is a bit different animal. Medicaid funding across the board has seen freezes and/or decreases due to federal and state budget issues. Medicaid is primarily funded by the Federal government, but disbursed by the states. Keep in mind that ENSG will annually be at the whim of federal Medicare rates set for skilled nursing centers and Medicaid disbursement rates set by the states. With runaway health care costs, trends for annual increases in Medicare/Medicaid reimbursement rates are not favorable going forward.


*ENSG will have approximately $1 per share in cash (minus debt) post-ipo. This is a good sign. Usually roll-up type operations such as nursing facilities come public pretty significantly leveraged. ENSG's solid balance sheet on ipo will allow them to aggressively grow over the next 2-3 years. Expect ENSG to grow revenues much faster than the industry growth rate the next 1-2 years due to acquisitions. When looking at this type of ipo, balance sheet health is as important (if not more) than any other factor. Nursing facilities are both a slim margin and consolidating sector. A solid balance sheet post-ipo allows a company such as ENSG to not only flow more operating margin to the bottom line, but grow top/bottom line strongly first few years public. I like the balance sheet here post-ipo quite a bit.

ENSG does plan on paying a dividend. Based on the past 12 months, it appears the dividend will be approximately $0.04 quarterly. At $0.16 annually, ENSG would yield 0.8% annually on a $19 pricing.

3 X's book value on a pricing of $19.

Growth going forward will be driven by acquisitions as the current Medicaid/Medicare reimbursement environment is not favorable for significant rate increases. ENSG's operating margins are not going to increase in this reimbursement environment, in fact they've dipped slightly in 2007. This is an industry wide trend, not specific to ENSG. This environment makes it even more important for a strong balance sheet and lack of debt.

Revenues in 2005 were $301 million, 2006 $359 million and through the first three quarters of 2007 on pace for $409 million.

ENSG has had a net profit annually since at least 2002.

2007 - Revenues on pace for $409 million, a 14% increase over 2006. Gross margins 19%. Operating margins of approximately 8 1/2%. Net margins 5%. Earnings per share should be in the $0.90 - $0.95 range. On a pricing of $19, ENSG would trade 21 X's 2007 earnings.

2008 - I fully expect ENSG to utilize their solid balance sheet to acquire revenue growth. Based on third quarter revenues, a full year operating current facilities should increase revenues by 10%. I think acquisitions could add another 5%, for a 15% top-line revenue growth. Gross margins will remain 19%, operating margins may increase slightly filtering down to a small net margin increase. With this sector it is extremely difficult to grow margins so you're just never going to see operating margins expand too much here no matter the revenue growth. With a 15% top-line growth rate, ENSG should earn $1.20 per share. On a pricing of $19, ENSG would trade 16 X's 2008 earnings.

Recent IPO SKH operates in the same sector as ENSG. The big difference between the two is SKH is heavily leveraged while ENSG post-ipo will have more cash on hand than debt.

SKH - $588 million market cap, operates approximately 80 skilled nursing facilities. Currently trading less than 1 X's 2008 revenues and 17 X's 2008 earnings. SKH has approximately 450 million in net debt on the books, much of it high interest debt. SKH has net margins of 3 1/2%.

ENSG - $390 million market cap on a $19 pricing. SKH operates 61 skilled nursing facilities. At $19 would trade less than 1 X's 2008 revenues and 16 X's 2008 earnings. ENSG has $1 per share net CASH on hand post ipo. ENSG has 5% net margins.

Conclusion - ENSG operates in a highly regulated sector experiencing rate freezes or lowered increases going forward. These factors make it nearly impossible for an operation such as ENSG to expand their margins. Top and bottom line growth therefore will come from acquisitions. With this type of business and in this sector you really want to look at operations that have low debt levels which will allow them A) filter more of their slim operating margins to the bottom line and B) allow them plenty of room to grow through acquisitions. I like the balance sheet here and I like the valuation at 16 X's 2008 revenues. Due to the constraints on the sector mentioned above, you don't want to pay too hefty an initial multiple here, but ENSG looks good to me in range. I would especially be interested here on a low pricing/open. Recommend.

November 16, 2007, 11:44 am

OZM - Och-Ziff Capital Management

pre-ipo analysis for 200+ ipos a year at http://www.tradingipos.com

OZM - Och-Ziff Capital Management

OZM - Och-Ziff Capital Management plans on offering 41.4 million shares at a range of $30-$33. In addition OZM is also making a private offering to Dubai International Capital(DIC). the private offering will constitute an overall 9.9% stake in OZM and the price will be the equivalent of the underwriters discount pricing of OZM's public offering. Based on all ownership stakes post ipo, DIC will purchase approximately 38.2 million shares at a price of $1.50 below ipo price. Goldman Sachs and Lehman are leading the deal, thirteen other firms co-managing. Post-ipo, OZM will have a total of 390.4 shares outstanding for a market cap of $12.4 billion on a pricing of $31.50. All ipo proceeds from both offerings will go to insiders. The insiders will reinvest those proceeds(in their own name) back into Och-Ziff funds.

Daniel Och will own 49% of OZM post ipo. Mr. Och will retain voting control via a separate share class.

In addition to insiders(OZM principals) receiving all ipo proceeds(approximately $2.2 billion), they also declared a special distribution of $750 million payable to them. This payment was made by laying debt onto the back of the soon to be public OZM. Boy I'm so weary of these 'business as usual' shenanigans. Apparently it is not enough to be wealthy beyond wildest dreams, one also needs to pile debt onto the company just prior to coming public to pay yourselves even more money. At some point the market needs to say 'enough' to these greed grabs. Mr. Och will have an equity stake in the public OZM of approximately $6 billion, not counting the approximately $1 billion in cash he'll receive from this offering. Was the extra $750 million(of which Mr. Och stands to receive $350 million) really needed too???? I'm not touching this ipo simply for this reason. I'm tired of these shenanigans with these things. If they're this greedy pre-ipo how well will they treat their silent partners, those buying their public shares? Also Mr. Och will receive deferred income distributions totaling ans additional $1 billion during a three-year period beginning in 2008.

From the prospectus:

'We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $30.1 billion of assets under management for over 700 fund investors as of September 30, 2007.'

OZM has been in operations 13 years. OZM is a hedge fund and operation focusing on "Risk-adjusted returns". Risk adjusted returns are based on the income generated from primary investment positions while also being hedged to limit risks from market changes, interest rate fluctuations, currency movements, geopolitical events and other risks. OZM goes out of their way to state they look for long term value and to mitigate risk.

OZM derives revenues from management fees and incentive income. Management fees are based on total assets under management and average 1.50% - 2.50% of assets. Incentive income is realized and unrealized gains generated by the funds that managed by OZM. Incentive income is typically equal to 20% of the net realized and unrealized profits earned. Pretty standard hedge fund revenue structure. OZM's partners(managing directors) receive nearly all their income payments from participation in the profits of our entire business.

Assets under management have grown impressively. OAM had $11.4 billion under management end of 2004, $15.6 end of 2005, $22.6 end of 2006 and $30.1 billion on 9/30/07.

OZM's flagship global multi-strategy fund is the OZ Master Fund. **Note** - The OZ Master Fund has lagged the S&P 500 in each of the following periods: one year performance 3% behind S&P 500; three year performance 0.6% lower than S&P 500; five year performance 1.6% behind the S&P 500. The OZ Master fund has averaged a 13.9% return over the past five years compared to a 15.5% average annual return for the S&P 500. An S&P 500 ETF held the past five years would have returned more than the OZ Master Fund which takes a % of assets as well as a % of gains annually as revenue.

The OZ Master fund holds approximately 63% of OZM's assets under management.

OZM had a losing quarter overall in their funds for the quarter of 9/30/07. This was the first quarter for OZM to not experience appreciation of assets since spring of 2003.


$750 million in debt-post ipo. As noted ipo all this debt was taken on to pay insiders a 'special dividend.'

OZM intends to pay quarterly dividends. They state, 'Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of Och-Ziff Operating Group annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the operation and growth.' As OZM does not factor in incentive income until the year end, assuming OZM's funds are net positive annually the fourth quarter distribution stands to be larger than the other three quarters.

Note - OZM is heavily invested in their own funds. This greatly increases OZM's profit when their funds appreciate as they've done annually the past five. However this also means losses can hit even harder. OZM derives approximately 2/3's of their operating revenues annually from incentive fees. These incentive fees are based on a percentage of annual gains in OZM's funds. OZM's gains from investing in their own funds has the past 7 quarters equaled 1/2 their operating profit. If OZM had a flat year overall in their funds for 2006 for example, they would have had nearly $1 billion less in inventive fees and funds gains putting them deeply in the red for the year. You do not want to be in OZM if they ever have a bad year. Not only will there be no distributions, the losses per share will be pretty staggering. **Essentially the public OZM is making a significant bet that OZM's funds can continue to perform well year in and year out. Also OZM's managing directors also appear to have much of their net worth tied up into OZM equity and investments in OZM funds. Everyone involved here is making a big bet OZM continues to perform. Keep in mind, if OZM has a flat year in their funds, dividends and earnings will disappear pretty quickly.

As with Fortress and Blackstone, OZM's financials are intricate and difficult to grasp.

2006 - Total revenues were $972 million. 2/3's of this revenue came from incentive fees, 1/3 from management fees. Compensation and benefits were 50% of revenues. Gains from investments in their own funds added $242 million to the bottom line. Pre-tax, OZM earnings $1.50 per share. If we plugged in taxes, earnings would be approximately $1 per share.

2007 - As OZM does not factor in incentive fee revenues until after the fourth quarter closes, net here is negative through nine months. Note that this is a change from the first nine months of 2006 directly due to a pretty significant bump up in compensations expenses. If we're to factor in incentive fees for the full year 2007, I would imagine revenues will be closer to $1.2 billion. Earnings per share should be in the ballpark of 2006, again due to a sharp increase in compensation expenses. OZM looks as if they'll earn again in the $1-$1.50 ballpark. Note that these numbers are highly fluid and much depends on the amount in incentive fees, OZM books on the close of 12/31/07.

Due to all the accounting changes as well as equity distributions and compensation and benefits, OZM's pre-ipo financials are dense and tricky. going forward keep in mind OZM is heavily leveraged in their own funds in the form of actual investments in their funds and the heavy reliance on incentive fees. As long as OZM's funds post solid annual gains, OZM will put on a solid bottom line. If OZM's funds have a hiccup in a given year, OZM can easily slip into the red on the bottom line.

Conclusion - complex dense financial statements in a deal in which insiders are making out extraordinarily well. What strikes me is that in the one, three and five year periods, OZM's flagship fund has underperformed the S&P 500. Why? Well because OZM takes not just 2% of assets under management for fees, but they also grab 20% of the profits annually. Why pay someone this much when your return is lagging the S&P 500? OZM has done well growing assets under management in the hedge fund boom this decade. At $12 billion+ market cap though, there are enough question marks and negative to keep me away in range.

November 11, 2007, 10:58 am

GRO - Agria Corporation

all ipo pieces completed and available to subscribers before pricing and open. http://www.tradingipos.com

GRO - Agria Corporation

GRO - Agria Corporation plans to offer 19.7 ADS(assuming over-allotments) at a range of $14.50-$16.50. Insiders will be selling 5.5 million ADS in the ipo. Credit Suisse is lead managing the deal, HSBC, Piper Jaffray and CIBC are co-managing. Post-ipo GFO will have 65.5 million ADS equivalent shares outstanding for a market cap of $1.02 billion on a $15.50 pricing. IPO proceeds will be used to fund capital expenditures, for R&D and for general corporate purposes.

An entity co-controlled by Chairman of the Board and CEO Guanglin Lai and Director Zhaohua Qian will own 60% of GRO post-ipo.

From the prospectus:

'We are a fast-growing China-based agri-solutions provider engaged in research and development, production and sale of upstream agricultural products.'

Yes yet another China ipo. GRO sells corn seeds, sheep breeding products, and seedling products. corn seeds account for 48% of revenues, sheep breeding products 40% and seedling products 12%. Gross margins for each segments are: corn seeds 41%, sheep breeding products 73% and seedling products 79%.

GRO has access to 27,000 acres of farmland in seven provinces of China, of which approximately 23,000 acres are used for production of corn seeds, approximately 3,700 acres are used for sheep farming and breeding activities and the remainder are used for seedling production and research and development activities. Note that GRO does not own their own farmland, as apparently they are legally prohibited to own farmland. Instead they rely for the most part on contractual agreements with village collectives. GRO owns 17,000 sheep and sells frozen sheep semen, sheep embryos and breeder sheep. Through the first six months of 2007 GRO sold approximately 14,400 tonnes of corn seeds, 10.6 million straws of frozen sheep semen, 4,980 sheep embryos, 1,760 breeder sheep, 14,400 Primalights III hybrid sheep and a total of 11.6 million seedlings. Seedling products predominantly include blackberry, raspberry, date and pine bark seedlings.

Sector - China's agricultural sector is growing, note however the growth has lagged China GDP growth in recent years. The agricultural sector accounts for 10% of China's GDP and has grown 8% average annually the past five years. China is the world's second largest corn producer accounting for 19% of worldwide-corn production. China has the largest sheep flock in the world at an estimated 171 million sheep.


$2 per share in cash post-ipo, no debt.

3 X's book value on a pricing of $15.50.

While corn seed still accounts for 45%-50% of revenues, corn seed revenues have been stagnant for 2 1/2 years now. Revenue growth has been driven by sheep breeding revenues and seedling products.

Annual revenues have been: 2004 - $20 million; 2005 - $50 million; 2006 - $60 million; 2007 - on pace for $65 million.

GRO has been profitable since 2002.

Note that revenues are seasonal with the June and December quarters annually being the strongest. As GRO sells barely any corn feed in the September quarter, that Q is by far the weakest. Expect a seasonally weak report when GRO releases their 9/30/07 quarterly earnings report.

2007 - Revenues appear on pace for $65 million, a 5%-10% increase over 2006. Gross margins should be 57%. GRO has very little operational expense as they contract with village collectives for most of the work, which is factored into gross margins. Actually looking at the strong gross margins here for GRO, I'd think these village collectives might want to consider adjusting their contracts! Operating expense ratio is just 6%. Operating margins should be 51%. Tax rate thus far has been 0%. However it appears going forward GRO's tax rate on earnings will be in the 10% range, so we'll plug that percentage into 2007 earnings. 46% net margins, earnings per share of $0.45-$0.50. On a pricing of $15.50 GRO would trade 33 X's 2007 earnings.

Conclusion - $1+ billion market cap for a farmings operation that will book $65 million in 2007 revenues, just 10% higher than 2006? The net margins here are strong, but just 10% top line growth and nearly 14 X's revenues for an agricultural operation that has village collectives producing corn seed, sheep and seedlings for them seems awfully excessive. China ipos have been pretty hot in 2007 and we've seen a number of good ones. GRO looks fine as a company, the valuation here seems way off however. Most of the high multiple, highly successful China appears have been sector leaders benefiting directly from the urbanization and growing affluence of the middle class in China. While one could make a tangential case that GRO benefits from the growing China individuals affluence, it is still not a direct link. This is a pass for me, as I've no interest in paying for a $1+ billion cap agricultural operation with $65 million in revenues. In range, this seems like a very lofty price to pay for an operation responsible for producing corn seed, various sheep breeding products and seedlings. Pass in range for me.

November 2, 2007, 10:53 am

GXDX - Genoptix

pre-ipo analysis on every deal at http://www.tradingipos.com

disclosure: tradingipos.com does have a position in GXDX at anaverage of 24 1/4.

GXDX - Genoptix

GXDX - Genoptix plans on offering 5 million shares at a range of $14 - $16. Insiders will be selling 700k shares in the deal. Lehman is leading the deal, BofA and Cowen co-managing. Post-ipo GXDX will have 15.6 million shares outstanding for a market cap of $234 million on a pricing of $15. IPO proceeds will be used to 1) increase personnel, (2) establish a second laboratory facility and expand backup systems, (3) repay all outstanding indebtedness and (4) pursue new collaborations or acquisitions.

Enterprise Partners will own 20% of GXDX post-ipo.

From the prospectus:

'We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists, or hem/oncs. Our highly trained group of hematopathologists, or hempaths, utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patients condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.'

Cancer laboratory diagnostic operation focusing on malignancies of blood and bone marrow. There are approximately 800,000 patients in the United States living with malignancies or pre-malignant diseases of the blood and bone marrow, with more than 140,000 new cases being diagnosed each year. 60% of GXDX diagnostic cases are bone marrow, 40% blood-based.

In order for hematologists and oncologists to make the correct diagnosis, develop therapies and monitor therapy effectiveness, they require highly specialized diagnostic services. That is where GXDX comes in. 2007 Medicare reimbursement rates average $3,000 for typical bone marrow diagnostic cases and range from $100-$3000 for blood based cases. GXDX estimates there are 350,000 bone marrow procedures performed in the US annually and each one requires at least one bone marrow diagnostic test. GXDX believes the bone marrow diagnostic test market is approximately a $1 billion market in the US; 350,000 procedures with at least one diagnostic battery done on each averaged $3,000 a pop. In addition to the bone marrow diagnostic tests, GXDX believes there are 200,000 blood-based diagnostic tests for liquid and solid tumors performed annually in the United States.

Traditionally these tests have been performed by hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories. GXDX believes historically none of these testing entities effectively served the needs of community based hematologists and oncologists. GXDX states their diagnostic testing services as follows:

'We believe our differentiated services offer the technical expertise of an esoteric testing laboratory, the customer intimacy of a hospital pathologist and the state-of-the-art technology of an academic laboratory, while maintaining a specialized service focus that is not typically available from national reference laboratories that cover a broad range of medical specialties.'

The key differences appear to be:

1) Personalized and comprehensive approach - GXDX assigns a single hempath to guide the diagnostic process for each patient file. This hempath is the person that is responsible for guiding the sample through all diagnostic services and for communication with the hem/oncs. Hematologists and oncologists speak directly to the hempath if and when needed and desired. This appears to be a key differentiator with GXDX and the testing labs that have traditionally provided bone marrow cancer and blood cancer testing.

2) More than just test results - GXDX hempaths provide hem/oncs with a clear, concise and actionable diagnosis rather than just providing individual test results. GXDX is sort of a full service diagnostic shop, not just a testing company.

GXDX two service offerings are COMPASS and CHART. With the COMPASS service offering, the hem/onc authorizes the hempath at GXDX to determine the appropriate diagnostic tests to be performed, and the hempath then integrates patient history and all previous and current test results into a comprehensive diagnostic report. As part of their CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. Approximately 50% of test requisitions in 2007 have been for both the COMPASS and CHART services.

Cartesian Medical Group - GXDX contracts with Cartesian Medical Group to provide all hempaths and an internal medicine specialist. All GXDX hempath physicians are employees of Cartesian, contracted to work for GXDX in GXDX labs. There are approximately 1,500 hempaths licensed in the US with just 75 newly receiving board certification annually.

GXDX estimates their current bone marrow testing market share is 3%.

54% of revenues come from private insurance, including managed care organizations and other healthcare insurance providers, 43% from Medicare and Medicaid and 3% from other sources.


$5 per share in cash post-ipo, no debt. Note that GXDX will be using $2-$3 per share in cash of ipo monies to construct a second lab testing facility and to hire personnel.

Often these small medical ipos come public way too early in their revenue profit curves. The reason is simple: They need the ipo cash to fund growth attempts. I like here that GXDX did not come public before generating significant revenues and turning a nice operating profit. Personally I'd like to see much more of this as it really gives us far more information to make a good buying decision. I am thrilled that GXDX did not attempt to come public in 2005 when revenues were still in development stage and there was doubt as to whether GXDX would be successful in grabbing bone marrow cancer and blood cancer diagnostic services from the traditional sources. Here in the fall of 2007, we can clearly see GXDX has been wildly successful, very quickly grabbing market share in this niche.

Revenue growth has been nothing short of phenomenal. Start-up stage in 2004 (GXDX did not begin offering their services until 3rd quarter of 2004), revenues in 2005 were $5 million, in 2006 $24 million and on pace in 2007 for $55-$60 million. 10+ straight quarter of sequential revenue growth. *At just a $234 million market cap this revenue growth rate in a very specialized niche is reason enough to recommend this ipo very strongly.*

It gets better too. GXDX moved into operational profitability in the first quarter of 2007 and in the 6/30/07 quarter booked operating margins of 28%. For a company attempting to grab a foothold in a highly specialized niche, you nearly always see them spending massively on sales & marketing to grow revenues as fast as GXDX. Hasn't been the case here, there appears to be extremely strong organic demand for GXDX services. Sales and marketing expenses were just 20% of revenues in the 3/07 quarter and dipped to only 17% of revenues in the 6/30/07 quarter. In hard dollars, GXDX doubled revenues in the 6/07 quarter when compared to the 12/06 quarter yet spent just the same each quarter on sales and marketing expenses. This is perfect in what you want to see with small fast growing ipos.

The three paragraphs above are reasons to get very excited about this GXDX ipo as you rarely see all these highly positive combinations in one ipo, let alone an ipo that was in start up stage just 3-4 years prior. This is just outstanding stuff here, this GXDX ipo in range is a 'goose bump' ipo.

Provisions for doubtful accounts has run around 4% in 2007.

GXDX has sufficient tax loss carryovers to cover the bulk of 2007's earnings. We'll take a look at earnings untaxed and also plugging in normalized taxes as GXDX should begin normal tax rates by mid 2008.

2007 - Revenues are on track here for $55-$60 million. Gross margins are increasing quarterly and full year should be 61% for the full year. Operating expense ratio is dropping quarterly as well. Increasing revenues, coupled with increasing gross margins and lowering operating expense ratios is a recipe for fast bottom line growth. Full year operating expense ratio should come in at 34%. Operating margins should be 27%. Untaxed net earnings will be around $1 per share. Plugging in full taxes GXDX should earn $0.65 in 2007.

Pricing range of $14-$16 is much too low here for all the positives. GXDX has plenty of room to continue growing as they're going to make $0.65 in only their third full year of operations and garnering just 3% of the bone marrow cancer testing segment. Strong recommend in range, this is the one to pay up significantly for as well. Fantastic ipo.

October 28, 2007, 9:21 am

PZN - Pzena Investment Management

We're looking at a very busy ipo calendar with 25 on the schedule the first two weeks alone. We're the best spot on the web to get a complete analysis write up on every deal pre-ipo. We've also an active forum focused on entries/exits as ipos trade throughout their first year public. We also provide pre-open indications for all nasdaq ipos, giving subscribers up to the minute open indications the day ipos debut.


PZN - Pzena Investment Management

PZN - Pzena Investment Management plans on offering 7 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs and UBS are lead managing the deal, BofA, Fox-Pitt Kelton, JP Morgan an KBW are co-managing. Post-ipo PZN will have 65 million shares outstanding for a market cap of $1.105 billion on a pricing of $17. IPO proceeds will be used to redeem shares from non-employee insiders. Essentially think of the shares offered in this deal as being offered by insiders as PZN will retain no ipo monies.

CEO Richard S. Pzena will own 40% of PZN post-ipo and will retain full voting control post-ipo due to a separate share class.

From the prospectus:

'Founded in late 1995, Pzena Investment Management, LLC is a premier value-oriented investment management firm with a record of investment excellence and exceptional client service.'

We've seen a few investment management firms ipo this decade(notably Calamos), however I believe this is the first value-oriented firm coming public in a longtime. Most of the management firms that have accessed the public markets via ipo over the years have concentrated more on growth investing.

As of 6/30/07, PZN managed $30.6 billion in assets. Revenues are generated on advisory fees earned on assets under management. For these type firms, the level of profits and growth are directly tied to the size and growth of assets under management. PZN earns about 1/2 of 1% annually on assets under management. The goal of PZN and those of their ilk is to invest those assets in a way that will generate strong annual gains as well as attract new money inflows to their funds.

PZN invests strictly on a value oriented approach, eschewing growth metrics. They've ten distinct value oriented strategies that differ by market cap and geographic focus. As of 6/30/07 PZN managed separate accounts on behalf of over 375 institutions and high net worth individual investors and acted as sub-investment adviser for twelve SEC-registered mutual funds and ten offshore funds. PZN has seen net-inflows annually each of the past five years.

PZN's value investment philosophy can be summed up as follows:

'we seek to make investments in good businesses at low prices...we are focused on generating excess returns over the long term.'

Asset growth has been impressive. On 12/31/03, PZN managed $5.8 billion in assets. They grew to $10.7 in 2004, $16.8 in 2005, $27.3 in 2006 and $30.6 as of 6/30/07. It should be noted that the first half of 2007 saw lowest dollar amount of net inflows since 2004. Net inflows the first half of 2007 were $1.3 billion, well below the first half of 2005 and 2006.

PZN's four main investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have outperformed their benchmarks by 3%-5% since inception. Note that while PZN underperformed during the bull run of the late '90's, they outperformed massively in the difficult markets of 2000-2002. Since 12/31/95, PZN has easily outperformed both the S&P 500 and the Russell 1000 value index.

John Hancock Advisers - Part of PZN's rapid growth the past three years has been due to a strategy of forming strategic relationships with 'sub-advisers', essentially managing the assets of investment funds. PZN has a close relationship with John Hancock Advisers managing mutual funds for Hancock. PZN acts as the investment 'sub-adviser'(read: asset manager) for the John Hancock Classic Value Fund, the John Hancock Classic Value Fund II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund. these four funds combine for approximately 1/3 of all of PZN's assets under management. For In the past 18 months 20%-25% of all PZN revenues have been directly from assets managed for John Hancock.

Note - The third quarter of 2007 was characterized by a period in which value stocks underperformed heavily, as evidenced by the huge losses sustained by quant funds heavily long value and short speculative stocks. The rough quarter for value stocks did not leave PZN unscathed. PZN's assets under management as of 9/30/07 declined $1.7 billion to $28.9 billion. PZN saw net inflows for the quarter of $0.4 billion, meaning markets losses were $2.1 billion for the quarter alone. In other words PZN lost 6.8% across the board on their investments in the third quarter of 2007 alone. Third quarter was a rough quarter for the value approach indeed.

PZN's value strategy - PZN generally invests in companies after they have experienced a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. PZN's approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. Obviously the risk here is that the trouble company is unable to manage a turnaround. PZN's portfolios are concentrated, generally with 30 to 60 holdings of companies underperforming their historical earnings. When PZN enters a troubled company, they usually enter in pretty good size due to the relatively concentrated approach. Top holdings as of 9/30/07 included Citigroup, Allstate, Freddie Mac, Wal-Mart, Alcatel-Lucent and on the international side ING and Mitsubishi.


PZN will have about $50 million in debt(minus cash on hand) on the books post-ipo. Not enough to make much of a difference with $29 billion in assets under management. Should be noted however that the debt was taken on to fund a dividend payout to insiders pre-ipo.

PZN does plan on paying dividends of $0.11 quarterly. At an annualized $0.44, PZN would be yielding 2.6% annually on a pricing of $17.

2006 - PZN had total revenues of $115 million. Again revenues are generated from advisory fees based on assets under management. Unlike the hedge fund/private equity ipos we've seen in 2007, PZN does not generate revenues based on a percentage of portfolio gains quarterly of annually. Compensation and benefits expenses were a fairly low 30%. This is well below investment banking/private equity/M&A ipos of the past few years, all with compensation expense & benefit ratios in the 50%-60% ballpark. General and administrative expenses are minimal here, just 7% of revenues. Operating margins were 62%. Plugging in full taxes, net margins were 40%. Earnings per share were $0.71. On a pricing of $17, PZN would trade 24 x's 2006 earnings.

2007 - As PZN derives revenues from total assets under management and not gains on those assets, the bad third quarter won't kill their year. That is, assuming the 3rd quarter of 2007 was an anomaly and not the beginning of a trend. PZN actually had a very solid third quarter operationally as assets under management for the quarter, while they slipped, were still near all time highs for PZN. Through 3 quarters, revenues for 2007 are on pace to be $148 million, a 29% increase over 2006. With the ipo, the compensation expense and benefits ratio will actually decrease as a chunk this expense line will be shifted to equity compensation and ipo shares. Expect this expense line to dip to 23% or so, which will boost operating margins. 2007 operating margins should increase to 70%, with 43% net margins. Earnings per share should be in the $1.00 ballpark. On a pricing of $17, PZN would trade 17 X's 2007 earnings.

Looking across the publicly traded asset managers, nearly all trade 20-25 2007 earnings, indicating a bit of a discount here with the PZN pricing range. I suspect this in part to the rough third quarter for PZN's investments. If you look at PZN's track record over the past twelve years, the odds appear in favor of the third quarter of 2007 being an anomaly and not the beginning of a trend. As long as that is the case, PZN is an easy recommend in range. One thing you do not want to see here however, is another quarter of a drop in assets under management. I applaud PZN for having the fortitude to come public in a quarter in which their investments got knocked around pretty good. If PZN is able to return to their historic levels of gains on assets under management, the pricing range here offers good value mid-term plus

October 18, 2007, 6:29 am

CML - Compellent Technologies

as always all ipo pieces on every ipo available to subscribers pre-ipo at http://www.tradingipos.com

CML - Compellent Technologies

CML - Compellent Technologies plans on offering 6.9 million shares at a range of $10-$12. Morgan Stanley is leading the deal, Needham, Piper Jaffray, RBC and Weisel co-managing. Post-ipo, CML will have 30.5 million shares outstanding for a market cap of $336 million on a pricing of $11. IPO proceeds will be used for working capital (to fund losses) and general corporate purposes.

El Dorado and Crescendo Ventures will each own 17% of CML post-ipo. El Dorado and Crescendo each made a mint back in the 1990's, being very early stage tech centric venture funds. It has been quite awhile since one of their companies has gone public I believe.

From the prospectus:

'We are a leading provider of enterprise-class network storage solutions that are highly scalable, feature rich and designed to be easy to use and cost effective.'

Storage Area Network (SAN) operation; CML has sold their SAN's to 600 enterprises worldwide. They call their SAN, 'Storage Center.' CML describes their Storage Center product as follows:

'Provides storage virtualization and speeds both common and complex storage tasks by reducing the time and effort required for many complex functions into a few simple point-and-click steps.'

Performance: CML is still losing money on the bottom line. Two things however make this an interesting little tech ipo: Recent swift revenue growth and industry acknowledgment of CML's high quality storage solutions. Rarely in the prospectus do you see a company make the sort of claim CML makes. To quote, 'We believe that Storage Center is the most comprehensive enterprise-class network storage solution available today, providing increased functionality and lower total cost of ownership when compared to traditional storage systems.'

Awards: In 2006, InfoWorld selected CML's Storage Center as "Best SAN" and Computer Reseller News selected CML as a top Storage Standout. Gartner, a third-party industry analyst, recently reported Compellent to be the fastest growing disk storage company in the world in 2006.

CML does not sell through a direct sales force, instead relying 100% on channel partners. CML also employs something they call a 'virtual manufacturing strategy' in which their hardware component suppliers ship directly to customers, merging in transit with CML's storage solutions. This helps CML cut down on inventory as supplier components are pretty much drop shipped to CML's customers at the same time as CML's storage products. CML believes relying on channel partners as well as 'virtual manufacturing' lowers their operating cost structure.

Sector - Data storage as been a growing need this entire decade as enterprises are creating vast amounts of data in need of storing. Traditional storage solutions were not developed for the continued need for updated storage. These storage systems were designed to take storage snapshots, storing all data at regular intervals. This has led to massive stored data duplication.

CML's solution: Similar to 'node storage' CML's solution is based on module 'Dynamic Block' storage architecture. A block is the lowest level of data granularity within any storage system. Dynamic Block Architecture allows CML to record and track specific information about each block of data and provides intelligence on how that block is being used. With the use of modules, CML's customers can easily add storage capacity as they go. CML's block system also allows for automatic movement of blocks of data between tiers of high cost, high performance storage and tiers of lower cost inactive storage. CML believes up to 80% of stored data falls into the 'inactive' area, allowing CML's customers to save money in storing this inactive data in a low cost way.

Virtualization: Dynamic Block Architecture enables end users to create a shared storage pool. Storage Center distributes workloads across the entire pool, automatically improving utilization of storage resources for all applications. CML believes their Storage Center product meshes well with the growing adoption of server virtualization. CML and VMware have a technology partnership. From CML's website: 'Compellent's innovative storage virtualization technology integrates with VMware to create an efficient virtualized data center. Using Compellent and VMware in unison enables customers to improve utilization and lower overall costs with flexible server.'

CML currently has eight pending patent applications in the United States, two patent applications filed pursuant to the Patent Cooperation Treaty and four pending foreign patent applications. The bulk of the pending patents relate to their Dynamic Block Architecture.

Historically CML has focused on small and medium sized business. One of their growth goals going forward is to expand their business into larger enterprises. One reason that CML has focused on smaller operations is that the SAN space is dominated by large, well established tech companies. CML's direct competition includes Dell, EMC, Hewlett-Packard, Hitachi, IBM and Network Appliance.

CML has also focused primarily on the US market. 89% of revenues through the first 6 months of 2007 were from enterprises based in the US.


$2 per share in cash, no debt.

CML began shipping product in February 2004. Since revenues have grown briskly. In 2004, CML booked a shade under $4 million in revenues, $10 million in 2005 and $23.3 million in 2006. Through the first 6 months of 2007, CML appears on pace to book $48-$50 million in full year revenues a 100%+ increase over 2006. Hefty losses have come with the swift revenue growth. CML lost $0.43 in 2006.

2007 - Revenues are on pace to hit $48-$50 million in 2007, a strong 110% improvement over 2006. Gross margins are in the 45%-50% range. CML is such a young company it is not at all surprising that operating expenses here have been hefty in relation to revenues. Operating expense ratio in 2005 was 133%, 76% in 2006 and 68% through the first 6 months of 2007. The good news is that operating expenses are moving in the right direction, growing at a slower pace than revenues. They're still quite robust however, meaning CML is not closing in on break-even just yet. It should be noted that in the 6/07 quarter, CML did have by far both their strongest revenue quarter in operating history and lowest operating expense ratio. Assuming each trend continues the back half of the year, I'd expect CML to hit 62% operating expense ratio for the full year 2007. Losses for 2007 on $49-$50 million in revenues should be approximately $0.20 - $0.25.

2008 - With a company this young growing revenues this swiftly, we'll need to see the last two quarters of 2007 before predicting 2007. Assuming strong growth continues, CML should be shifting towards operational break-even sometime the back half of 2008.

Positives here are pretty clear: Swift 'hockey stick' type revenue growth from recent start up stage, industry awards, and a technology partnership with hyperbolic tech growth company VMware. Really that is enough to recommend CML in range. There are numerous risks here going forward that need to be mentioned. CML is coming public a bit too prematurely in their revenue and profit curve. This greatly heightens the risks going forward. As CML relies on one product (Storage Center) for the bulk of their revenues, any end market hiccup in quarterly demand/revenues would lead to a rather significant drop in share price. This is a very difficult and competitive sector filled with large players more than willing to cut margins to increase their market share and drive smaller companies such as CML out of the game. One need only to look at recent storage ipo ISLN for an example of what can go wrong with these type of young fast growing ipos; it is the pace of that growth stalls. In addition CML has never booked a quarterly profit and losses should continue annually for full year 2008. All this means one does not pay up heavily for this ipo. However, with an initial market cap in range of $350m or so, CML is worth the risk here. Personally I'd be far more comfortable if CML had one more year of revenue growth while shifting closer to break-even before accessing the public markets.

Recommend in range due to swift growth from recent start-up stage, industry awards/recognition and the technology partnership with VMware.

October 5, 2007, 6:27 pm

DUF - Duff & Phelps

disclosure - as of date of blog post(10/05/07), tradingipos.com does have a position in DUF.

going on 2 1/2 years now, as always all ipo analysis pieces are available to subscribers pre-ipo.


DUF - Duff & Phelps

DUF - Duff & Phelps plans on offering 9.5 million shares (assuming over-allotments) at a range of $16.50-$18.50. Goldman Sachs and UBS are lead managing the deal. Lehman, William Blair, KBW, and fox-Pitt Kelton will be co-managing. Post-ipo DUF will have 33.8 million shares outstanding for a market cap of $592 million on a $17.50 pricing. Approximately 20% of the ipo proceeds will be used to repay debt, the remainder will go to insiders.

Vestar Capital will own 20% of DUF post-ipo, Lovell Minnick 16%. Both are private equity entities that came on board DUF to help fund the 2005 purchase of Corporate Value Consulting from Standard & Poors. In addition on 9/1/07, Shinsei Bank (Japanese) purchased a 10% post-ipo stake in DUF at $16.07 per share.

From the prospectus:

'We are a leading provider of independent financial advisory and investment banking services. Our mission is to help our clients protect, maximize and recover value. The foundation of our services is our ability to provide independent advice on issues involving highly technical and complex assessments of value.'

DUF's valuation advisory services are focused on four core areas: 1)financial and tax valuation; 2)mergers & acquisitions; 3)restructuring; and 4) litigation & dispute.

We've seen a number of financial advisory and/or investment banks come public the past few years. DUF is a bit of a different animal than the rest as they focus on the unique niche of valuation advisory services specializing in complex financial, accounting, tax, regulatory and legal issues.

DUF breaks down their business into Financial Advisory and Investment Banking segments. Financial Advisory segment provides valuation advisory, corporate finance consulting, specialty tax and dispute and legal management consulting services. Investment Banking Segment provides M&A advisory services, transaction opinions and restructuring advisory services.

This is a good spot to make an important point. With the slowdown in M&A activities over the past two months, this might not be an ideal time for a financial operation with an Investment Banking M&A component to come public. DUF however derives 75%-80% of annual revenues from their Financial Advisory segment (valuation advice) and 20%-25% from their Investment Banking segment. It should be noted that a chunk of those Financial Advisory segment revenues have come from valuation advisory services for newly acquired/merged operations. DUF believes the past 18 months that 45%-50% of their overall revenues were in some aspect related to M&A. This alone should be enough to proceed with a bit of caution on this DUF ipo.

DUF does not fall neatly into either of the financial advisory/IB ipos of the past two years in that they do not rely primarily on either direct M&A advisory services nor capital raising (IPO/secondary) activities.

DUF (with 21 offices, 6 being international) had approximately 400 clients in 2006. 36% of the S&P were a client sometime over the past 18 months and during that period 60%+ of revenues were derived from repeat customers. DUF is the industry's leading independent practice providing purchase price allocation services. Additionally, DUF is the number two independent provider of fairness opinions and a top ten global provider of restructuring services based on number of assignments.

Growth Drivers:

Sarbanes Oxley - In 2002 the Sarbanes-Oxley Act, among other things, has conflict of interest restraints preventing accounting firms from providing other non-audit advice. The Enron scandal was the primary driver behind this aspect of Sarbanes-Oxley. This has led to an increase in demand for independent non-audit accounting related services. DUF believes that Sarbanes-Oxley gives them a competitive advantage over the auditing focused accounting firms in securing valuation advisory clients as DUF has no audit related segment and thus no potential conflicts of interest that would run up against the constraints of Sarbanes-Oxley.

Fair Value Accounting - DUF believes they benefit from the shift towards Fair Value Accounting (FVA). FVA seeks to measure the current market value of a company's assets and liabilities as an alternative to the traditional historical cost method of accounting. Simplified for our purposes, FVA is an accounting snapshot of a company as it looks on current assessment of value, not historical. As DUF specializes in valuation, this shift to FVA standards and away from historical accounting standards plays into their favor.

Global M&A boom - This is the big question mark with this ipo. While DUF's direct M&A advisory arm is small when compared to their Financial Advisory segment, a huge chunk of their organic growth the past few years has been from giving financial advisory valuation services to newly acquired and merged companies. As M&A activity, particularly levered buyout M&A activity has slowed significantly the past few months, it remains to be seen what sort of impact this slowdown will have on DUF's advisory services. I would think the third quarter of 2007 will see a rather significant slowdown in DUF's direct and indirect M&A related revenues. Whether M&A activity resumes strength over the next twelve months will go a long way in determining the success of this DUF ipo.

Restructuring - On the flip side, if the economy slows DUF hopes that their restructuring and financial distress advisory services will grow in demand. I do like that DUF is playing both sides of the fence here with merger financial valuation advisory services as well as bankruptcy valuation services. On some level, valuation experts will be in demand no matter the economic climate.

Note - In the prospectus DUF stresses quite a bit on their non M&A related strengths. They do have that, however the transaction boom the past few years has been very good to DUF. It stands to reason that if the number of transactions in the global marketplace slow from 2006 and first half 2007 levels, DUF's revenue stream would be impacted on some level.


DUF will have approximately $1 per share in cash and debt each on the books post-ipo.

Compensation expense ratio - DUF is a people expertise operation, quite similar in this fashion to investment banking/M&A ipos such as EVR/GHL/TWPG etc...As such, compensation expenses are by far the highest expense line item. DUF's historical compensation expenses are a bit more difficult to decipher than most as they've made a few acquisitions over the past few years, most significantly being the private equity backed Corporate Value Consulting acquisition in 2005. These acquisitions have led to significantly deferred equity compensation expenses which have shown up in 2006 and 2007 (and will again for the final time in 2008). Folding out these acquisition related awards, DUF's compensation expense ratio is in line with other 'people expertise' operations at 50%.

*Note* - DUF does not fold out these acquisition related expenses in the prospectus, so the numbers below will look different than those in the prospectus. I feel the numbers below are more representative of the overall operation in 2006 and first half of 2007.

Much of DUF's revenue growth has been fueled by their own acquisitions and related M&A advisory services.

2006 - Revenues were $278 million. Compensation expense ratio was 50%. Operating margins were 11%, net margins 6%. Earnings per share were $0.50.

2007 - without seeing the impact of 3rd quarter M&A slowdown on results, I'm not going to try and forecast the full year here. This is one of those ipos that is coming right in the middle of a whole lot of confusion in their core growth driver niche and frankly I don't know how significant the M&A slowdown in the third quarter of 2007 will be on DUF. Instead let us take a look at the first half of 2007 and go from there. Revenues for the first half of 2007 were a very strong $171 million. DUF at the halfway point was on pace to blow away 2006 revenue numbers. Compensation expense ratio was 52%. Operating margins were 14%, net margins 8%. Earnings per share for the first half of 2007 were $0.42.

One would have to surmise that DUF's third quarter of 2007 will be stagnant at best, most likely a bit weaker than the first half of 2007. If we are a bit conservative on the back half of 2007, DUF earnings per share range should be $0.70 - $0.75 for the full year. On a pricing of $18.50, DUF would be trading 25 X's 2007 earnings. Again keep in mind due to the acquisition related deferred compensation expenses, GAAP earnings will be much smaller than this number. This number however is a truer indication of their current business.

Conclusion - This is a tough one. DUF had a very solid first half of 2007 fueled by prior acquisitions and a strong M&A environment. DUF is a niche leader in valuation advisory, a nice growing segment whose growth is not entirely fueled by M&A. I really would like to see DUF's third quarter earnings report. I think the abrupt global M&A slowdown in July had to have impacted DUF in some fashion. I like expertise related niche leaders however I would be very careful adding DUF on an aggressive open pending the third quarter earnings release. . M&A activity in the first half of 2007 was about as strong as it has ever been. That pace has slowed considerable thus far in the 2nd half of 2007. DUF's niche leadership is enough to recommend in range, however I'm not interested here on an aggressive opening until I see the third quarter earnings report.

September 21, 2007, 9:21 am

PRGN - Paragon Shipping

disclosure: Tradingipos.com does hold a position currently in PRGN. Full analysis pieces on every ipo for subscribers at http://www.tradingipos.com

PRGN - Paragon Shipping

PRGN - Paragon Shipping plans on offering 10.3 million shares at a range of $16-$18. UBS and Morgan Stanley are lead managing the deal, Cantor Fitzgerald and Dahlman Rose are co-managing. Post ipo PRGN will have 26 million shares outstanding for a market cap of $442 million on a pricing of $17. IPO proceeds will be used to assist in purchasing PRGN's fleet.

Chairman and CEO Michael Bodouroglou will own 20% of PRGN post-ipo.

From the prospectus:

'We are a recently formed company incorporated in the Republic of the Marshall Islands in April 2006 to provide drybulk shipping services worldwide. We acquired our current fleet of three Handymax and three Panamax drybulk carriers, which we refer to as our initial fleet, in the fourth quarter of 2006 and the beginning of 2007.'

PRGN's initial fleet of six drybulk vessels achieved daily time charter equivalent rates of $24,080 the first quarter of 2007. All six are currently employed under fixed rate time charters with an average remaining term of 19.6 months as of June 30, 2007. In addition to the initial fleet, PRGN has agreed to purchase an additional three drybulk vessels. These three have existing charters with an average remaining term of 28.1 months as of June 30, 2007.

PRGN plans to distribute cash flows quarterly to shareholders. Based on projections, the initial dividend is expected to be $0.4744 quarterly. Annualized that will be $1.90. On pricing of $17, PRGN would yield a very strong 11.2%.

A quick glance at annual yields of similar public companies based on most recent quarterly payout:

OCNF 9.7%; DSX 8%; DRYS 1.5%; EXM 2.7%; EGLE 7.3%; GNK 4.8%; QMAR 7%.

Some of the public dry bulk shippers distribute bulk of cash flows to shareholders, some utilize cash flows to grow. PRGN on a mid-range pricing would be the strongest yielding public drybulk shipper it would appear. This strong dividend makes the deal work.

Note - PRGN has three time charters expiring over the next few months. They've already rechartered each at substantially higher rates then the previous charters.

CEO and Chairman Michael Bodouroglou will also act as Fleet Manager through another company he owns and operates. Fleet management fees appear as if they'll be approximately $2.2 million annually.

Average age of the combined fleet is 7.8 years.


Dry Bulk cargo consists of of iron ore, coal and grains as well as fertilizers, forest products and essentially any non-liquid, non-container cargo. Dry bulk cargo accounts for 33% of world seaborne trade with coal and ion ore combining for 51% of all dry bulk cargo. The dry bulk cargo sector has grown an average of 5% annually this decade.

Dry bulk rates exploded in late 2003 and hit all-time highs the second half of 2004. New shipbuilds had slowed to a crawl during the worldwide economic slowdown in 2001-2002 and there just were not enough vessels in use in 2003/2004 to handle the demand boom from China/India coupled with a worldwide economic activity pick-up. Since, the sector has seen a sharp rise in new vessel construction much of which has begun to come on-line the past 2 years. The result has been a move off the highs for the dry bulk spot rate market. Worldwide demand however has continued to remain strong and while dry bulk rates are not at their record levels, they have been in a fairly tight range the past two years at historically strong levels. The big risk in the shipping sector is a worldwide economic slowdown just as heavy supply of new shipbuilds come on-line.

The big risk here is that there is a global economic slowdown at just about the time PRGN's charters expire. If that is the case, PRGN may struggle to replace their vessels at a price near current charter rates. Also as this sector is notoriously cyclical, new shipbuilds tend to increase dramatically during periods of strong rates. That is occurring currently. As of 4/30/07 drybulk newbuilding orders had been placed for an aggregate of more than 20.0% of the existing global drybulk fleet, with deliveries expected during the next 36 months. This is a classic boom/bust sector with a few of the public companies in the sector managed by those that went bankrupt during the last cycle trough.


PRGN will have a bit of debt on the books post ipo, $126 million worth.

1 1/2 X's book value.

Forecast - As PRGN plans on distributing nearly all quarterly cash flows to shareholders, cash flow here is what to look at not earnings. PRGN forecasts approximately $85 million in revenues their first year public. Based on current charter rates, PRGN anticipates $45-$50 million in distributable cash flows.

conclusion - The initial yield makes this deal work. Keep in mind while the yield is strong, this a classic boom/bust sector currently enjoying a boom time. Recommend due to the 11.1% initial yield on a pricing of $16.

September 4, 2007, 7:22 pm


Well it appears the ipo schedule will commence next week after a 3 week or so lull. We should see quite a few the back half of September so we'll resume the one free weekly blog piece.

This weeks is an interesting China ipo from August, EJ. Note as always analysis pieces are available for subscribers before debut. The free blog pieces are all done pre-ipo and posted here after debut. We've analyzed pretty much every ipo here before debut for 2 1/2 years now. Subscriptions to the site are available at:


EJ - E-House(China) Holdings

EJ - E-House (China) Holdings plans on offering 16.8 million ADS at a range of $11.50 - $13.50. 4 million ADS will be sold by insiders. Credit Suisse and Merrill Lynch will be lead managing the deal, CIBC and Lazard co-managing. Post-ipo EJ will have 76 million ADS equivalent shares outstanding for a market cap of $950 million on a $12.50 pricing. Bulk of ipo proceeds will be used to fund capital expenditures.

Chairman and CEO Xin Zhou will own 30% of EJ post-ipo.

From the prospectus:

'We are a leading real estate services company in China based on scope of services, brand recognition and geographic presence. We provide primary real estate agency services, secondary real estate brokerage services as well as real estate consulting and information services.'

EJ has been the largest real estate agency and consulting services company in China for three years now (2004-2006). EJ has 2,100 real estate professionals in twenty cities throughout China. In the past five years they've sold 5 million square feet of properties worth a $5.4 billion US. EJ also operates the only information system that provides up-to-date, comprehensive and in-depth information covering residential and commercial real estate properties in all major regions in China.

Chinese sector leaders in fast growing sectors have done very well in the US market the past few years, usually garnering aggressive multiples. The US market has not been a 'one size fits all' for Chinese offerings, the differentiators would appear to be that sector leadership. Sector leaders tend to outperform non-sector leader Chinese ipos. Financials and valuation aside, EJ would appear to fit in the 'sector leadership outperformer' category.

Awards - EJ has been named "China’s Best Company" from the National Association of Real Estate Brokerage and Appraisal Companies in 2006, and the "Leading Brand Name in China’s Real Estate Services Industry" from the China Real Estate Top 10 Committee in 2006.

Sector - The real estate sector in China has experienced rapid growth with primary property sales revenue growing 38% over the past five years. Primary property refers to the sale of new properties, which is EJ's focus. As such, EJ's clients tend to be real estate developers who utilize EJ's middle-man services to consult on development and to sell their properties. 82% of revenues in 2006 were from services relating to 'primary' (newly developed) properties.

Approximately 45% of 2006 revenues were derived in the populous Shanghai, Jiangsu Province and Zhejiang Province.

Governmental Control - Since 2006, the PRC has instituted a number of initiatives to slow the swift property growth rates. These include: requiring that at least 70% of the land approved by a local government for residential property development for any given year be used for developing low- to-medium cost and small-to-medium size units and low-cost rental properties; 70% of construction be for 'small unit space' properties. Increasing the down payment required for larger properties; imposing a resale tax on properties held less than five years.

Note- EJ has very high 'receivables' for their revenues stream. The June 2007 quarter saw approximately $23.5 million in revenues, while receivables on the book totaled $48.5 million. This appears due to EJ receiving payment for services only after a development (or phase of development) has been completely sold. EJ reports revenue upon each sale, however they do not receive the actual monies until the entire development project has been completed and all units sold. I'm not real thrilled with this accounting method. It appears to be a concession EJ has made to garner business, which is fine. However they've substantial receivables on the books that they've already booked as revenues but have not yet been paid. Cash flows here are not nearly as impressive as revenues/earnings would indicate. If all goes well they would eventually see the cash, however there appears to be serious lag time here from 'booking' revenues and actually receiving monies.


$2 per share in cash post ipo.

Tax Rate - EJ is taxed a little more heavily than many of the Chinese based ipos we've seen. It appears EJ's current tax rate is in the 25%-30% ballpark.

Historically, EJ has booked an outsized revenue number in the fourth quarter of the year. For example in 2006 quarterly revenue numbers were (in millions) $4, $10, $8 and $34. I would expect a similar trend in 2007.

2006 - Revenues were $56 million, a 44% increase over 2005. Operating margins were a strong 44%. Net margins were 34%. Earnings per share were $0.24.

2007 - As the bulk of revenues will be booked in the fourth quarter, it is a bit difficult to forecast full year. However based on the growth in first and second quarters, I would expect revenues to rise sharply in 2007 to $115 million or so. That would be a very impressive 100%+ revenue growth in 2007. Operating margins should improve to 50%. *Note* - both revenue and operating margin numbers assume a strong fourth quarter of 2007. Net margins should be 38%. Earnings per share should be $0.55 - $0.60. On a pricing of $12.50, EJ would trade 22 x's 2007 earnings.

*Note* - EJ's net margins and earnings per share are not quite comparable to similar sector leader Chinese ipos in that their earnings are taxed at a higher rate than most of those.

Conclusion - Strong recommend in range. In fact, EJ is so attractive in range, I expect the range to be increased here. Sector leader in a fast growing sector, 100% revenue increase expected in 2007, coming at a pretty fully taxed 21 X's 2007 earnings. EJ is coming too cheap in range.

August 6, 2007, 2:21 pm

DM - Dolan Media

pre-ipo analysis on this week's full calendar at http://www.tradingipos.com

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DM - Dolan Media

DM - Dolan Media plans on offering 12 million shares(assuming over-allotments) at a range of $13.50 - $15.50. Insiders will be selling 1.5 million shares in the deal. Post-ipo DM will have 25.1 million shares outstanding for a market cap of $364 million on a $14.50 pricing. Goldman Sachs and Merrill Lynch are lead managing the deal, Piper Jaffray and Craig-Hallum Capital Group will co-manage. 3/4's of the ipo proceeds will be used to redeem preferred shares, 1/4 to repay debt.

Executives and Directors will own 20% of DM post-ipo.

From the prospectus:

'We are a leading provider of necessary business information and professional services to the legal, financial and real estate sectors in the United States. We provide companies and professionals in the markets we serve with access to timely, relevant and dependable information and services that enable them to operate effectively in highly competitive and time sensitive business environments.'

DM operates under two segments, Business Information and Professional Services.

Business Information - Business journal publishing, court and commercial newspapers and other publications as well as operating websites in 20 US markets. Third largest business journal publisher and second largest court and commercial publisher in the US. DM also believes they're one of the largest carriers of public notices in the United States. DM publishes 60 print publications consisting of 14 paid daily publications, 29 paid non-daily publications and 17 non-paid non-daily publications. Paid publications and non-paid and controlled publications had approximately 75,500 and 167,400 subscribers, respectively, as of March 31, 2007. DM's 42 on-line publication/non publication web sites also had approximately 315,000 unique users in March 2007.

Professional Services - This is the segment that is the most interesting. DM, via the ABC and Counsel Press brands names, provides services that enable law firms and attorneys to process residential mortgage defaults and court appeals. DM is the dominant provider of mortgage default services in Michigan and Indiana, which had the second and third highest residential mortgage foreclosure rates in the first quarter of 2007. DM serviced approximately 30,100 mortgage default case files relating to approximately 270 mortgage loan lenders and servicers that are clients of DM law firm customers in Michigan and Indiana during the first quarter of 2007. DM, via their Counsel Press brand, is the largest appellate service provider nationwide, providing appellate services to attorneys in connection with approximately 8,300 and 2,200 appellate filings in federal and state courts in 2006 and the first quarter of 2007. Customers of Counsel Press include 80 of the top 100 law firms in the US.

DM's Business Information segment collects revenues primarily via classified advertising, Professional Services via fee arrangements. Both segments have grown through acquisition, with the Business Information segment completing 38 acquisitions since 1992 and Professional services 5 since 2005.

In 2006 Business Information segment accounted for 55% of revenues Professional Services 45%. Display and classified advertising accounted for 21% of total revenues, public notices also 21% of revenues While DM has their hands in a few different pots, their more a classic classified advertising reliant publication company as anything else with 42% of total revenues derived from advertising and public notices. A risk here going forward is that a number of states are considering switching from required public notice postings in print publications to posting their own public notices online. If that is a trend that develops, DM could lose a substantial portion of their public notice business.

Mortgage foreclosure services accounted for 35% of revenues in the first quarter of 2007.


DM will have a bit of debt on the books post-ipo, $55 million. Fully expect DM to continue to acquire smaller publications and professional services businesses, so debt here should rise going forward.

Revenues in 2006 were $128 million. 2006 was the first full year DM derived revenues from their professional services segment, so comparables to previous years is not valid here. Operating margins were 17%. Interest expense 'ate' up 29% of operating profits. Net margins were 6%, earnings per share $0.31. On a $14.50 pricing, DM would trade 47 X's 2006 earnings.

2007 - DM had a solid first quarter. Full year revenues should be in the $150 million ballpark, a 17% increase over 2006. Revenue growth is being driven by the Professional Services segment. Operating margins look to be improving a bit past few quarter, full year could see 20%-21%. Interest expense should eat up 20% of operating profits. Net margins should be in the 9% ballpark. Earnings per share should be $0.50 - $0.55. On a $14 1/2 pricing, DM would trade 28 X's 2007 earnings.

Conclusion - I like the mortgage default processing segment quite a bit here, I'm not enamored with the publications side of the business. Problem is, DM conducts their mortgage default processing services in just two states, while they own publications in 20 markets and derive 55% of annual revenues from that segment. 28 X's 2007 earnings with a 17% organic revenue growth rate is an awful lot to pay for that segment. Mortgage defaults in Michigan and Indiana have been a growth business the past year and should continue to be a strong revenue driver for DM. On that basis this is a slight recommend in range. Frankly I'd be much more interested here if DM was ipo'ing just their higher margin, higher growth Professional Services segment here without the print publication business attached. I wouldn't pay up for this deal, but in range it is worth a shot due only to the Professional Services segment.

July 24, 2007, 5:39 am

OWW - Orbitz Worldwide

all of this week's deals analyzed pre-ipo at http://www.tradingipos.com

While only 35 or so delayed pieces appear annually on the blog, every ipo is in the subscriber section of the site before ipo debut.

OWW - Orbitz Worldwide

OWW - Orbitz Worldwide plan on offering 39.1 million shares at a range of $16-$18. Morgan Stanley, Goldman Sachs, JP Morgan and Lehman are lead managing the deal, six other firms co-managing. Post-ipo OWW will have 88 million shares outstanding for a market cap of $1.497 billion on a $17 pricing. IPO proceeds will be going to parent company Travelport, which is essentially Blackstone(BX). They've structured the bulk of these proceeds directed to Blackstone as debt repayment, but it is essentially a nice payday for the Blackstone controlled Travelport.

This is 'round two' for Orbitz. Orbitz initially went public in December of 2003 under the symbol 'ORBZ'. Orbitz website was originally formed in 1999(and launched in 2001) by a group of major US airlines including American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Air Lines. In 11/04 Orbitz was acquired by Cendant. Cendant combined Orbitz with other online travel sites including cheaptickets.com to form the online segment of Cendant's Travelport. Travelport was then acquired by Blackstone and TCV in 8/06 via a leveraged buyout. Less than a year later, Blackstone is flipping Orbitz Worldwide back onto the public markets. As usual, Blackstone is making out nicely here on the transaction.

Through Travelport, Blackstone will own a 59% stake in OWW post-ipo. As one might imagine through Orbitz leveraged buyout history there is a bit of debt here post ipo, approximately $600 million. Not nearly as high as many similar leveraged buyout flips back onto the market, but a substantial debt presence none the less. In fact since OWW operates in a highly competitive, razor thin margin business the debt on the books is THE difference here between a bottom line profit and a bottom line loss.

From the prospectus:

'We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products.'

In addition to Orbitz and cheaptickets, assets include ebookers, HotelClub, RatesToGo and the Away Network and corporate travel brands, Orbitz for Business and Travelport for Business.

Air travel is OWW's largest on-line business segment. Other services include the obvious, hotels, rental cars and vacation packages that are customized by travelers. As Orbitz was originally designed and geared as a site for air travel, OWW feels they are currently under penetrated in the non-air online travel market. In 2006 OWW generated approximately $10 billion in worldwide bookers, 87% of which was US based.

Industry - Online travel is the largest e-commerce category. Approximately 47% of travel bookings in the US were booked online in 2006, and worldwide online travel growth grew by 30% in bookings for the year. While the US is by far the largest online travel segment, growth going forward in online travel is expected to be driven by Europe and Asia.

OWW has approximately 25 million unique users monthly and is the second largest online US travel company. Air travel accounts for 70%-75% of revenues annually. With 87% of revenues derived from the US it is not a stretch here to define OWW as an online US air travel booking entity. Yes OWW is branching out from this base via hotel related and non-US focused travel sites, but still the overwhelming majority of revenues are derived from air travel bookings in the US.

Risks here are obviously any occurrence that slows US air travel. Also competition is fierce in this space with a myriad of travel booking sites including the US airlines own websites. A few of the discount carriers such as Southwest do not make their fares available for OWW's sites either. Personally, I'm always much more comfortable booking directly from the airline site itself. I utilize sites such as Orbitz to locate fares, then I'll go directly to that airlines website to purchase, bypassing the booking fees that Orbits and related sites take.

Direct US competitors include Expedia, Hotels.com and Hotwire, which are owned by Expedia; Travelocity and lastminute.com as well as the airline sites themselves and a myriad of smaller fare aggregators/bookers. Offline competition includes travel agents and travel professional companies such as Liberty and American Express.


$600 million in debt, negative book value post-ipo.

2006 - As OWW has made a number of acquisitions comparing revenues from 2006 to prior periods does not indicate a whole lot. It appears that OWW's organic revenues were up 5%-10% or so for 2006 to $753 million. OWW has something I never like to see in a rather mature company coming public: Operating expenses for 2006 were higher than revenues. So OWW is already in the red before debt servicing charges are added in as 2006 operating margins were negative. Yes a portion of this is due to depreciation & amortization charges, but really OWW's cash flows for '06 were more or less flat as well. Factoring in debt servicing, OWW lost about $1 per share in 2006.

2007 - OWW had positive operating margins for the first quarter of '07(just barely), something they did not manage to do in 2006. Revenues were solid in Q1 and it appears OWW may grow revenues to $850-$900 million in 2007, a 16% increase over 2006. Yes a portion of this is due to acquisitions, and fully expect OWW to lay on additional debt in the future to continue to acquire smaller travel related websites and operations. I would anticipate OWW to be approximately break-even operationally in 2007, with a bottom line net loss of $0.50 due to debt servicing costs.

Note - OWW has been experiencing the past two quarters lower revenue per transaction. It appears they're getting squeezed a bit on their transaction fees. As I mentioned above, this is a very competitive sector and that will not change going forward.

Conclusion - a quick flip leveraged buy-out related ipo with a negative bottom line. I rarely recommend a leveraged buyout related quick flip ipo. Why? The leveraged buyout entity is essentially sucking out capital to profit themselves and that profit usually comes at the expense of the future public shareholders. OWW is an interesting combination of a number of online travel sites, primarily of course Orbitz itself. There is some value here. It is simply not an ipo for me. Orbitz struggled as a public company the first go round after pricing and opening enthusiastically. I'm not certain we need the leveraged quick-flip version of the Orbitz ipo a second time. Pass in range here, I'm simply not interested.

July 21, 2007, 8:07 pm

LIMC - Limco-Peidmont

As alway analysis pieces on every ipo every week available to subscribers at http://www.tradingipos.com

disclosure - at date of blog post(7/20/07), tradingipos.com does have a position in LIMC at an average of $12.60 per share.

following analysis piece was completed for sunscribers 7/08/07

LIMC - Limco-Piedmont

LIMC - Limco-Piedmont plans on offering 4 million shares at a range of $9.50 - $11.50. Majority owner TAT Technologies(TATTF) will be selling 1/2 a million shares in the offering. Oppenheimer and Stifel are co-leading the deal. Post-ipo LIMC will have 12.5 million shares outstanding for a market cap of $131 million on a $10.50 pricing. IPO proceeds will be used for general corporate purposes.

Pre-ipo, LIMC is a wholly owned subsidiary of TAT Technologies(TATTF). With this ipo TATTF is spinning off LIMC and will retain a 65% stake in LIMC post-ipo. It does not appear the TATTF is in a hurry to spin off the remainder of their ownership stake. TATTF has actually agreed to a one year lock-up arrangement instead of the usual 180 day lock-up period. If TATTF plans on divesting the remainder of their LIMC interests, it doesn't appear as if we'll get an announcement to that effect for at least a year. By agreeing to the extended lock-up period, it appears to me that TATTF plans on holding their majority stake in LIMC indefinitely.

From the prospectus:

'We provide maintenance, repair and overhaul, or MRO, services and parts supply services to the aerospace industry.'

LIMC operates four FAA certified repair stations. Two are located in Tulsa, Oklahoma, and the other two are located in Kernersville and Winston-Salem, North Carolina. The four service centers provide aircraft component maintenance, repair and overhaul services(MRO) for airlines, air cargo carriers, maintenance service centers and the military. In addition LIMC also is an equipment manufacturer of heat transfer equipment for airplane manufacturers and operates a parts services division that provides inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.

As the name would suggest, Limco-Piedmont is the result of two merged operations, Limco and Piedmont. Limco bought Piedmont in 7/05.

MRO Services - 61% of revenues in first quarter of 2007. Government regulations and manufacturing specs require aircraft to undergo MRO servicing at regular intervals, usually each three to five years of service. Warranty covers the first one to five years of aircraft components, LIMC's MRO services usually 'kick in' after the warranty expires. LIMC specializes in the repair and overhaul of heat transfer components for the aerospace industry, special air conditioning units for military operations, APUs, propellers, landing gear and pneumatic ducting, which is used to channel air through the air conditioning and other pneumatic systems on the aircraft. LIMC works on aircraft and components from all the major manufacturers including Boeing, Airbus, Lockheed Martin, General Dynamics and GE.

Parts Servicing - 39% of revenues in first quarter of 2007. LIMC supplies parts to approximately 500 commercial, regional and charter airlines and business aircraft owners.

Sector - MRO/parts servicing growth for aircraft is being fueled by the aging and growing worldwide aircraft fleet. 74% of the world aircraft fleet is 5+ years old. Global air travel is also expected to grow by 4%-5% annually over the next five years. While not a swift growing niche, the MRO component services sector generates over $8 billion in worldwide revenues and is expected to grow 4% annually over the next 5 years.

LIMC's five largest MRO customers account for 20% of revenues. Customers include Bell Helicopter, Fokker, Hamilton Sundstrand, KLM Royal Dutch Airlines NV, Lufthansa Technik AG, PACE Airlines, Piedmont Airlines and the U.S. Government. LINC derives nearly 10% of their revenues from the US Government, primarily Department of Defense related.

Competition - LIMC is a rather small player and competes directly with larger manufacturers whom also service their manufactured components. These include various segments of Honeywell, as well as Standard Aero Group, Aerotech, AAR, and a number of others.

LIMC's future growth strategies include expanding to additional MRO services as well as continuing to grow Western Europe based revenues. I would expect LIMC to utilize the ipo cash to make future acquisitions that assist them in their growth efforts. Fully expect one or more acquisitions here paid in LIMC's first year public.

70% of 2006 revenues derived from companies located in the US, 30% internationally.


$2 per share in cash, no debt. LINC does not plan on paying dividends.

3 X's book value on a $10 1/2 pricing.

LIMC has swiftly grown revenues since the mid 2005 acquisitions of Piedmont. In conjunction with the acquisition, LIMC instituted a number of cost cutting initiatives to reduce redundancies between the two companies.

Revenues in 2006 were $59 million. LIMC, which has been profitable since 2002, earned a fully taxed $0.38.

2007 - LIMC had a strong first quarter. Revenues should hit $90 million in 2007, an impressive 52% revenue increase from 2006. LIMC attributes recent quarterly revenue growth from both existing customers as well as winning new MRO/parts services contracts. Both increased due to LIMC receiving FAA approval to expand MRO services to include a greater number of aircraft components. Gross margins are not strong in this sector. I would expect 2007 gross margins to hit the 23%-25% area. GSA expenses should hit 10% levels of revenues. Operating margins then should be in the 14% ballpark. Net margins for full year should be in the 8%- 9% ballpark. This is slightly higher then LIMC has booked in recent quarters and is attributable to debt paid off on ipo as well as pre-ipo stock compensation charges. Earnings per share should be $0.60-$0.65. On a pricing of 10 1/2, LIMC would be trading 17 X's 2007 earnings.

Conclusion - Market cap on ipo here gives LIMC plenty of room for growth. LIMC his hitting on all cylinders the 2 quarters leading into the ipo, booking two strongest quarters in corporate history. The gross margins in this sector are rather thin and this is not traditionally a high growth sector. Those two factors mean you do not pay fat multiples for this type of company. However coming at a $131 market cap(on a $10 1/2 pricing) and 17 X's 2007 earnings with a strong year to year growth rate this is an easy recommend in range. I like this ipo in the $9 1/2 - $11 1/2 range quite a bit actually. Strong recommend here, there is plenty of market cap room here for substantial appreciation going forward.

Note - While I would doubt 2008 revenues will grow at close to the pace of 2007 revenues, I fully expect LIMC to utilize the ipo cash to acquire one or more smaller component service companies

July 4, 2007, 3:13 pm

SHOR - ShorTel


This analysis piece was done for http://www.tradingipos.com subscribers on 6/23 well before Mitel filed a patent infringement suit against SHOR. On site we've been discussing post-suit in subscribers forum section.

Also tradingipos.com does own shares in SHOR at an avg of $10.10, again as posted on forum section of susbcribers site real-time on tuesday 7/3.

SHOR - ShorTel

SHOR - ShorTel plans on offering 7.9 million shares at a range of $8.50 - $10.50. Lehman and JP Morgan are lead managing the deal, Piper Jaffray, JMP, and Wedbush co-managing. Post-ipo SHOR will have 41.3 million shares outstanding for a market cap of $392 million on a $9.50 pricing. IPO proceeds will be utilized for working capital and general corporate purposes.

Crosspoint Venture Partners will own 22% of SHOR post-ipo. Note that Lehman and JP Morgan related venture funds will own a combined 22% of SHOR post-ipo also.

From the prospectus:

'We are a leading provider of Internet Protocol, or IP, telecommunications systems for enterprises. Our systems are based on our distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single telecommunications system. Our systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location.'

Enterprise IP communications systems. Products consist of ShoreGear switches, ShorePhone IP telephones and ShoreWare software applications. SHOR sells 9 switch products and 5 different IP phone systems. SHOR sells their products through 3rd party sales channels(resellers). As of 3/31/07, SHOR has sold to 4,500 enterprise customers through 400 different channel partners.

Of note, SHOR's enterprise IP telecommunications systems received PC Magazine’s Best of the Year 2005 Editors’ Choice designation. In addition for the past four years IT executives surveyed by Nemertes Research, an independent research firm, have rated ShoreTel highest in customer satisfaction among leading enterprise telecommunications systems providers. These two nuggets make this SHOR ipo at least worth a closer look.

Sector - This is a fairly large sector with an estimated $17 billion in overall worldwide enterprise telephony systems equipment revenues. The past few years has seen a shift by enterprises from separate voice and data networks to a single IP network for both. SHOR operates in the voice and date IP niche, expected to grow 19% annually, far outpace overall enterprise telephony growth. It is estimated that currently voice and data IP systems equipment market alone will be nearly $8 billion by 2010. As would be expected there is substantial competition in the space. The usual communications equipment players all offer some form of enterprise IP telecommunications equipment including Cisco, 3Com, Alcatel-Lucent, Inter-Tel Incorporated, Mitel Networks Corporation (which recently announced plans to acquire Inter-Tel Incorporated) and Nortel. In addition Microsoft is entering the space and appears to be developing an IP partnership with Nortel in which Nortel will produce IP-based communications equipment that will be integrated with the Microsoft systems and Office Communicator.

SHOR's IP solution. Many of SHOR's competitors offer a hybrid IP telecommunications solution, meshing it with existing legacy communications equipment and products. SHOR offers switch-based IP telecommunications systems for enterprises that address the limitations of hybrid and server-centric IP systems. SHOR lists the usual benefits in these prospectus including scalability, ease of use, reliability etc...A few highlights:

1) Personal Call Manager allows end users to control their phones from their PCs, regardless of their location, and integrates with enterprise software applications, such as Microsoft Outlook and salesforce.com.

2)IT management via anywhere use browsers.

3) SHOR believes their system costs less to install and operate.

In these filings every company states why their products are superior. In this case, SHOR has PC Magazine and four year's worth of IT managers' recognition to back their claims up. It would appear from gross margins below and awards that SHOR may indeed offer a superior product.

Historically SHOR has sold their products to small and medium size enterprises. A key growth strategy going forward in FY '08 is to begin selling into larger companies.


$2 a share in cash, no debt.

SHOR's fiscal year ends on 6/30 annually. FY '07 ends 6/30/07.

Revenues have increased sequentially each quarter for over two years. I always like to see this. Revenues past four quarters(ending 3/31/07) were(in millions) $19, $20.5, $22.5 and $26 million.

FY '07(ending 6/30/07)

2 quick points. SHOR has booked more stock compensation expenses in FY '07 then they will post-ipo. I smoothed this out a bit by 'pro forma'ing' the stock comp numbers for FY '07 cutting them slightly. SHOR does not have excessive options dilution in their future and stock compensation charges annually should be around $1 million, while for FY '07 pre-ipo they'll be in the $2.5 million ballpark.

2nd point is taxes. SHOR has substantial deferred losses as they did not shift into profitability until FY '06. Their effective tax rate for FY '07 and FY '08 should be in the 10% ballpark.

Revenues for FY '07 with one quarter to go should be in the $97 million ballpark, a strong 60% increase over FY '06. Gross margins for this type of highly competitive communications equipment sector are very strong at 62%. Gross margins are up in FY '07 from FY '06 56%. SHOR attributes this to the release of higher margin products. We've seen a slew of very aggressively valued networking equipment ipos with 40% gross margins, SHOR here in what should be a somewhat commoditized sector is doing something very right to be garnering 62% gross margins.

Operating expense margins have risen pretty evenly with revenues. Ideally you want to see expenses decreasing as a % of revenues as revenues increase. With SHOR we're not seeing that quite yet. for the past four quarter operating margin expense ratio has been in the 52%-55% of revenue range. Going forward I'd like to see SHOR be able to lower that operating expense ratio. That will be a key to future profit growth.

Operating margins for FY '07 were 8%. Plugging in taxes, earnings per share should be $0.17.

FY '08(ending 6/30/08) - If the past three years are indicative, SHOR should continue to grow revenues sequentially each quarter. I would estimate FY '08 revenues in the $120-$125 ballpark, a 25% increase over FY '07. Gross margins should be in the 60% ballpark again. I'd like to see operating expense ratio dip. However I'm not going to plug in much of an operating expense ratio dip as they've not demonstrated they've been able to do that past four quarters. Operating margins should be in the 9%-10% ballpark. Earnings per share should be in the $0.25 - $0.30 range. On a pricing of $9.50, SHOR would be trading 34 X's FY '08 earnings.

Conclusion - The only negative here is that earnings have not quite caught up yet with valuation on ipo. Still a number of things to like here: 1)Award winning product; 2) Gross margins actually increasing in a very competitive sector; 3) Quarter to quarter top and bottom line growth; 4) A valuation on ipo, that would make them very attractive buyout candidate; 5) Directly benefiting from the enterprise switch(pun!) from legacy communications systems to an integrated single platform all IP network.

Definite recommend here in range. I like this one quite a bit in single digits. I've no idea if this works initially, but mid-term plus I can envision SHOR much higher down the line due to the factors

June 23, 2007, 7:02 am

SLT - Sterlite

9 deals on tap upcoming week, just after the huge Blackstone ipo. http://www.tradingipos.com this week celebrated our 2nd anniversary of providing in-depth pre-ipo analysis from a trading/investing perspective on every ipo every week.

Every pre-ipo analysis piece is available to subscribers. We also have stored every piece since 3/05 and we feature a lively forum section in which we discuss ipos and give pre-open indications.

Past few weeks have featured pieces we've not been interested in buying here at tradingipos.com. We do like/own SLT however.

Disclosure: Tradingipos.com has a position in SLT at date of blog post.

SLT - Sterlite Industries

Sterlite Industries, SLT plans on offering 125 million American Depository Shares (ADS) at an estimated price of $14 per ADS. Each ADS is equivalent to one share. This offering includes 113.5 million ADS on the NYSE and 11.5 million ADS in Japan. The ADS offering in Japan will not be listed in an exchange. Merrill Lynch, Morgan Stanley and Citibank are lead managing the deal, Nomura co-managing. Post-offering SLT will have 683.5 million shares outstanding for a market cap of $9.57 billion on a pricing of $14. IPO proceeds (which will be significant at an estimated $1.65 billion) will be used for general corporate purposes.

Note - The SLT offering on the NYSE is technically a secondary as Sterlite is currently listed and traded in India on the NSE and the BSE; it is also a component of the exchanges’ major index. Over the past year, SLT's dollar adjusted shares have traded in a range of approximately $6 - $14. Like many foreign stocks trading elsewhere in the world, they tend to make their debut in the US right at all-time highs in stock price. The overall trend has been an initial 'sell the news' on the US debut, although that is not an across the board trend.

Vedanta Resources, a listed London metals and mining company will own 60% of SLT post-offering. Vedanta ipo'd in London in late 2003 and is up over 300% since ipo.

From the prospectus:

'We are India’s largest non-ferrous metals and mining company based on net sales and are one of the fastest growing large private sector companies in India based on the increase in net sales from fiscal 2006 to 2007.'

SLT operates three primary businesses in India:

1) Copper - SLT is one of the two custom copper smelters in India, with a 42% primary market share by volume in India in fiscal 2007. In 2006, SLT was the worldwide 5th largest custom copper smelter and operated two of the five lowest costs of production copper refineries in the world.

2) Zinc - SLT is India’s only integrated zinc producer and had a 61% market share by volume in India in fiscal 2007. SLT's zinc mine is the third largest in the world in terms of production and 4th largest on a reserves basis. SLT operates both zinc mining and smeltering operations in India. SLT has plans to open an additional zinc smelter over the next couple of years.

3) Aluminum - one of four primary aluminum producers in India, with a 25% market share in FY '07. In addition to current production, SLT owns a 30% minority interest in Vedanta Alumina. Vedanta Alumina has commissioned a new 1.0 million tons per annum aluminum plant in India. While initial product is expected to be shipped from the plant beginning in June 2007, it will be 2009-2010 before the plant is shipping extensive product.

In addition to copper, zinc, and aluminum, SLT is getting into the power generation business in India. SLT has experience in building and managing the seven power plants that service their metal smelting operations. SLT is now investing $1.9 billion to build the first phase, totaling 2,400 MW, of a thermal coal-based power facility expected to be complete in 2010. This is an aggressive investment for SLT, as the power plant will be 2 1/2 X's the size in terms of power generated as all of their smelter power plants combined. This facility will be used to sell power to the Indian power grid.

SLT has grown revenues swiftly the past three years due to capacity growth and commodity price increases. Really SLT has been positioned perfectly over the past 3-4 years. If this entity had come public 4-5 years ago it would be one of the biggest winners this decade. Keep in mind that here in 2007, SLT is coming to the US with a $9.57 billion market cap, far far higher than wold have been the case had they listed in the US closer to the beginning of the commodities boom.

Being located in India, SLT enjoys a low cost of production making them quite competitive in the world commodities market. SLT enjoys a leading market share in India in all three of their primary business lines, Copper, Zinc and Aluminum production.

While zinc mines much of their own end product, they source the majority of their copper and aluminum requirements from third parties. Copper concentrate is purchased on the London Metals Exchange, alumina from third party suppliers.

78% of revenues are derived from sales in India and Asia combined.

Indian government - There appears to be some issues in the divestiture of the Indian government’s minority ownership in both SLT's aluminum operations and zinc operations. The Indian government currently owns 49% of SLT's aluminum operations and 30% of SLT's zinc operations. The issue with the zinc operations actually pertains to the government of India's original divestiture of 64% of the zinc operations to SLT earlier this decade. This one by a public interest group appears to have little chance of success. In 2004, SLT exercised an option to purchase the remaining 40% Indian government interest in SLT's aluminum operations. The Indian government has and still is disputing this exercise. As of 6/07 there has been no resolution. There is also another issue with SLT's optioning the 30% remaining Indian government interest in the zinc mines. This pertains to claims that SLT did not act in the best interest of India. This one has been dragging on for over 5 years, although there has been no further action by the Indian government since 2005. If down the line the Indian government again asserts these claims and were to eventually win the resulting legal case, the penalties for SLT are quite harsh. I've no idea what the chance of this happening may be, although it would appear this would not occur for 4-5 more years at least....and it appears the Indian government may have decided to drop this last one altogether. Also it appears SLT plans on ending this, by issuing a 'call right' in which SLT would overpay the Indian government for their remaining 30% interest in SLT's zinc operations. SLT is actually planning on using the ipo cash for this very purpose. I think the takeaway here overall is that government intervention is a definite risk here. At the least, SLT has extensive regulation and a not so silent partner in the Indian government. If for some reason the government of India shifts to a more anti-capitalist stance, operations such as SLT would indeed suffer. In other words, public shareholder would suffer.

Commodity risks -- stating the obvious, but should the strong commodity market of the past 5 years turn down, SLT would definitely be affected. With the continued strong growth in Asia and India, it would probably take a prolonged worldwide economic slump for this to occur.


SLT's fiscal year ends 3/31 annually. FY '07 ended 3/31/07.

$1.8 billion in cash post-ipo, $300 million in debt. SLT will most likely use the cash on hand to purchase the Indian government’s minority ownership of SLT's zinc operations. This is not a given however.

Dividends - SLT has paid dividends in the past and plans to in the future. Dividends are payable annually soon after the end of the fiscal year(3/31). FY '07's dividend was equal to $0.075 per share. On a pricing of $14, SLT would be yielding 1/2 of 1% annually.

2 1/2 X's book value on a pricing of $14.

Fueled by the strong commodity market in both demand and price, SLT doubled revenues in FY '06 and then again in FY '07.

FY '07(ending 3/31/07) - Revenues increased by 100% to $5.65 billion. Copper operations accounted for 47% of revenues, zinc operations 33% of revenues and aluminum operations 20% of revenues. Gross margins were a strong 40%. Operating margins were 38%. SLT's tax rate was 27%. Net margins after taxes were 28%. After removing minority interests (which will remain post-ipo also), net earnings were $1.61. On a $14 pricing, SLT would trade 9 x's trailing earnings. Interestingly, the bulk of SLT's net earnings are derived from their zinc operations. While the zinc operations accounted for 33% of revenues, they accounted for 60% of operating profits. Pretty easy to discern the reason: SLT mines the majority of their own zinc production, while they source the majority of their raw aluminum and copper. The cost of production for their zinc operations remains rather constant even with the underlying commodity price rise. Because SLT mines their own zinc they're able to benefit from any commodity price rise of zinc in their end selling price. While they're able to pass along the commodity costs of the procured aluminum and copper, their raw materials costs in these two segments rises with the underlying commodity price rise. The following fueled earnings for SLT: 'The daily average zinc cash settlement price on the LME increased from $1,614 per ton in fiscal 2006 to $3,581 per ton in fiscal 2007, an increase of 121.9%.' SLT's operating margins in their zinc business literally went through the roof in FY '07 to the tune of 73%!

FY '08(ending 3/31/08) - Copper and aluminum are low margin segments for SLT, as long as zinc prices remain robust, SLT will produce strong results. Through the first quarter of FY '08, zinc prices have remained quite strong. Results for FY '08 will also depend on SLT's ability to purchase the Indian government’s 30% remaining stake in SLT's zinc operations. If they're able to reclaim this stake, the bottom line should grow nicely the remainder of the fiscal year as few earnings in SLT's zinc operations will be funneled off to minority investors. SLT has increased capacity each of the past two years across their operating segments. I would anticipate a 5% -10% capacity increase in FY '08. Assuming a continued robust end market price/demand wise for copper, aluminum and (especially) zinc, I would expect to see SLT grow the top-line by 10%-15% in FY '08. This does not assume SLT is successful in buying that 30% zinc stake from the government. Bottom line could grow 20% due to very little relative GSA expense. Earnings per share on $6.4 billion in revenues would be $1.80 - $1.90. Note that these estimates assume rather flat commodity prices in 2007, no large gains or dips in aluminum, zinc and copper. Zinc is the one to watch here. If zinc prices fall, SLT's earnings will as well. If SLT earns $1.80 - $1.90, on a pricing of $14 it would trade 8 x's FY '08 earnings.

Power generation is sort of the wild card here. While SLT already operates seven power plants that supply power to their metal production facilities, they're planning construction of a general power plant. This plant will not be online until at least 2010.

The other wild card is SLT's ability post-offering to purchase the remaining 30% interest in their zinc operations from the Indian Government. If this transpires, and if the price of zinc remains strong, SLT's earnings will be substantially higher then projected.

Conclusion - SLT will be an institutional favorite on offering. There are a huge number of shares being offered here. Also there most likely will not be the usual 'ipo effect' as SLT is already trading in India. The result should be a rather muted opening here. This is a solid operation, printing money in this commodity bull run the past few years. If this were a straight ipo with fewer shares, this would be a 'must own' on the offering price of $14. I like this deal even with the large number of shares and that it is a secondary coming to the US market at all-time trading highs. Keep in mind the huge number of shares in this deal (125 million) and the run-up to all-time highs for Sterlite on the Indian exchange pre-US offering. Plus this deal is pretty substantially dilutive, adding 23% to SLT's worldwide market cap. I like this company and think the deal works over time. The external factors mentioned just prior, however, should really mute near-term performance. I would be very surprised if SLT appreciated substantially near-term. Over time, if the price of zinc remains strong, SLT will do quite well.

Also keep an eye on SLT's efforts to purchase the Indian government's 30% stake in SLT's zinc operations. If they're successful that could be a nice bottom line driver in a strong zinc pricing market. Recommend the deal, but with substantial near term deal related headwinds would not expect much appreciation here near term. Recommend as mid-term plus play in a strong zinc pricing environment.

copyright © 2007 tradingipos.com

June 15, 2007, 7:40 am


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BAGL - Einstein Noah Restaurant Group

BAGL - Einstein Noah Restaurant Group plans to offer 5.8 million shares(assuming over-allotments) at a range of $19-$21. Morgan Stanley and Cowen are lead managing the deal, Piper Jaffray co-managing. Post-ipo BAGL will have 16.4 million shares outstanding for a market cap of $328 million on a pricing of $20. IPO proceeds will be used to repay debt.

Greenlight Capital(affiliated with recent ipo GLRE) will own 60% of BAGL post-ipo. Greenlight assumed 97% ownership in BAGL following BAGL's reorganization from bankruptcy in 2003. Greenlight was a corporate bond holder in BAGL prior to the bankruptcy and those debt notes were converted to a nearly full equity stake following reorganization. Greenlight is not selling any shares on ipo, although a chunk of ipo proceeds will be used to close out a debt note held by Greenlight.

BAGL's shares currently trade(pre-ipo) on the 'pink-sheets' under the symbol NWRG. Looking through NWRG's most recent earnings release, it appears this is a very 'clean' move from the pink sheets to the nasdaq on ipo. Company structure wise it will act as a secondary offering of 5.8 million shares, which will be used to clean the balance sheet up by paying down debt. Debt levels will go from $227 million pre-ipo to $138 million post-ipo, assuming a pricing of $20. NWRG's stock price has ranged from $17-$22 over the 30 days pre-ipo, with very few shares generally traded.

From the prospectus:

'We are the largest owner/operator, franchisor and licensor of bagel specialty restaurants in the United States. We have approximately 600 restaurants in 36 states and the District of Columbia under the Einstein Bros. Bagels, Noah’s New York Bagels and Manhattan Bagel brands.'

The Einstein brand is located in 33 states, Noah's in 3 states and Manhattan concentrated in the northeast US. As with most bagel spots, focus is on morning and into early afternoon. Offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels and breads, gourmet soups and salads, decadent desserts, premium coffees and an assortment of snacks.

Fast casual morning niche - Highly competitive segment in which BAGL operates. BAGL's largest component Einstein Bagels was created in 1995 by Boston Chicken. It appears much as Boston Chicken, Einstein expanded too quickly laying on debt to open new locations. This actually occurred pretty much across the board in the bagel segment as the bagel chains races to open new stores to grab the 'bagel' segment market share in attempts to be the 'bagel' Starbucks. Pretty much all of them ran into financial difficulty as debt servicing overcame sluggish revenues. Consolidation ensued, the debt holders took over the various companies and a few years later we get the BAGL ipo. Even with consolidation in the sector, competition is fierce. BAGL competes directly with other bagel chains such as Brueggers, as well as coffee chains such as Starbucks, Dunkin' Donuts and Caribou and other 'fast casual' morning stops such as Panera. In addition many fast food restaurants such as McDonalds are focusing more on premium coffee and offerings that are directed at taking market share from the coffee chains and fast casual breakfast spots such as BAGL. It is a tough niche. The history of the 'bagel wars' from the late '90's is a perfect example of why debt levels are always extremely important to keep an eye on. When operations lay on heftier and heftier debt to expand either through new locations or acquisitions, the bar to insolvency gets lower and lower. For those that are interested in a primer on the importance of debt should research the bagel 'boom' and the theater chain expansions of the late '90's.

60% of BAGL's revenues are derived during the 'breakfast' portion of the day. BAGL post-ipo will be the largest 'bagel' operator in the US. 10 consecutive quarters of positive same store sales. This should have an asterisk though as BAGL had negative same store sales for 2-3 years in a row prior to this pick-up, so the starting point here was low.

New stores - For the past 5 years BAGL has focused on getting their financial house in order. This has included closing under performing stores, reworking their entire in-store concept and managing the business(and each store) more efficiently. The result has been that BAGL has seen the number of stores decrease annually each of the past 5 years. As of 4/4/07, BAGL had 597 total locations, 410 of which were company owned, 100 licensed and 87 franchised. In 2007 however, BAGL plans to begin a moderate expansion of company owned stores by opening 10-15 new stores under the Einstein and Noah brands. BAGL also plans on much more aggressive licensing and growth. Licensed locations are located in airports, colleges and universities, hospitals, military bases and on turnpikes. BAGL opened 29 new licensed locations in 2006 and plans to open 30-40 new licensed locations in 2007. During BAGL's reorganization and aftermath, the franchising segment suffered greatly. BAGL has lost franchises annually each year this decade. They plan on growing this part of the business, however it appears much of the non-company owned growth is being directed towards the licensing concept.

Company owned restaurants account for 90%-95% of overall revenues.

Property - BAGL does not own any properties, they lease all restaurant space at company owned locations.


BAGL will have fairy significant debt post-ipo of $138 million.

Even with 10 straight quarters of same store sales growth, revenues have been sluggish this entire decade. As BAGL has operated more efficiently and grown same store sales the past 2 1/2 years, the impact in overall revenues has been nil due to store closings and loss of franchisees. Overall, looking at BAGL's revenues the past five years is akin to looking at a flat line with revenues 'stuck' from 2002-2006 at $374 million - $399 million.

2006 - $390 million in revenues, 20% gross margin. Indicative of improving store performance(and closing poorly performing locations), gross margins were highest in 4 years. Operating margins were 11%. Debt servicing costs(factoring in reduced debt servicing based on debt paid on ipo) ate up 40% of operating profits. Depreciation & amortization charges took away a bit more as well. Note that BAGL has approximately $150 million in tax loss carryforwards from pre/post bankruptcy days. Even though they're capped on how much they can utilize in a given year, BAGL won't be paying taxes on any earnings for the foreseeable future. So we'll give a 'no tax' number here for net and then a 'tax plugged in' number so that BAGL can be compared apples to apples with the sector. 'No tax' net margins for 2006 were 3%, fully taxed would have been 2%. Earnings per share not taxed were $0.80, plugging in taxes they would have been $0.50.

2007 - Much as rest of decade previous, first quarter 2007 revenues were flat compared to first quarter 2006. Same store sales increased 1%. BAGL had 21 fewer restaurants in the first quarter of 2007 as compared to first quarter 2006. It would appear BAGL is about completed shuttering non-performing stores(only 20 more anticipated closing next three years as leases expire) and is about to embark on company owned store expansion. The plan is for controlled growth, so I would expect the number of overall company stores to grow all that much in 2007 overall. I would expect overall revenues to be in the $390-$400 million ballpark for 2007. Gross and operating margins should be similar to 2006. BAGL will benefit in 2007 from decreased amortization & depreciation costs which will assist to boost the net margins and bottom line. Net margins('no tax') should improve to 3 1/2%, taxed to 2 1/2%. Official untaxed earnings should be in the $0.85-$0.90 range. Plugging in taxes, earnings would be $0.55-$0.60.

Conclusion - Coming out of bankruptcy reorganization, management the past 3 years has done a nice job improving margins and same store sales comparables. Keep in mind much of this same store sales growth is attributable to sluggish performance in 2003/2004 as well as management simply closing non-performing stores. BAGL has extensive tax carry-forwards, meaning the bottom line here is greatly benefiting from not being taxed. Plugging in taxes, BAGL looks awfully pricey in range, especially keeping in mind past bankruptcy(for Einstein and Noah) and the not insignificant debt being carried on the books. Revenues have been stagnant, competition is fierce. BAGL to me looks to be a turn-around story at least fully valued in range.

June 1, 2007, 12:44 pm


pre-ipo analysis pieces available to subscribers at http://www.tradingipos.com

RRR - RSC Equipment Rental

RRR - RSC Equipment Rental plans on offering 24 million shares(assuming over-allotments) at a range of $23-$25. Note that 11.5 million shares in this deal are being offered by insiders. Deutsche Bank, Lehman and Moran Stanley are lead managing the deal, five firms co-managing. Post-ipo RRR will have 103.1 million shares outstanding for a market cap of $2.47 billion on a $24 pricing. IPO proceeds will be used to repay debt as well as $25 million going to terminate a 'monitoring' fee. This $25 million is heading into insiders pockets.

Ripplewood and Oak Hill will each own approximately 32% of RRR post-ipo. combined they'll own 64% of RRR. Recently RRR recapitalized their operation resulting in the Ripplewood and Oak Hill majority ownership. As is the norm these days with this these sort of deals, Ripplewood and Oak Hill funded their recap investment primarily by laying on substantial debt to the back of RRR. RRR operates in a business in which they will have debt on the books as it is. They finance equipment purchases and then enter into leasing agreements with customers for said equipment. However the recapitalization more then doubles RRR's debt on the books, and did so without generating any future revenues as RRR's business related debt would. Even by paying off debt on ipo, RRR will have $2.7 billion in debt on the books post-ipo. This is simply too much for my tastes, especially with RRR's type of operation. By laying more debt onto RRR, Ripplewood and Oak Hill slow RRR's ability post-ipo to grow via laying on debt to finance greater number of equipment to then lease. RRR is a large established successful operation. However the balance sheet here stands in direct contrast to the recent ACM ipo whose balance sheet post-ipo is pristine. Different businesses yes, but all in all I'll go with a cleaner balance sheet ipo every time. Not only will the 'un-natural' debt laid on in the recap potentially slow growth, this substantial debt level will also eat into operating profits. As usual, I dislike seeing third parties come in and finance company purchases(or majority ownerships) via laying debt onto the back of a solid cash flow generating operation. It really handicaps the newer public shareholders post-ipo. Oak Hill, Ripplewood and minority owner ACF are the selling shareholders in this deal. ACF was the owner that sold a % in the recap to Ripplewood and Oak Hill. These two private equity firms will do quite well on this deal with the ipo cash-out as well as shares held post-ipo. We've seen this sort of thing a number of times previously.

Contingent 'earn-out' notes - In addition to the debt outstanding, there is the potential for more due to something called a contingent 'earn out' notes deal. If RRR has combined EBITDA of $1.54 billion or better for the fiscal years 2006 and 2007 combines, RRR will owe the pre-ipo shareholders(primarily Oak Hill, Ripplewood and ACF), a $150+ million bonus. If EBITDA is $800+ million in FY '08 then an additional $250+ million bonus is due. these bonuses would mature beginning in a decade or so and would go on the books I believe as new debt until then. There are a number of exceptions to this payout delay that would kick in principal payment earlier. It would appear RRR has a 50/50 or so chance at hitting the $1.54 combined 2006/2007 EBITDA number which would kick in the 'earn out' notes deal.

From the prospectus:

'We are one of the largest equipment rental providers in North America. As of March 31, 2007, we operate through a network of 459 rental locations across 10 regions in 39 U.S. states and four Canadian provinces.'

RRR believes they're the #1 or #2 equipment rental provider in the majority of regions in which they operate. Customers are primarily non-residential construction and industrial markets. Equipment ranges from large equipment such as backhoes, forklifts, air compressors, scissor lifts, booms and skid-steer loaders to smaller items such as pumps, generators, welders and electric hand tools.

85% of revenues are derived from equipment rentals, 15% from sales of used equipment. Average fleet age is 25 months, which RRR believes is one of the youngest in the industry. Original equipment cost of the fleet was $2.5 billion. RRR has invested $2.2 billion in their fleet over the past four years.

Fleet utilization was 70% over the 15 months concluding 3/31/07. Over the period, RRR has had over 470,000 customers with the top 10 customers representing 7% of overall revenues.

Business has been strong the past 4 years as RRR has achieved 15 consecutive quarters of positive 'same store sales' growth. This would mesh with the strong nature of the of non-residential real estate construction sector since 2003. The equipment rental market was $34.8 billion business in 2006 and is expected to grow 8%-9% overall in 2007. The top 10 companies in the sector accounted for 30% of overall revenues in 2006. Interestingly while this is a fairly fragmented sector, RRR has grown exclusively organically and not via acquisitions.

Competition - National competitors include United Rentals, Hertz Equipment Rental Corporation and Sunbelt Rentals. Regional competitors are Neff Rental, Ahern Rentals,. and Sunstate Equipment Co. A number of individual Caterpillar dealers also participate in the equipment rental market in the United States and Canada.


Substantial debt of $2.7 billion post-ipo is the issue here. The nature of RRR's business is going to mean there will be debt on the books. Prior to the recapitalization however, RRR was doing a very nice job of maintaining level debt levels of $1.2 billion in 2004, 2005 and into 2006 while expanding their equipment fleet. They were adding a lot of new equipment through cash flows while keeping debt levels stable. Sign of a strong business and solid management. My issue here(and it is a big one) is that the substantial additional debt added recently due to the recapitalization did nothing to help grow the business. All it did was help the private equity interests make money.

As RRR states, 'Our revenues and operating results are driven in large part by activities in the non-residential construction and industrial markets. These markets are cyclical with activity levels that tend to increase in line with growth in gross domestic product and decline during times of economic weakness.'

Debt servicing costs will now eat up roughly 50% of RRR's operating profits post-ipo. While business is strong currently RRR will still have nice cash flows even at these debt levels. However their business is highly dependent on overall non-residential construction. We saw this segment of the economy slow substantially in 2001-2002. While a similar future slowdown most likely would not mean difficulty in servicing their debt, it could easily mean servicing debt wipes away cash flows and bottom line net profits. My issue here is not RRR's debt as they're going to have debt in their line of business. My issue is the substantial debt laid on during the recap that does nothing to assist the business. The newer debt is debt that is dragging the business, not debt in which they're making a profit by leasing equipment financed. Big difference. THE difference maker for me when it comes to this RRR ipo.

Business has been strong: Same store sales increases were 12% in 2004, 18% in 2005, 19% in 2006 and 13% the first quarter of 2007. Keep in mind this sector is not apples to apples comparison to retail and restaurant same store sales growth. While the latter two tend to have a finite selling space, RRR is able to add equipment and overall rental capacity annually much easier in a strong demand environment. This is not really a 'finite selling space' type business. Still the same store sales do indicate an overall healthy operating climate for RRR the past few years.

Note that 2006/2007 numbers include a look at the company as if both the recapitalization and the ipo had closed 12/31/05. In other words a look at operations as the company will be structured post-ipo.

2006 - Revenues were strong at $1.65 billion, a 14% increase over 2005. Reasons for the increase were additional rental equipment added as well as higher purchase and rental rates on equipment. Gross margins are rather strong here at 36%. RRR is in many ways a 'middle man' type operation. These are impressive margins for this type of business. Operating expenses were 11% of revenues. RRR has held operating expenses in this 10%-11% range over the years. Operating margins were 26%. Pre-recapitalization, net margins would have been 12% with earnings per share of nearly $2. Without the recap debt, RRR would be dirt cheap in range and strong recommend. However that isn't the case. Including the recap debt, 2006 net margins were 7% with earnings per share of $1.17. Huge difference, all into the pockets of the Oak Hill and Ripplewood.

2007 - RRR had a solid first quarter, even though equipment sales were down a bit. It appears in 2006 RRR cleared out a lot of old equipment via sales and replaced rental fleet with newer stuff. Overall revenues look as if they may grow by 10% in '07 to $1.82 billion. Gross margins should again be in the 36% range. As RRR as managed operating expenses to that 10%-11% area for years now, I would expect similar in 2007 meaning operating margins should again come in around that 25%-26% number. Debt servicing will 'eat' up approximately 50% of all operating profits in 2007. Again a chunk of this debt is recap related and not debt RRR will be making money off of through equipment purchases and then renting out said equipment. Net margins should be 7 1/2% - 8%. Earnings per share should be in the $1.30 range. On a pricing of $24, RRR would trade 18 x's '07 earnings.

RRR's closest public comparable is United Rentals(URI). A quick look at each.

URI - $2.83 billion market cap, currently trades 0.72 X's '07 revenues and 13 X's 07 earnings estimates. URI is heavily leveraged with $2.7 billion in debt. Revenue growth estimates are in the 5%-7% range.

RRR - $2.47 billion market cap on a $24 pricing. Would trade 1.4 X's '07 revenues and 18 x's '07 earnings estimates. RRR is heavily leveraged post-ipo with $2.7 billion in debt. Revenue growth estimates for '07 in the 10% ballpark.

Conclusion - If not for the recap debt laid onto RRR, this would be an easy recommend. As it is, the multiple here seems a bit steep in relation to both URI and the amount of debt on the books post-ipo. RRR is a solid company that has booked strong cash flows and earnings the past four years. This is a good company that appears to have managed growth very well. However I can't recommend this deal, due to the debt laid on here to directly benefit Ripplewood and Oak Hill(and not the company and public shareholders). In solid economic climate, I would expect RRR operationally to continue to do well. Neutral overall here on this deal. Strong business and sector leadership with a private equity related drag on the bottom line.

May 23, 2007, 8:30 pm


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SKH - Skilled Healthcare

SKH - Skilled Healthcare Group plans on offering 19.1 million shares(assuming over-allotments) at a range of $14-$16. Insiders are selling 10.8 million shares in the deal. Credit Suisse is lead managing the deal, with eight firms co-managing. Post-ipo SKH will have 37.4 million shares outstanding for a market cap of $561 million on a $15 pricing. IPO proceeds will be used to repay debt.

Onex, a Canadian conglomerate, will own 47% of SKH post-offering. Onex will control SKH through a separate share class. Onex is the primary selling shareholder in this deal. Onex brought EMS public in 12/05. Post-ipo Onex owned 77% of EMS, they currently have an approximately 27% stake. EMS has nearly tripled since ipo debut.

Onex formed SKH in 12/05 by merging together two nursing/assisted living companies. They owned one and completed a leveraged buyout of the other on the merge. Post-merger Onex owned 95% of the combined entity. It also appears as if there was a roughly $100 million dividend payout to Onex in there as well. The result is that SKH was heavily leveraged after the merger. Even after paying off debt on ipo, SKH will still have significant debt on the book of $414 million. Keep in mind that one of SKH's predecessor's filed for bankruptcy in 2001.

I would much prefer to see Onex withhold selling shares on ipo here to allow SKH to offer more shares themselves and help the balance sheet.

From the prospectus:

'We are a provider of integrated long-term healthcare services through our skilled nursing facilities and rehabilitation therapy business. We also provide other related healthcare services, including assisted living care and hospice care.'

As of 4/1/07, SKH owned or leased 64 nursing facilities and 13 assisted living facilities comprising 8,900 beds. SKH owns 75% of their operated facilities which are located in California, Texas, Kansas, Missouri and Nevada. SKH focuses on urban and suburban locations with 67% of locations in non-rural areas.

Higher reimbursed non-Medicaid patients comprised 70% of patients the first quarter of 2007. Medicare patients accounted for 38% of 2006 revenues, while Medicaid patients accounted for 30% of revenues. Medicare patients are reimbursed at a pre-determined rate adjusted for inflation. SKH is seeing downward reimbursement pressure on Medicaid patients due to rapid Medicaid spending growth and slower state revenue receipts. Currently Medicaid is reimbursed at lower rates then Medicare, a trend SKH foresees continuing. Both Medicare/Medicaid tend to be reimbursed at lower rates then private insurance.

Roll-up - SKH has grown via the acquisition route, making 30 nursing home and/or assisted living purchases over the past 4 years. Count on SKH to continue to grow by purchasing(or leasing) additional facilities going forward. I would expect SKH to mimic the 7 1/2 facility per year acquisition pace of the previous four years.

Sector - The US nursing home market is a $120 billion annual business. Growth is being driven by the aging of the US population coupled with longer life expectancies. The annual growth rate of those in the US 65 years of age or older is expected to be 2% over the next decade. The market is highly fragmented and consists of approximately 16,000 facilities with 1.7 million licensed beds. The top 5 operators run only 10% of these facilities. This is a prime consolidation niche and companies such as SKH plan on growing via the consolidation/acquisition route.

Organic growth - In addition to future acquisitions, SKH is constructing two new facilities: a nursing facility in the Dallas/Fort Worth area and an assisted living center in the Kansas City, MO area. The Kansas City location will add 45 beds by 9/08 while the Dallas location will add 385 beds by 4/09.

53% of revenues are derived from facilities in California, 32% from Texas. Occupancy percentage in SKH facilities has been 85%-86% the past few years. 85% of all revenues are derived from SKH's nursing facilities.

Medicare/Medicaid - Approximately 70% of SKH's annual revenues come from Medicare/Medicaid. An ongoing risk for this type of business is the annual budgeting process. In the current budget proposal, there is a 'freeze' on Medicare nursing home payments as well as reduce payments for hospice services. The same budget including a proposed $25 billion cut in Medicaid over the next five years. SKH expects Medicaid/Medicare cost containment measures for nursing homes to be an ongoing issues for them into the future.

Referral Network - SKH relies on a hospital referral network for a portion of their new business. SKH believes forming alliances with leading medical centers improves their ability to attract high-acuity patients to their facilities because an association with such a medical center typically enhances SKH's reputation. Current alliances include Baylor Health Care System in Dallas, Texas, St. Joseph’s Hospital in Orange County, California and White Memorial in Los Angeles, California.


Debt is the issue here, $414 million post-ipo. Nearly a third of this debt is at a rather high interest rate of 11%. Debt servicing in 2007 will be $40 million, approximately 50% of operating profits. That is substantial and more then I'm comfortable with.

Negative book value post-ipo.

2006 was SKH's first year of operations as a combined entity. SKH was kind enough to 'back in' acquisitions as if they occurred 12/31/05, as well as take into effect alterations based on ipo. Essentially the following 2006 numbers take into account how the company will look post-ipo. All numbers then are pro forma, but a better indication of public SKH then the actual numbers. Revenues for 2006 were $564 million. Gross margins were 25%. Operating margins were 14%. Debt servicing is the killer here eating up substantial operating profits. Net margins after debt servicing and taxes were 4%. Earnings per share were $0.56. On a pricing of $15, SKH would be trading 27 X's 2006 earnings.


SKH is adding 500 beds just in time for the 2nd quarter of 2007. Following numbers take that into account but do not take into account any future acquisitions in 2007...of which I've no doubt there will be a few.

2007 revenues should be in the $625 range, an 11% increase over 2006. Gross margins should be in the same 25% ballpark as 2006. Operating margins also should be in the 14% range. Debt servicing will still be in the $40 million ballpark, but due to greater operating earnings, it will be less a % which will help net margins slightly. Debt servicing is still hefty here, make no doubt. I believe debt servicing in 2007 will ear up close to 1/2 of all operating profits. I would anticipate net margins in the 4 1/2% range. Earnings per share should be in the $0.75 range. On a pricing of $15, SKH would be trading 20 X's 2007 earnings.

Competitors include Manor Care(HCR) and Sun Healthcare(SUNH). In the same general sector is 2005 IPO Brookdale(BKD). BKD focuses more on senior living and senior communities but does also operate low to mid acuity assisted living centers. SKH and BKD are not 'apples to apples' comparables as BKD is not nearly as reliant overall on Medicare/Medicaid as SKH. BKD has done well, even though they came public heavily leveraged.

BKD - $4.5 billion market cap


Pretty simple business model. This is a rather low margin business with very little gross/operating margin improvement potential. 70% of revenues come directly from Medicaid/Medicare and if margins look a little high, they'll slash reimbursements next cycle. Also we're currently in a budget deficit with both the Executive/Legislative branch looking for places to cut. The 30% non direct Medicare/Medicaid is often indirectly linked to Medicare rates. Pretty much any way you look at it this is not a business in which gross/operating margins are going to improve much. To lay more money on the bottom line, facility operators are looking to acquire and consolidate what is a very fragmented sector. That is the SKH plan, to grow through acquisition as well as constructing new facilities in key areas.

Thus far that plan is working for them SKH is on pace to have a strong operational 2007. The issue here for me is the debt. I'm not comfortable with the debt levels here, particularly in a sector that had a rash of bankruptcies just 6-7 years prior.

The pluses: SKH appears well managed and operationally should put together a strong 2007. This ipo is being brought public by Onex, which also brought public EMS. EMS is up 3 fold since 2005 debut. Also in the same general 'senior living' sector, another heavily leveraged ipo BKD has performed quite well over the past 1 1/2 years. 20 X's 2007 earnings here is not unreasonable at all considering SKH growth patterns.

The negatives: The debt. Debt servicing will eat up nearly 50% of 2007 operating revenues. Also should something occur to slash either Medicare/Medicaid funding, the drag on SKH's cash flow could potentially cause repayment issues. Also current debt levels could slow future growth.

Without the debt, this would be a strong recommend in range. I can't recommend a company leveraged this much. I like the niche and I like the business and growth plan. In range I think this deal works. However keep in mind this is a heavily leveraged company, and it doesn't take too much bad news before a leveraged operation runs into trouble.

May 14, 2007, 2:58 pm

ACM - Aecom Technology

Disclosure. At date of posting to blog(5/14/08), tradingipos.com does have a position in ACM from 21.2 avg.

ACM - Aecom Technology

ACM - Aecom Technology Corporation plans on offering 35.2 million shares at a range of $18-$20. Insiders are selling 15.3 million shares in the deal. Morgan Stanley, Merrill Lynch and UBS are lead managing the deal, Goldman Sachs, Credit Suisse, and DA Davidson are co-managing. Post-ipo, ACM will have 92.4 million shares outstanding for a market cap of $1.76 billion on a $19 pricing. approximately 1/2 the ipo proceeds will be used to repay debt, 1/5 to fund employee stock plan and the rest for general corporate purposes.

Note that ACM is paying off essentially all debt on offering. For a company that has made numerous acquisitions the past decade, a clean balance sheet gives them a nice competitive advantage.

ACM's own retirement and trust plan will own 20% of ACM post-ipo. this is a bit unusual and is a result of Aecom beginning life as an independent entity from an employee buyout in 1990.

From the prospectus:

'We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government.'

A government engineering and construction contractor focusing on general building, transportational and environmental markets. Quite similar in project scope to 2006 ipo KBR. ACM is large, in fact they're the largest general architectural and engineering design firm in the world. ACM has grown via acquisitions with over 30 acquisitions over the past 10 years. Interestingly, while ACM absorbs these acquisitions under the ACM 'umbrella' nearly all of them continue to operate under their original names and keep much of their organizational structures intact. The result is that ACM operates subsidiaries all under different names.

ACM operates under two business segments, Professional Technical Services and Management Support Services. Professional Technical Services is ACM's higher margin growth driver in which they've a worldwide leadership role in their target markets. Management Support Services is ACM's low margin employee intensive government fulfillment segment.

Professional Technical Services

81% of revenues, this is the business driving segment. planning, consulting, architectural and engineering design, and program and construction management services to government, institutional and commercial clients worldwide. Current projects include 2012 London Olympics, Pentagon Renovation, JFK airport in New York, and a Russian Independent Power Project. Private sector accounts for 45% of revenue, public sector 55%. Public sector breakdown is 31% US state and local, 11% direct US federal and 13% non-US government.

A quick look at ACM's core Professional Technical Services end markets:

Transportation - ACM's prime growth driver includes design and construction management of airports, seaports, bridges, tunnels, railway lines and highways. Domestically this is a direct play on the aging US infrastructure.

General Building - Includes the construction of commercial buildings, office complexes, schools, hotels and correctional facilities.

Water, Wastewater and Environmental - Projects include water treatment facilities, water distribution systems, desalination plants, solid waste disposal systems, environmental impact studies, remediation of hazardous materials and pollution control.

Energy/Power - Revitalizing energy and power transmission and distribution systems in the United States.

Management Support Services

19% of revenues. Facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. Clients include Department of Defense, Department of Energy and the Department of Homeland Security. Projects include managing and maintaining Camp Arifjan Army Base in Kuwait, Fort Polk Training Center and operating for the Department of State an international civilian police force.

ACM 25 largest worldwide projects accounted for 14% of 2006 revenues. ACM operates in 60 countries worldwide. Backlog was $3.1 billion as of 3/31/07. Overall a little over 60% of revenues are derived from government contracts.


$3 a share in cash post-ipo. This takes into account the small amount of debt on the books after offering. What impresses me here is the lack of debt on the books post-ipo. Fully expect ACM to use the clean balance sheet and cash on hand to aggressively acquire smaller operations first year public.

Dividends - ACM does not plan on paying dividends.

4 X's book value on a $19 pricing.

ACM's fiscal year ends 9/30 annually. FY '07 will end 9/30/07.

FY '07

Revenues appear on track to grow 24% to $4.2 billion for the year. Much of this growth is due to acquisitions. Gross margins are in the 26% range.

Operating margins are 3.3%. Note that ACM has much stronger gross margins then similarly sized recent government contractor ipos SAI/KBR. While this is in part due to nearly 40% of ACM's revenues being derived from non-government sources, it also appears to be in part an accounting function of employee costs. The operating margins of the three are the apples to apples comparison. Based on recent quarters, operating margins of the three look like this:

ACM 3.3%

KBR 2.7%

SAI 6.8%

Note that SAI has a much lower employee intensive business then ACM/KBR. KBR is a closer pure comparable to ACM.

Net margins for FY '07 look to be in the 2% range. Earnings per share look to be in the $0.90 range. On a pricing of $19, ACM would be trading 21 X's FY '07 earnings.

A quick glance at ACM/KBR

KBR - $3.7 billion market cap, trading 0.4 X's revenues, 2 X's book value and 19 X's FY '07 earnings. Note KBR is expecting a significant revenue decrease in FY '08 due to splitting of Iraq contracts.

ACM - $1.76 billion on a $19 pricing. Would be trading 0.4 X's revenues, 4 X's book value and 21 X's FY '07 earnings. Difference here is that ACM is growing revenues to the tune of 24% in FY '07. ACM fueled with IPO cash and a clean balance sheet should be able to grow revenues double digits in FY '08 through acquisitions as well.

ACM is much strong then KBR simply due to their ability to grow revenues(and the bottom line) going forward.

Conclusion - ACM has a very nice revenue mix from government contracts and private contracts. They rank #1 or #2 in US companies in engineering and consulting services for the following sectors: Mass Transit and Rail; Airports; Marine and Ports; Highways; Bridges; Educational Facilities; Government Offices; Correctional Facilities; Sewage & Solid Waste. That is one impressive list. Factor in the clean balance sheet post-ipo and the strong cash position and this is an easy recommend in range.

Note - With 35 million shares(15 million from insiders) in the offering this is a bulky deal. It is also a low margin business. While ACM has enough going for it to make this a very easy 'recommend' in range, I'm less constructive the higher the pricing/open. This is not the type of company or offering you want to pay way up for, however ACM ipo does offer a nice mid-term risk reward opportunity in pricing range.

April 29, 2007, 6:19 pm

EDN - Edenor

EDN - Edenor

EDN - Edenor plans on offering 15.2 ADS on the NYSE and 4.07 ADS equivalent shares in Argentina at a US dollar price range of $16-$18. 11.4 million of the 19.9 million total ADS offering will be coming from selling insiders. Citigroup and JP Morgan will be co joint book runners on the ipo. Post ipo EDN will have 45.3 million ADS equivalent shares outstanding for a market cap of $770 million on a $17 pricing. IPO proceeds will be utilized to repay debt, capital expenditures and general corporate purposes.

Electricidad Argentina will own 51% of EDN post-ipo.

From the prospectus:

'We are the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2006...We believe we are also one of the largest electricity distributors in Latin America in terms of customers and volume of electricity sold.'

EDN has the exclusive concession to distribute electricity to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires. Electricity distribution area comprises 4,637 square kilometers and a population of approximately seven million people. In 2006, EDN sold 16,632 GWh of energy and purchased 18,700 GWh of energy. EDN purchases 19% of all electricity wholesale purchases in Argentina.

Approximately 2.5 million total customers in 2006. 32% of total energy revenues are derived from residential customers. EDN has averaged 11%-11.5% losses of energy power the past three years. This being power that EDN purchased but did not pass through to paying customers. EDN is reimbursed by the Argentina government for lost energy up to 10% annually.

Regulation - EDN is regulated by the Argentinian government. EDN passes through to customers their cost of energy plus a regulated distribution margin. In January '07 EDN received a a 28% increase in the distribution margin charged to non-residential customers.This is the first margin increase approved for EDN since 2002. The increase was effective retroactively to 11/05. EDN's non residential customers will be charged the retroactive margins monthly over 55 months. The upshot for EDN is that the margin increases they're now able to charge non-residential customers coupled with the retroactive payments mean their gross margins in 2007 should be significantly stronger then historical gross margins. EDN's long term viability is a public company depends squarely on EDN's ability to continue to receive distribution margin increases from the Argentinian government.

Dividends - Since electricity distribution isn't normally a growth business, there is often a pretty significant dividend to entice shareholders. Note though that EDN does not plan on paying a dividend initially. In fact they're not permitted to pay dividends until mid-'08 at the earliest. Expect then no yield here for at least the first year public. All things being equal, a significant negative.

Argentina - During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. The inflation rate in 2002 reached 41%. Beginning in 2003, the Argentinian economic climate has stabilized and since Argentina has outpaced most of the rest of the world. Inflation still tends to be high in the country with inflation rates topping 12% in 2005 and nearly 10% in 2006. GDP growth has averaged 9% annually since 2003. Argentina's strong economic growth the past few years has boosted electricity demand in the country. EDN estimates that overall electricity demand in Argentina has grown 5.8% annually from 2003-2006.

EDN collects revenues in pesos but their debt is denominated in US dollars. EDN does not hedge for currency risk.


Debt - In 4/06 EDN restructured the bulk of their debt. Note that until this restructuring EDN had been in default on this debt since 2002. Post-ipo EDN will have a substantial amount of debt on the book, approximately $358 million. In a very slim operating margin business, you don't want to see substantial debt on the books. This is particularly the case here in which the slim operating margin is strictly regulated by the Argentina government.

1.3 X's book value in a $17 pricing.

Thanks to a strong economy in Argentina, EDN has been able to grow electricity sold and revenues by 8% - 10% the past 3 years.

Note that EDN seems to consistently be fined substantial amounts of monies. In 2006 EDN was fined approximately $8 million, in 2005 approximately $22 million and in 2004 approximately $12 million.

2006 - Total revenues were $450 million a 9% increase over 2005. Gross margins were 42%. If EDN's retroactive distribution margin increase was in effect for 2006, gross margins would have been a much stronger 57%. Operating margins were a very slim 2 1/2%. EDN has plenty of relatively fixed costs, the only hope they've got of growing operating margins are government regulated increases in the distribution margins. Again if those 2/07 retroactive distribution margin increases had been in place for all of 2006, operating margins would have been 18%. Debt servicing ate up all actual operating margins in 2006. Losses for the year were in the $0.50 range for 2006. Actual numbers look quite different in the prospectus due to 1) a one-time $59 million gain from debt restructuring and 2) $55 million in income tax gain. EDN lost massive amounts of money in 2001 and 2002 and still has substantial tax breaks and refunds assisting the bottom line. Neither of these are operational earnings, so I folded both out.

2007 - Revenues should grow strongly due to 1)the distribution margin increase for non-residential customers; 2) received payments for the retroactive increases covering 9/05-1/07; 3) the continued strong economy in Argentina. I would expect overall revenues in 2007 to increase in the 25% ballpark to $550-$570 million. EDN estimates that the non-residential distribution margin increases alone should account for a 17% increase in revenues. Gross margins will be much strong as well thanks to the the margin increase. Operating margins should approach 19%-20% in 2007. Net margins(excluding income taxes and income tax carryfowards) should be in the 14% range.

Earnings per share(before any income tax refunds from prior years) in 2007 should be in the $1.70 ballpark. Keep in mind these are untaxed earnings. On a $17 pricing, EDN would be trading 10 X's 2007 earnings. The ruling allowing a more favorable distribution margin for EDN shifted them from a money losing operation to a nicely profitable one.

Conclusion - Argentina's economic growth the past fours years has opened the door for an operation such as EDN to come public. The deal only works in range however due to EDN's winning approval of a distribution margin rate increase to non-residential consumers. That approval shifts them into a nice bottom line profit operation. What EDN is not - EDN is not a high growth enterprise. They will experience substantial growth in 2007 due to a couple of one-time factors.In the future(2008 and beyond) I would expect EDN's revenues to by closely tied to Argentina's economic climate. EDN is also not paying a dividend. This is the type of business, electricity distribution, in which I'd like to see a nice slice of the cash flows returned to shareholders. However I do think this deal works in range due to Argentina's strong economic climate in recent years. Investors have been eager to find companies operating in countries growing faster then the US and Europe and EDN fits the bill. I expect this deal to work in range, recommend. One reason I believe EDN will work is that they'll be reporting stronger financials in 2007 then anytime in their operating history. I tend to like ipos that will be reporting very strong quarter first year public and that will be the case here.

April 21, 2007, 1:23 pm


http://www.tradingipos.com pre-ipo analysis piece on VRAZ. Piece was on site for subscribers 4/1. On 4/5 VRAZ priced at $8, below the $10-$12 range. VRAZ currently trades near $7 a share.

VRAZ was touted by a nationally televised financial program to be a 'buy' up to $15, tradingipos.com disagreed with that assesment as the piece below indicates. This isn't a bad company, just yet another tech ipo coming public a little too soon on the growth and earnings curve for my tastes.

VRAZ - Veraz Networks

VRAZ - Veraz Networks plans on offering 9 million shares at a range of $10-$12. Insiders will be selling 2.2 million shares in the deal. Credit Suisse and Lehman Brothers are lead managing the deal, Jefferies and Raymond James will be co-managing. Post-offering VRAZ will 39.5 million shares outstanding for a market cap of $435 million on an $11 pricing. IPO proceeds will be utilized for capital expenditures, working capital and for general corporate purposes.

ECI, the selling shareholder, will own 25% of VRAZ post-ipo.

From the prospectus:

'We are a leading global provider of Internet Protocol, or IP, softswitches, media gateways and digital compression products to established and emerging wireline, wireless and broadband service providers. Service providers use our products to transport, convert and manage voice traffic over legacy and IP networks, while enabling voice over IP, or VoIP, and other multimedia communications services.'

IP Products:

ControlSwitch softswitch solution - Manages and directs the IP traffic (such as a voice call) to its appropriate destination, whether it starts out as IP traffic or is traditional traffic that has been converted.

I-Gate 4000 family of media gateway products - convert traditional telephone voice traffic into IP, compress the data packets and transport this data on IP networks.

VRAZ two product families work in conjunction with each and according to the company, 'convert traditional voice traffic to IP and back allows our customers to operate two distinct networks as a single network and thereby continue to utilize their existing wireless and wireline legacy networks while simultaneously offering next generation IP applications and services.'

Advantages include: 1)seamless migration of legacy networks to IP; 2)cost reduction; 3)rapid introduction of new services; 4) compatibility with current systems.

Legacy Products:

Digital circuit multiplication equipment(DCME) - Communications systems that use proprietary signal processing technology to increase the effective capacity of transmission links by compressing voice and fax traffic while maintaining the quality of that traffic.

While DCME products made up 38% of revenues in 2005, they've been declining in recent years. The growth driver for VRAZ has been their IP products which doubled in revenues in 2006. VRAZ is leveraging their installed base of DCME customers to position to be the provider of IP network solutions to customer base as they migrate to IP networks. Much like a slew of recent tech ipos, VRAZ is a play on the increased traffic growth over networks and the upgrade cycle of said networks by service providers. Pushing this growth is increased subscriber demand for advanced voice, video and data telecommunications services and the broad adoption of broadband.

Customer base includes 400 service providers that have deployed VRAZ DCME products and 55 customers that have deployed VRAZ IP Products.

As with most of the networking sector, competition in the Internet Protocol space is fierce. Direct competitors to VRAZ include Alcatel-Lucent, Ericsson, Nortel Networks, Siemens, Cisco Systems, Sonus Networks, Tekelec and Huawei. Note that this has also been a notoriously cyclical sector. Business for IP networking products has been robust the past few years. However even in a robust environment, VRAZ has never been able to book a profit. Another cyclical slowdown at some point in the future would hurt a company like VRAZ a great deal.

VRAZ sells their products mainly through resellers and distributors. VRAZ largest shareholder ECI has been responsible for generating 25%-30% of VRAZ sales the past two calendar years.

82% of revenues are derived outside the US. Much of VRAZ research and development staff is based in India.

Flextronics manufactures all of VRAZ IP products, largest shareholder ECI manufactures all VRAZ DCME products.


$2 a share in cash post-offering, no debt

Revenues have been increasing annually past few years solidly if not spectacularly. All of the growth has been fueled by VRAZ IP products. Their legacy DCME products appear to be slowly drying. DCME product revenues has declined each of the past two years and is expected to once again in 2007. In comparison, IP product revenues have doubled the past two years.

2006 - Total revenues were $99.5 million, a 30% increase over 2005. All of that revenue increase was due to VRAZ IP product line. Gross margins were 54%, a decline from 2004/2005's 56%. Led by R&D and sales & marketing, operating expenses were hefty at 58% of total revenues. Operating expense ratios have really not declined all that much past few years as revenues have increased. This is just not what one wants to see. Unless VRAZ either ramps revenues much fast then they've been or somehow manages to lower operating expense ratios, they'll never be able to put much on the bottom line. Losses in 2006 were steep at $0.34. VRAZ did approach break-even in the fourth quarter of 2006, however they've noted a few times in prospectus that they expect hefty losses to resume the first quarter of 2007.

2007 - VRAZ expects DCME product revenues to continue to decline, so revenues growth will depend on their IP products line. It appears VRAZ did not have a stellar first quarter of 2007. In fact they expect overall revenues to decline sequentially in the first quarter of 2007. Why? Apparently their IP product revenues did not grow in the first quarter of 2007. So we've got an operation losing significant monies whose growth driver looks as if it may have stalled...at least for a quarter. I would expect 2007 revenue growth here to be in the 10%-20% range overall. Losses should be in the $0.25 - $0.35 ballpark.

Conclusion - VRAZ is another tech ipo coming a bit too early. The revenue growth and steady losses just do not justify appreciation from ipo range. Pass.

April 16, 2007, 6:23 am


Other then BBND, I've really not been enamored by the recent tech ipos...a little too much enthusiasm and a little too many operating losses seem to be the norm of later. VRAZ latest example of an unrealistic ipo range.

SMCI priced below range at $8, which was quite appealing. We like SMCI anywhere in single digits actually.

Following is our pre-ipo piece on SMCI.

Note that tradingipos.com does currently have a position on SMCI.

SMCI - Super Micro Computer

SMCI - Super Micro Computer plans on offering 9.2 million shares (assuming over-allotments) at a range of $9.50 - $11.50. Merrill Lynch is lead managing the deal, Needham and UBS co-managing. Post-offering SMCI will have 28.6 million shares outstanding for a market cap of $300 million on a $10 1/2 pricing.

*Note* - This SMCI deal is another of those tech ipos structured more like a 1999 ipo than should be in this day and age. This means there are excessive outstanding, already in the money and exercisable, options here. SMCI has a whopping 15 million shares of common stock issuable upon the exercise of stock options outstanding at a weighted average exercise price of $2.12. You can bet over the next few years these options will be exercised, converted into shares and sold. Factoring in this dilution, SMCI would have 43.6 million shares outstanding for a market cap of $458 million on a $10 1/2 pricing. This is a trend we've been seeing way too much of lately and one I do not care to see. While these options will not effect early trading of SMCI, they do create a pretty significant headwind for a stock over the first few years of trading. What we will see here with SMCI is a continued stream of insiders exercising and selling options beginning at the 180 day market and most likely continuing quarterly for a few years. SMCI as a company will have to outperform operationally to simply 'stand still' on stock price as these options will be growing market cap, even with stock at same price. Please keep this in mind for those looking to hold SMCI longer term - you will be diluted heavily by insiders. Many of the options shares are part of SMCI's 1998 stock option plan. As most options need to be exercised within 10 years, there is a pretty good chance that many of the 15 million option shares will be exercised and sold by the end of 2008.

Approximately 1/3 of ipo proceeds will be used to repay all debt, 2/3's for general corporate purposes.

Chairman of the Board, President and Chief Executive Officer Charles Liang will own 32% of SMCI post-ipo.

From the prospectus:

'We design, develop, manufacture and sell application optimized, high performance server solutions based on an innovative, modular and open-standard x86 architecture. Application optimized servers are configured to meet specific customer needs in contrast to typical servers which are offered in limited standardized configurations.'

Customizable server company. SMCI customizes their servers to meet specific customer requirement by adjusting memory, processing power, and/or input/output capabilities. SMCI's servers are based on x86 which is the open standard utilized by both Intel (INTC) and Advanced Micro Devices(AMD) in their microprocessors. INTC and AMD are SMCI's only suppliers of microprocessors. Note that SMCI does not participate in the traditional UNIX server market. The open architecture server market in which SMCI participates is growing much faster than the traditional UNIX server market. Going forward the UNIX server market is expected to grow 6%-7% annually the next 4 years, while open architecture servers are anticipated to grow 40%+ over the same period of time.

SMCI's open architecture approach allows for easy integration of their servers as well as allowing for the ability to 'stack' their servers to create scalable server systems. The selling point for open system servers is the ease of scaling when compared to the traditional UNIX server market. SMCI also offers server components to OEM's. Majority of revenues are from individual servers and server components, not complete server systems. As SMCI sells through distributors, this is not surprising. Companies purchasing from distributors can/do stack SMCI's servers and components to create their own specialized server system.

SMCI commenced operations in 1993 and has been profitable every year since. Pretty impressive considering the various tech cycles since. SMCI sells primarily through distributors, whom accounted for approximately 70% of revenues past two years. In 2006, 400 companies in 70 countries purchased SMCI servers and server components.

SMCI believes their advantages include: 1) Customizable and flexible; 2) Rapid time to market; 3) Power efficiency and thermal management; 4) High density - Density is amount of space required by a server. By being 'high density', SMCI's servers require less floor space.

As of 12/31/06, SMCI did not offer a 'high performance blade server' solution. However SMCI expects in the first half of 2007 to launch a high performance blade server solution, called Superblade. Blade servers are specifically designed for high density by sharing power, cooling, networking and other resources within a single server-rack enclosure, compared to standard servers which each require their own independent resources. By eliminating these repetitive components and locating them in one place, a greater number of blade servers can be used in a smaller physical area as compared to standard servers. This would appear to be SMCI's answer to servers offered by companies such as Rackable (RACK).

No single customer accounted for more than 10% of revenues each of 2005 and 2006.

SMCI utilizes Ablecom Technology for contract design and manufacturing coordination support. SMCI’s purchases from Ablecom have accounted for roughly 1/3 of cost of sales expense the past 5 years. Ablecom is a private company owned by the brother of SMCI President/CEO Charles Liang.

Legal - In 9/05 Rackable Systems filed a patent infringement suit against SMCI. In 2/07 the Court threw out much of the lawsuit, ruling very favorably for SMCI. The remaining claims in the suit are set to go on trial in 8/07. Also SMCI was fined by the US Government for sales to Iran during the 2001-2003 period. In 2006, SMCI settled the charges and paid what appears to be approximately $500,000 in fines to the US government.


$2 per share in cash, no debt post-ipo.

The server market is notorious for lumpy revenues. A large order in any particular quarter can help a server company blow away estimates and.....conversely a company pushing out an order into another quarter can mean a pretty ugly looking quarterly earnings miss. Servers are generally not purchased on long term contracts, or even that far in advance. SMCI notes in the prospectus that most sales in a given quarter come from orders placed in that specific quarter. The fact that SMCI has been able to achieve and maintain profitability for 15 years in this highly competitive 'lumpy' sector is a pretty strong selling point here.

Note that SMCI accounts for revenues upon shipment to distributors, not the final sell-through from distributor to end user/customer. This has led to approximately $1-$3 million annually in 'inventory writedowns' for returned and/or excess product inventory.

SMCI's fiscal year ends 6/30 annually. FY '07 will end 6/30/07. 50% of revenues are derived from US customers, 50% from outside US. Revenues from outside US are growing more briskly and SMCI should generate more non-US revenues than US revenues in FY '07. Specifically SMCI is focusing future growth in China and throughout Asia.

Revenues have ramped impressively since 2002. Revenues in fy '05 (ending 6/30/05) were $211 million, $302 million in FY '06 and on pace for $400-$425 million through first half of FY '07.

Gross margins are slim in this niche. Through the past 18 months, SMCI has had gross margins in the 18%-20% range. This does not leave much margin for error. To be a successful company with these gross margins, managing operating expenses is crucial. In a niche in which SMCI must continue to develop new/better servers annually, R&D is the heftiest operating expense annually. Fortunately sales & marketing expenses are controlled at a low rate thanks to SMCI selling most of their products through distributors. Overall operating expenses equaled 10% of revenues in FY '06 and 11% through first two quarters of FY '07. SMCI has kept operating expenses in that 10%-11% of revenue area the past three fiscal years. I would expect that to continue to be the case going forward.

Net margins for FY '06 were 6%. EPS for the officially post-ipo share-count of 28.6 million was $0.63. When option shares are included, EPS dips to $0.41. On a 10 1/2 pricing, SMCI would be trading 17 X's trailing earnings without options shares included, 26 X's trailing earnings with future option dilution factored in. Big difference.

FY '07 (ending 6/30/07) - Based on first half of FY '07, we should expect full year revenues in the $400 - $425 million range. This would be approximately a 33% revenues increase from FY '06. Gross margins and operating expense ratios look to be in range of previous few fiscal years. Note however, that gross margins ticked down a bit in the 12/31 quarter from that 18%-20% range to 17%. While not dramatic, this will most likely drop FY '07 net margins by 1% for the full fiscal year. Net margins then should be in the 6% range, instead of FY '07's 7%. Earnings per share based on 28.6 shares outstanding should come in $0.80-$0.85. When factoring in option shares, earnings for FY '07 should be $0.55. On a $10 1/2 pricing, SMCI would trade 13 X's FY '07 earnings when no option dilution is factored in, 19 X's FY '07 earnings when full dilution is factored in.

Rackable Systems is the recent ipo most similar to SMCI. This will even be more the case when SMCI starts shipping their blade server product and components the first half of calendar year 2007. Let's take a brief look at the two. Note, in looking at SMCI's metrics below, we'll 'split the difference' on options and factor in 50% option dilution. As mentioned above, these options will not be in play until beginning approximately 180 days after ipo, although some may hit 90 days post-ipo. These options will be exercised, so when looking at SMCI we must factor in a good chunk of these options. The numbers below reflect SMCI as if 50% of outstanding in the money options were exercised.

RACK - $525 million market cap. Currently trades 1.1 X's FY '07 revenues and 22 X's FY '07 earnings estimates. Note that these estimates have been reduced substantially the past 90 days. RACK is expected to post a 27% revenue increase in FY '07.

SMCI - $380 million market cap (assuming 1/2 option dilution) on a $10 1/2 pricing. Would trade just less than 1 X's FY '07 revenue estimates and 16 X's FY '07 earnings with an expected 33% revenues increase in FY '07.

Conclusion - due to the lumpiness of revenues and the low gross margins, this should never be a sector in which a company is valued aggressively on forward PE's. RACK holders discovered this recently as a few good quarters in a notoriously lumpy sector were then forecast as the 'norm' going forward. Factoring in a huge quarter as the norm going forward will nearly always be a mistake in this sector. SMCI has done a terrific job over the years managing their business and growth through 13-14 profitable years in a row. This tells me a couple of things: 1) SMCI has been able to continually innovate over the years. This is a must in this sector as new products/components are constantly being introduced. 2) SMCI has done an excellent job managing operating expenses in a low growth margins sector. Both these are exactly what you need in a lumpy low gross margin sector. You need constant innovation and strong management. SMCI's years of continued profitability would seem to indicate they've both.

Revenue growth has really ramped here the past three years. I'm skeptical that this swift growth will continue. However if SMCI is simply able to grow in the 20%-25% range in FY '08, this is a very attractive ipo in range. The wild card for FY '08 and beyond is SMCI's Superblade server being introduced first half of 2007.

Keep in mind, the coming option dilution is a big negative here as ipo buyers will be massively diluted over the next few years. However even factoring in this dilution, SMCI still looks attractive to me in range. This dilution, coupled with low gross margins would lead me to pass here on any aggressive opening prints as it is doubtful those would be long-term sustainable.

This is not a sector in which you ever want to pay high multiples. In range and $1-$2 above however, SMCI is a recommend.

April 13, 2007, 11:53 am

FCSX part 2

Looks like rest of market discovered FCSX today --- the appeal of digging into ipos has always been finding one like this before the rest of the market realizes exactly what they do and how much money they will make.

FCSX has been a sweet backdoor way to play the commodities derivatives boom. Company today released their first earnings report since they went public at $24 last month.

Disclosure - at time of post on 4/13/07, tradingipos.com has a position in FCSX.

April 2, 2007, 6:12 am


With the ipo calendar slowdown during holiday week, we'll not have a free blog piece next weekend. Will continue with weekly free piece 4/15.

full analysis pre-ipo and active trading forum in membership section: http://www.tradingipos.com

ARUN - Aruba Networks

ARUN - Aruba Networks plans on offering 9.2 million shares(assuming over-allotments) at a range of $8-$10. Goldman Sachs and Lehman are lead managing, JP Morgan and RBC Capital co-managing. Post-offering ARUN will have 76.4 million shares outstanding for a market cap of $688 million on a $9 pricing. Note - In a trend we've seen with a few ipos lately, ARUN has excessive option/warrant/employee incentive shares already outstanding and ready to be converted to shares. ARUN has 19.9 million options outstanding with an average exercise price of $2.71 per share.In addition ARUN has approximately 1.6 million warrants and employee incentive shares already awarded. These 21.5 million options/warrants/employee incentive awards will be converted into share sooner then later and must be added into the initial market cap. Factoring in this upcoming dilution, ARUN will have 97.9 million shares for a market cap of $881 million on a pricing of $9.

IPO proceeds will be used for working capital and general corporate purposes.

4 venture capital firms will own between 55%-60% of ARUN post-ipo. Fully expect these firms to divest a portion of their holdings at the 180 day lock-up expiry.

From the prospectus: 'We provide an enterprise mobility solution that enables secure access to data, voice and video applications across wireless and wireline enterprise networks. Our Aruba Mobile Edge Architecture allows end-users to roam to different locations within an enterprise campus or office building while maintaining secure and consistent access to all of their network resources.'

Yet another networking ipo whose primary competition is Cisco and Motorola. As we'll see in the financials, Cisco's size and ability to compete on price are greatly effecting ARUN's ability to book a net profit even while growing revenues.

ARUN's focus is enterprise WLAN or 'wireless local networks'. ARUN,, which began shipping product in 2003, calls their product Aruba Mobile Edge Architecture(AMEA).

Industry - Enterprise wireless networking has grown appreciably due to the desire for mobile computing. WLAN or VPN(Virtual Private Networks) have been the solution enabling open access on wired network ports. These type networks extend the fixed network over the air. ARUN believes their AMEA product takes WLAN's to another level by providing additional security features, allowing secure roaming over the entire network, increased performance, easy scalability and integration etc...Essentially ARUN believes they've built a better enterprise WLAN product.

According to ARUN:

'Our architecture allows end-users to roam to different locations within an enterprise campus or office building while maintaining secure and consistent access to all of their network resources. Our architecture also enables IT managers to establish and enforce policies that control network access and prioritize application delivery based on an end-user’s organizational role and authorization level.'

ARUN's differentiators from traditional WLAN's:

1 - Secure mobility - Enables secure roaming over the network in various remote locations.

2 - Improved application performance - non-fixed port user centric and application aware allowing prioritization and optimization of data, voice and video services based on the specific user and/or the application being delivered.

3 - Ease of deployment and integration - Designed as an overlay to existing enterprise networks, allowing customers to deploy ARUN's products without causing any disruption to existing network operations.

4 - Scalability - Can be scaled to support up to 100,000 concurrent users from a centralized point-of-control.

5 - Flexibility - Designed for ease in introducing new applications.

The majority of ARUN's revenues are derived through resellers, distributors and OEM's, not ARUN's direct sales force. Third parties accounted for 75% of 2006 revenues. Largest channel partner/re-seller of ARUN's products is Alcatel-Lucent which accounted for 18% of revenues the past 18 months. ARUN has two interesting agreements with Alcatel-Lucent: 1) ARUN is restricted from selling products to other 3rd party sellers without consent of Alcatel-Lucent. Lot of power for a company that was responsible for just 18% of revenues past 18 months. 2) A 'most-favored nations' clause in which Alcatel-Lucent is guaranteed a match of the lowest price-point ARUN is selling their product to another channel partner/re-seller.

ARUN also has a strategic relationship with Microsoft, which began in June 2005. Microsoft chose ARUN's products for a worldwide company deployment in Asia, North America and Europe. Sales to Microsoft have totaled $3.5 million. In addition ARUN will essentially 'gift' MSFT approximately 400,000 shares of ARUN stock on ipo. Essentially MSFT is getting either free equipment or free ARUN shares from ARUN for choosing ARUN products.

ARUN's products have been sold to over 200 end customers. Flextronics handles the majority of ARUN's manufacturing.


$1 per share in cash post-ipo, no debt.

Revenues have been growing steadily if not rapidly. For the past 5 quarters ending 1/31/07, ARUN's revenues were(in millions): $20.1, $20.1, $24, $24.5, $26.6. Operating expenses have also grown steadily the past 5 quarters. In fact ARUN's operating expense growth has kept pace dollar for dollar pretty much with revenue growth.This really isn't what you want to see in a young growing company. The past 5 quarters of ARUN's operating expenses ending with the 1/31/07 quarter(in million): $12.4, $12.6, $14.7, $14.8, $16.4. the % of operating expenses to revenues the past 5 quarters are 62%, 63%, 61%, 60%, 62%. 5 quarters of solid revenue growth, yet ARUN is no closer to lowering their operating expense ratio.

ARUN's fiscal year ends 7/31 annually. FY '07 then will end 7/31/07. Through the first 6 months, ARUN's revenues are on pace for approximately $105-$110 million. This would represent a 48% increase over FY '06. Keep in mind ARUN was essentially in start-up revenue stage as recently as FY '04. Also at that revenue run rate, ARUN will be selling a hefty 9 X's 2007 estimated revenues.

Gross margins appear on track for the 60% ballpark. As noted above, operating expense levels are where ARUN runs into trouble. By growing their operating expenses in the ballpark of dollar for dollar, ARUN is not shifting close to profitability even with the increased revenue growth. This is a very competitive niche and it appears ARUN is plowing a substantial amount of expense money into sales and markets to compete with Cisco. The result is that ARUN will actually lose more money in FY '07 then in FY '06 even with the 44% revenue growth.

Assuming the fully diluted 98 million shares outstanding, ARUN lost $0.12 in FY '06(ending 7/31/06) and appear on pace to lose $0.20-$0.25 in FY '07. Until ARUN is able to reduce their operating expense ratio significantly, they will not be able to turn a profit. Thus far ARUN has not been able to lower that ratio much at all.

Conclusion - ARUN appears more then fully valued when all those option/warrant/employee incentive shares are factored in. These are shares that will be exercised over the next 1-2 years, so you've got to include them in the initial market cap. ARUN to me does not look anything like a $1 billion market cap company should look. We've seen a number of good tech ipos the past 6 months, ARUN at this initial market cap is not one of them. There just isn't remotely enough here under the hood to justify a a nearly $1 billion dollar cap on pricing.

March 24, 2007, 9:47 pm


Disclosure: at date of post to blog(3/24) tradingipos.com does have a position in FCSX.

Original analysis piece for subscribers to http://www.tradingipos.com was available on 3/8, prior to fcsx 3/16 debut.

FCSX - FCStone Group

FCSX - FCStone Group plans on offering 5.3 million shares (assuming over-allotments) at a range of $21-$24. BMO Capital and Banc of America will be lead managing the deal. William Blair, Raymond James and Sandler O'Neill will be co-managing. BMO is a bit of a wild card here as this will be their first lead slot in a US ipo. BMO Capital was formed as currently constructed in 2006 from BMO Financial and Nesbitt Burns. They've had a hand co-managing a few US and Canadian ipos the past year including MA/AVR.

Post-offering FCSX will have 17.6 million shares outstanding for a market cap of $396 million on a $22 1/2 pricing.

IPO proceeds will be used to redeem a portion of shares outstanding, pay down debt and for general corporate purposes.

Directors and officers will own 16% of FCSX post-ipo.

From the prospectus:

'We are an integrated commodity risk management company providing risk management consulting and transaction execution services to commercial commodity intermediaries, end-users and producers. We assist primarily middle-market customers in optimizing their profit margins and mitigating their exposure to commodity price risk. In addition to our risk management consulting services, we operate one of the leading independent clearing and execution platforms for exchange-traded futures and options contracts.'

'Keywords' that garner immediate attention: commodity, derivatives and the phrase 'clearing and execution platform for exchange traded commodity futures and options.'

FCSX has over 7,500 customers and in FY '06 (ending 8/31/06) executed 50.2 million derivative contracts.

FCSX began as a grain elevator risk management cooperative in 1968. In 2005, FCSX recapitalized from a member-owned cooperative into a stock corporation. While they have four operating segments, 'Commodity & Risk Management Consulting' and 'Trade Execution & Clearing' are the clear profit drivers.

Essentially what we've got here is a company that provides risk management consulting and trade clearing/execution in commodity derivatives. Commodity derivative trading has boomed this decade as evidenced by the success of related ipos- CME / BOT/ NMX / GFIG the past few years. Exchange/OTC commodity derivatives have grown in volume/total derivative value by approximately 25% this decade. Interestingly, the OTC commodity derivative market is 5 X's larger than the exchange traded market. The OTC market reflects the demand for non-standard products and also reflects the need for an expertise company such as FCSX.

What has been driving this growth? FCSX lists a number of reasons, many of which have been outlined in the commodity exchange analysis pieces: 1) Increasing acceptance of market risk has led to increased use of sophisticated hedging with options/futures; 2) higher prices and higher volatility have increased derivative volumes; 3) the shift to electronic trading; 4) Product innovation - in the past 6 years, CME and BOT have doubled their listed derivative product offerings; 5) Proliferation of hedge funds and professional traders; 6) worldwide deregulation.

FCSX business segments

Commodity & Risk Management:

FCSX provides risk management consulting to companies that supply or consume commodities or end-products. Companies that produce or consume hefty quantities of various commodities hire FCSX to implement and execute a successful commodity risk management program. FCSX has 100 risk management consultants that work with customers to mitigate commodity price risks in their business.

End client segments include 1) Commercial Grain - elevators, processors, manufacturers, traders; 2)Energy - focusing on producers, refiners, wholesalers, transportation companies, convenience store chains, auto and truck fleet operators, industrial companies, railroads and municipalities; 3)Introducing Brokers - agricultural producer 'middle-men'; 4) Latin America & Brazil - FCSX has developed a niche in consulting customers involved in all aspects of agribusiness in Mexico and Brazil; 5) China - 'middle men' operations conducting business on the US commodity exchanges as well as agricultural producers; 6) Renewable Fuels - Ethanol. FCSX provides risk management consulting to companies producing over 20% of ethanol in the US; 7) Other - forest products, food services, transportation and weather-related hedging products.

FCSX has their hands in risk management consulting in a number of newer and fast growing customer bases, as well as traditional domestic agriculture and energy. Their business plan is to initially provide full service risk management consulting to new customers and have them execute that plan via FCSX's own commodity derivative execution and clearing platforms. As clients increase their knowledge and acceptance of risk management practices, they become more independent in their hedging decision-making and, in some cases, will transition to fully self-directed trading over a three- to five-year period. Often FCSX will continue to provide some form of consulting service to even long-term clients. FCSX has a nice set-up here. They develop relationships early with participants in emerging commodity risk management sectors, and then provide both risk management and clearing and trade execution to that client long-term. Even if a client eventually gets to the point of having their own in-house risk management team, they still will tend to utilize FCSX trade execution and clearing platforms and services. That is a nice business plan in what has been a booming sector, commodity derivatives.

FCSX's Commodity and Risk Management went ballistic in FY '06, growing approximately 50% in client contract volume. Note that for FCSX much of the growth was driven by specialized OTC risk management products as well as by traditional exchange traded products.

Clearing & Execution Services:

As noted, most of FCSX risk management clients will also utilize FCSX's clearing & execution services to execute their risk management plans. In addition, through their own trading platforms FCSX clears for a variety of institutional and professional traders. FCSX is a member of all major U.S. commodity futures exchanges including the CME, CBOT, NYMEX, COMEX Division of NYMEX, NYBOT, Kansas City Board of Trade and the Minneapolis Grain Exchange. Of note FCSX believes they hold the largest share of the professional floor trader market at the NYBOT and the COMEX Division of NYMEX.

Note - On many of their clearing/execution services involving OTC derivative contracts, FCSX will often take the other side of the trade. They'll then look to offset that risk by laying it off on other participants. OTC trades are those specialized derivative products not listed on one of the major commodity exchanges.

In the past four fiscal years, contract trade volume within FCSX's 'Clearing and Execution' segment has grown an average of 48% annually. Pretty powerful growth.

As noted above, FCSX's revenue/earnings drivers are these two segments above. They also participate in two other business segments: 1) Financial services - Grain financing and facilitation business in which FCSX lends to grain related companies against future grain production. FCSX also participated in energy and renewable fuel financing. 2) Grain Merchandising - FCSX acts as an intermediary to facilitate the purchase and sale of grain. A capital intensive low margin business, FCSX is looking to sell this segment and exit the grain merchandising business.


Approximately $100 million in debt minus cash post-offering. Note that FCSX debt/cash levels tend to shift substantially due to the nature of their business. these cash levels do not take into account the rather significant daily cash on hand levels due to their clearing/trading business. FCSX derives quite a bit more revenues in interest, then their annual debt servicing costs even with the official debt minus cash number.

Dividends - It appears FCSX does plan on paying quarterly dividends. I would anticipate these to be rather small, most likely yielding 1% or less annually for shareholders.

1.3 X's book value on a $22 1/2 pricing.

Note that FCSX fiscal years ends 8/31 annually. FY '07 will end 8/31/07. Also FCSX grain merchandising segment really distorts annual revenues as FCSX takes physical possession of the grains and books all revenues/costs of such. A better indicator of overall revenues is including just net revenues from this low margin business. Doing this does not alter net earnings at all and is more indicative of FCSX's overall revenues and revenue growth. Factor in too, FCSX is looking to exit this grain merchandising segment.

FY '06 - Total revenues were $182 million, approximately 50% growth over FY '05. Exchange contract volume grew 30%, while OTC contract volume doubled. Net margins were 9%, earnings per share were $0.90. On a $22 1/2 pricing, FCSX would be trading 25 X's FY '06 earnings.

FY '07 - Seasonally the first quarter each year tends to be FCSX strongest due to the grain harvest. However the rise in derivative transactions the past few years has smoothed this out a bit. Even for a traditionally strong quarter, FCSX blew out the doors first quarter of FY '07. OTC contract volume tripled from the 11/30/06 quarter, while exchange traded volume rose 25%. Revenues were $57 million, a whopping 46% increase over the same quarter a year earlier. Note that this number excludes the large increase in gross grain sales and only includes the net grain sales of $6 million, compared to $5 million in the 11/30/06 quarter. The growth was fueled by the commodity consulting and clearing/execution segments as well as interest gains. The interest gains were fueled by a 55% increase in customer assets. By any measure, FCSX business is going gangbusters as of 11/30/06. Net margins for the quarter were 12% and earnings per share were $0.38. How to forecast the remainder of the year? The commodities derivative exchanges are all forecasting sustained strong growth through 2007. Let's be very conservative here and assume FCSX just flatlines revenues and earnings quarterly the remainder of FY '07(the final three quarters. If we do so, FCSX should book approximately $240 million in revenues, a 33% increase over FY '06. This is a very conservative number. At that run rate, earnings per share should be in the $1.60 - $1.65 range. Again, this is a number I feel is quite conservative and pretty much eliminates further growth from the blowout first Q '07. On a pricing of $22 1/2, FCSX would be trading 14 X's very conservative FY '07 earnings estimates.

Conclusion - A very strong business model focused squarely on a red hot sector...and coming off a simply blowout first quarter to their 2007 fiscal year. In range, FCSX is being priced for appreciation. Recommend strongly.

March 19, 2007, 6:25 am


As SLRY has drifted back to pricing, thought might be a good pick for this week's free blog piece. This piece was available to subscribers at http://www.tradingipos.com before SLRY debuted.

SLRY - Salary.com

SLRY - Salary.com plans on offering 5.75 million shares (including over-allotments) at a range of $8-$10. 1.5 million shares in the offering will be sold by insiders. Weisel is lead managing the deal, Wachovia, Pacific Crest, Needham, and William Blair co-managing. Post-offering SLRY will have 14.3 million shares outstanding for a market cap of $129 million on a pricing of $9. IPO proceeds will be used to repay debt and for general working capital.

Founder, President, Chairman and CEO Kent Plunkett will (directly and indirectly) own 25% of outstanding shares post-offering.

From the prospectus:

'Salary.com is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers’ compensation spending.'

Salary and compensation data - To me this sounds as if it would be a nice piece of a larger company's business line, not the entire business itself. SLRY goal is (and has been) to replace the traditional approaches to compensation management, including paper-based surveys, consultants, internally developed software applications and spreadsheets. SLRY believes their website enables companies to determine how much to pay new and existing employees and to manage overall compensation programs.

SLRY's data sets include pay and benefits data that cover position titles held by 73% of the US workforce as well as comparison data for top executives in over 10,000 US public companies. SLRY offers two products: 1) the flagship CompAnalyst which is a suite of compensation management applications that integrates SLRY's data, third party survey data and a customer’s own pay data in a complete analytics package; 2) TalentManager - employee life-cycle performance management application that links employee pay to performance.

Both CompAnalyst and TalentManager are offered in annual or multi-year subscription packages. Current subscriber base is over 1,700 companies who spend between $2,000 and $100,000 annually. Customer base includes Wal-Mart, Home Depot, Procter & Gamble, Merrill Lynch, UPS and Cisco Systems. In addition, SLRY offers information to individuals and small businesses for a fee through their website salary.com.

In 2006, Salary.com was ranked in the top 10 websites for 'Financial Information & Advice.' Currently on Alexa.com, salary.com is ranked as the 5,081 most popular website in the world.

Market - In an independent study conducted in April 2006, the compensation management technology market, which includes software and online compensation data offerings, is estimated at approximately $320 million for 2006. This is not a large market at all, that is a small overall pie for a public company. SLRY believes however that revenues from compensation consulting firms and human resource business process outsourcers should be included in their overall target market. Including those revenues would bump the market size up to $1.2 billion annually. For our purposes, SLRY's target market then derives somewhere between $320 million and $1.2 billion annually.

SLRY currently employs approximately 200 people.

My question is, 'Where does SLRY derive their proprietary salary and compensation data?' The answer - a number of sources, including major consulting firms, SEC filings, US Government agency studies and data, 'other' third parties, and from SLRY’s own research efforts.

Note - In 2/07 Mercer, the consulting arm of March and McLennan filed a complaint against SLRY alleging copyright infringement, unfair competition, false representation, fraud, breach of contract and tortious interference with business relations.


$2 a share in cash, no debt.

Revenues - SLRY does run ads on their site, however advertising revenues account for only 10%-15% of revenues annually. The bulk of SLRY's revenues are derived from corporate subscriptions.

Revenues were essentially in start-up stage in 2002 and for FY '06 (ending 3/31/06) totaled $15.3 million. SLRY has increased revenues sequentially quarter to quarter for 3 years now. Normally I look at this as a positive with a small growing company. However with SLRY we should note two negatives: 1) Even with 12 straight quarterly revenue increases, SLRY has yet to book a break even quarter operationally, and 2) Even with folding out stock compensation charges, SLRY is increasing revenues quarterly only by about as much as they're increase their 'sales & marketing' expense line. The latter to me indicates there is no surging demand for their product; the growing revenues are simply a function of throwing more money at sales & marketing. In other words, SLRY appears to be 'buying' their revenue growth. Factor in the fact that other expenses are increasing about the same rate too and for years now SLRY has been losing in the $600k to $1.2 million ballpark operationally quarter after quarter. So yes they've increased revenues sequentially, but for the past few years have been doing no better than 'running in place' at a quarterly operational loss.

FY 2006 (ending 3/31/06) - Revenues were $15.3 million, a healthy increase over FY '05's $10 million. Gross margins were in the 80% ballpark. Unfortunately overall operating expenses were approximately equal to revenues themselves. Result was a loss of $0.20.

FY '07 (ending 3/31/07) - Through first 3 quarters, revenues look to increase by 45% or so to $22.1 million. Again the top-line % growth looks good, however keep in mind that operating expenses are keeping pace growth-wise as well here. Gross margins look like they're contracting slightly to 78%. Again, operating expenses equaled overall revenues, meaning more losses. Due to increased stock compensation charges SLRY looks to lose approximately $0.35 in FY '07. Note that operationally when folding out stock compensation charges, the loss here would mirror FY '06's.

Conclusion - I usually like small online ipos and I do like the topline growth here. However SLRY appears to be really just a small niche company and that plays out in their overall revenue base and lack of operating margins. With their current business model, they don't seem to be gaining any margin traction whatsoever. Yes they're growing revenues. However that growth appears due to increased money spent on sales & marketing expenses, not organic revenue growth. In fact revenues have been growing annually on a 1 to 1 basis to operating expense growth. Factor in also the overall small market pie here and SLRY appears to be more suited as an arm of another larger company's business, not a single standing public company. Pass here.

March 14, 2007, 5:01 pm

Tech ipos

It has been a pretty ugly time for tech ipos lately. They've been pricing nearly every one above range still(fire/bbnd):

FIRE: Currently trading 90 X's '07 earnings, broke above range pricing, currently 18% above day 1 open:

CLWR: no '07 earnings, broke top of range pricing, and 25% below day 1 open:

OPXT: Currently trading 80 X's '07 earnings, has not broken top of range pricing and 1% below day 1 open:

SLRY: no '07 earnings, has not broken above range pricing, 15% below day 1 open.

SDXC: no '07 earnings, not broken above range pricing(yet), 18% below day 1 open:

MLNX: 40 X's '07 earnings, has broken an above range pricing, 20% below day 1 open:

ISLN: no '07 earnings, has not broken an above range pricing, currently 20% below day 1 open:

DBTK: 30 X's '07 earnings, has broken top of range pricing, currently 4% above day 1 open:

GUID: 110 X's '07 estimates, has broken a below range pricing, currently 11% below day 1 open:

IPGP: Currently 30 X's '07 estimates, has not broken above range pricing, currently 30% below day 1 open:

NLST: currently 14 X's '07 estimates, has broken a bottom of range pricing, currently trades flat with opening prints:

OPTM: 30 X's '07(untaxed) earnings, has not broken above range pricing currently 13% below open prints:

APKT: 42 X's '07 estimates, has not broken an above range pricing, currently flat with opening prints:

CVLT: 32 X's '07 earnings, has not broken top of range pricing, slightly above opening prints:

DIVX: 45 X's 07 earnings, has not broken an above range pricing, slightly above opening prints:

RVBD: 90 X's '07 earnings, has not broken an above range pricing, currently nearly 100% above opening prints:

pretty eye-opening huh.....take-away is: aggressive pricings and even more aggressive openings, no earnings or very high multiples, and overall a lot of money lost if buying and holding those opening prints.

They've simply been pricing and opening these tech ipos way too aggressively overall since the success of RVBD/DIVX. Been nothing short of a disaster overall since for anyone eager to buy as soon as they open for trading on their first day.

Disclosure: http://www.tradingipos.com has no position in any of the above stocks at time of post. We may or may not take a position in any of the above stocks mentioned at some future time.

March 8, 2007, 7:11 am

Clearwire - CLWR

CLWR - Clearwire

CLWR - Clearwire plans on offering 23 million shares (assuming over-allotments) at a range of $23-$25. JP Morgan, Merrill Lynch and Morgan Stanley will be lead managing the deal, seven other firms co-managing. Post-offering CLWR will have 161 million shares outstanding for a market cap of $3.864 billion on a $24 pricing.

CLWR also has what I consider excessive option and warrant shares outstanding. Over the next 1-2 years there will most likely be a 35-37 million shares dilution coming from already exercisable options and warrants. That is at minimum a 21% dilution in sharecount to ipo shareholders directly due to options and warrants. CLWR will also need to access the capital markets at some point in the future. There is a very strong chance of at least one dilutive secondary over the next year or so.

IPO proceeds will be used for market and network expansion, spectrum acquisitions and general corporate purposes.

Entities controlled by Founder and Chairman Craig McCaw and CEO Benjamin Wolff will own 33% of CLWR post-ipo, Intel will own 29%. Motorola will also have a 10% ownership stake post-ipo. Craig McCaw and Benjamin Wolff will retain voting control of the public CLWR through a separate share class. Both Intel and Motorola made a substantial investment in CLWR in 2006. In return for the cash infusion, each received shares and agreements to partner with CLWR in building out a WiMAX network and producing equipment for said network.

Mr. McCaw is the reason this CLWR is getting done at this hefty market cap. Mr. McCaw, age 57, is a cellular phone pioneer who sold his company McCaw Cellular Communications, to AT&T Corp. in 1997 for $11.4 billion.

From the prospectus:

'We build and operate next generation wireless broadband networks that enable fast, simple, portable, reliable and affordable Internet communications. Our wireless broadband networks cover entire communities and deliver a high-speed Internet connection that not only creates a new communications path into the home or office, but also provides a broadband connection anytime and anywhere within our coverage area. We intend to evolve our network and the services we provide to facilitate a greater range of mobile communications services than we currently offer.'

CLWR is building their high speed wireless network based on WiMAX technology. CLWR's goal is to provide high speed wireline type services over broad area wireless networks. CLWR believes WiMAX technology enables them to combine the best features of cellular, cable modem, DSL, and WiFi networks into a single service offering that legacy networks cannot match.

CLWR feels their advantages over existing wireless networks include: 1) speeds competitive with wireline broadband offerings; 2) Portable - accessible anywhere within a CLWR enabled community. 3) Reliable - CLWR is the sole licensee on their networks, which enables them to minimize interference common on certain wireless networks that use unlicensed or shared radio frequencies.

CLWR was founded in October 2003 by Craig McCaw. Their first network was launched fairly recently, in August 2004. As of 12/31/06 CLWR's network in the United States is deployed in 34 markets across more than 350 municipalities and covers an estimated 8.6 million people. Considering the US population is approximately 300 million, CLWR's coverage area is still fairly limited, available to a little less than 3% of the current US population. In addition CLWR offers their wireless broadband services in Brussels, Belgium and Dublin, Ireland, where the network covers approximately 1.0 million people.

As of 12/31/06 wireless broadband Internet subscribers totaled 206,200. For the most part, CLWR's covered areas have consisted of 'test cases' in smaller metro areas. In late '06, CLWR launched their service in their first 'top 20' metro area, Seattle. Prices for the service range from $25-$40 monthly for Internet access. At the lower pricing, the speed is comparable to low speed DSL. At the higher end, speed is slightly lower than high speed cable. CLWR also offers Internet phone service for an additional charge. Note, currently CLWR's wireless modem requires to be plugged in to operate. So, while Internet access in a given area is 'anytime/anywhere', one does need to be near an electrical outlet. Also, all users in a given area share the throughput. More users could lead to slower speeds without either additional spectrum licenses or more towers.

In 2006, CLWR launched service in 9 new metro areas, 7 during the second half of the year.

WiMAX - I'll just quote from the prospectus here: 'Our advanced wireless broadband network currently relies on network infrastructure equipment that is based on proprietary non-line-of-sight, or NLOS, Orthogonal Frequency Division Multiplexing, or OFDM, technologies. We have committed to deploy networks based on the IEEE mobile Worldwide Interoperability of Microwave Access 802.16e-2005, or mobile WiMAX, standard once mobile WiMAX equipment is commercially available and meets our requirements.' Note the phrase, 'once WiMAX equipment is commercially available.' As of now, mobile WiMAX technologies have not yet become commercially available. CLWR will have a $3.8 billion market cap on a $24 pricing, and the equipment to communicate over the planned network buildout is not yet commercially available. Currently CLWR's networks and equipment do not operate on WiMAX; they are using something CLWR refers to as 'pre-WiMAX' or 'Expedience'.

Intel and CLWR are developing a mobile WiMAX service that will be available only over CLWR's network. Intel is a minority owner of CLWR and has devoted substantial R&D expense developing WiMAX equipment and networks. Intel is also manufacturing equipment for this expected service. Currently Motorola manufactures CLWR's 'Expedience' equipment.

CLWR believes they've the second largest 2.5G spectrum license position in the US. Sprint - Nextel has the largest 2.5G spectrum license position. After factoring in the recent purchase of all of AT&T's 2.5G spectrum licenses, CLWR's 2.5G licenses will cover areas in which approximately 250 million US residents reside. In addition CLWR has 3.5G spectrum licenses that cover approximately 200 million residents in Europe.

Industry - The US residential broadband market is anticipated to grow 14% annually over the next 4 years and exceed 68% penetration of US households by 2010. The North American WiMAX market is expected to increase from the current 30,000 installed bases to 21+ million by 2011. As broadband penetration grows, CLWR also hopes demand for anywhere high speed wireless Internet access via WiMAX will also increase substantially.

Strategic relationships - CLWR is still in the early stage of their buildout. Currently they offer services in areas in which only 3% or so of the US population resides. In addition, their focus is on the fledgling WiMAX technology for which mass produced equipment does not yet exist. Money and partnerships will be a key to whether or not CLWR sinks or swims. They do have three strong partners in their minority shareholders- Intel, Motorola, and Bell Canada. Currently, and in the future CLWR will need to rely on the three partners for access to equipment, deployment of mobile WiMAX and development of other value added services, such as VoIP telephony.

Competition - In this space, the competition is brutal. Cable, DSL, cell companies developing and promoting 3G and other high-speed wireless networks, municipalities installing Wi-fi city-wide, satellite etc...you name it pretty much. What this means is that high speed data communications will become a commoditized product offering over time. Fully expect more speed at lower prices over time as this occurs. As is often the case, this commoditization tends to benefit those whose networks are already in place and operational. They're much more able to compete purely on price than an operation such as CLWR still in a very early buildout stage. CLWR is a cash burning network buildout upstart that is operating in a sector whose product sold will continue to decrease in price due to competition.


$1.5 billion in cash post-ipo, $644 million in debt. While it appears here that cash minus debt is in the $5-$6 a share area, keep in mind CLWR's cash burn is massive. CLWR lost $1.75 per share in 2006, spent over $200 million in capital expenditures and a hefty additional amount on spectrum licenses. All told, CLWR's direct cash flow drain from operations/investment in 2006 was approximately $1.1 billion. Yes, $1.1 billion went out the door in 2006! This will continue to be a hefty cash burn operation for the foreseeable future as well. CLWR is really in the infancy of their planned buildout. Their financial situation on ipo looks fine, that will not be the case by early 2008 without an additional cash infusion. CLWR expects to burn through an astounding $5 a share in cash in 2007, which will actually be a bit of a decrease from 2006. This even assumes a doubling to tripling of revenues in '07. Expect cash per share (minus debt) to be closer to $1 per share by the end of 2007. This will mean CLWR will need more cash no later than the first half of 2008. Fully expect a pretty hefty dilutive secondary here sometime the first 12 months post-ipo. If market conditions allow, I would fully expect a similar size (20+ million shares) dilutive secondary as the ipo.

Note - CLWR founder as well as senior management have been very successful in the cellular phone business over the years. This is not a low risk ipo however. We've got a cash burning machine with little current market penetration planning on using an unproven technology. All that at a $3.864 billion market cap. In structure, this ipo resembles many of the fiber/wireless network ipos of 1999/2000. Some of those succeeded, many went bankrupt. Many of the ones that succeeded went through very dark days in 2001-2003. CLWR is a bet that some very smart people can pull off a high risk endeavor. A big factor here to me is the fat initial market cap for such a high risk venture still in relative infancy stage.

CLWR began their service in 2004. Revenues have grown strongly as CLWR has added service to communities and metro areas. 2005 revenues totaled $33 million. 2006 revenues tripled to $100 million. 2006 also marked the first year that CLWR experienced positive gross margins on their service and equipment sales. I would expect that trend to continue to get stronger as CLWR continues to expand. That does not mean CLWR is profitable however. While CLWR tripled revenues to $100 million in 2006, they also doubled SGA expense to $215 million. That disparity itself indicates CLWR is many years away from break-even. Expect that SGA expense line to continue to grow rapidly as CLWR advertises extensively in their coverage areas.

CLWR's losses are accelerating with their revenues. As noted above, expect that trend to continue over the next few years. Losses were approximately $1.75 per share officially in 2006. With 161 shares outstanding on ipo, that's a pretty hefty loss. Expect larger losses in 2007 and 2008. Cash flow drain will actually be more extensive for CLWR than the posted losses annually.

Revenues in 2007 should continue to grow strongly as CLWR expands their service. I would not be surprised if CLWR doubles or triples 2007 revenues to $200-$300 million. Much will depend on the timing of roll-outs. Note - CLWR sold their equipment segment to Motorola in the summer of 2006. They will no longer be receiving similar equipment revenues going forward. In 2006, approximately 35% of the revenues were from equipment sales. Going forward, the bulk of CLWR's revenues will be service revenues from customers subscribing to their Internet and phone plans. This could slow revenue growth a bit in 2007, however I would still expect revenue growth to be double or triple that of 2006. Regardless of revenue growth, do not look for anything but hefty losses here for the next few years.

Financially CLWR looks an awful lot like the network buildout ipos of 1999 and 2000. Note: 15% of CLWR's 2006 revenues appear to have come from related-party equipment sales in connection with a company controlled by CLWR founder Mr. McCaw. Similarly 15%-20% of 2005 revenues were also derived from related-party transactions with a company controlled by Mr. McCaw.


We'll start with the positives. 1) Senior executives with a solid track record in opening nationwide cellular communications networks. That is the driver of this ipo. CLWR's founder was instrumental in shifting cellular communications to a national voice network; 2) The financial backing of Intel/Motorola. Two strong partners. 3) A solid financial position on ipo. 4) A competitive product at a competitive price-point. I would use the Clearwire service were it available in my area.

Really, all things being equal, this would be enough to recommend this deal. However, all things are not equal here. CLWR is facing a slew of hurdles. 1) The cash burn rate figures to be enormous the next few years as CLWR builds out their network; 2) Competition is fierce. As CLWR spends to build out their network, the price points for broadband communication figure to shrink; 3) Dilution. Options and warrants alone figure to dilute those buying on ipo by 20% over the next two years. CLWR will also need more money. Expect a secondary in the first year. That will further dilute ipo holders by 10%+. That is 30% dilution for those buying the ipo. Fully expect CLWR's market cap in two years to be closer to $5 billion than $3.86 even if the price remains in the $24 ballpark. That is a hefty dilution for those buying ipo and for me trumps everything else.

Can CLWR be successful? I think it is possible. How much success is built in on a $4-$5 billion market cap? I would say more than a little. I've no idea really how this ipo will perform short or mid-term. For me though it really comes down to one factor: CLWR is coming public because they absolutely positively need the ipo money. I avoid ipos that come public out of a dire need for that ipo cash. It often bodes poorly for the long term prospects of that company. I'm passing on CLWR here. I realize there has been an awful lot of hype and attention on this ipo. There are just too many things here I do not like for this market cap. I wish Mr. McCaw and company well. I would use their product (if it were available in my area) but I won't be buying the stock.

February 19, 2007, 6:20 pm


pre-ipo analysis on every deal at http://www.tradingipos.com

PRTS - U.S. Auto Parts Network

PRTS - U.S. Auto Parts Network plans on offering 11.5 million shares(assuming over-allotment is exercised) at a range of $10-$12. Insiders are selling 3.5 million shares in the offering. RBC Capital and Weisel are lead managing the deal, Piper Jaffrey and JMP are co-managing. Post-offering PRTS will have 29.8 million shares outstanding for a market cap of $328 million on an $11 pricing. Approximately 40% of ipo proceeds will be utilized to repay all outstanding debt, the rest for working capital and general corporate purposes.

Oak Investment Partners, not selling any shares on ipo, will own 22% of PRTS post-ipo.Oak has had a piece of a number of ipos over the past few years including LOOP/SHOP/GMKT/CBOU/DKS.

From the prospectus:

'We are a leading online provider of aftermarket auto parts, including body parts, engine parts, performance parts and accessories. Our network of websites provides individual consumers with a comprehensive selection of approximately 550,000 products, identified as stock keeping units or SKUs. We have developed a proprietary product database that maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years.'

Websites are located at www.partstrain.com and www.autopartswarehouse.com. Each was launched in 2000. In September 2006, PRTS two sites combined had approximately 6.9 million unique visitors with autopartswarehouse.com being the more popular of the two. Average order value of purchases on the sites is approximately $120.

PRTS discusses how they are able to directly acquire from the manufacturer thus eliminating intermediaries. In essence, PRTS websites become the intermediary or 'middle-man' in the auto parts supply chain. As with many online retailers, PRTS feels the lack of brick/mortar expenses as well as their flexible fulfillment methods allow them to discount prices at attractive levels for buyers.

Industry - The US aftermarket auto parts market is $200 billion business. PRTS believes their addressable total market domestically is a little over $90 billion. Overall the US auto parts market is characterized by slow growth, specifically in recent years as auto manufacturers new car quality ratings have increased. Better built new cars, means slowing demand for aftermarket auto parts. PRTS believes the exception to this slowing growth is the online auto parts aftermarket niche. Currently just 3% of the US aftermarket auto parts market activity is done online. That % is expected to grow to 13% by 2010.

PRTS made a substantial acquisition in the first half of 2006. The acquisition was Partsbin, another online retailer of auto parts. Price was approximately $60-$70 million in cash, stock, and other considerations. The acquisition significantly increased PRTS product offerings and number of SKU's, particularly in the area of engine parts and performance parts and accessories. One of PRTS biggest challenges in first of 2007 will be continuing to profitably integrate this acquisition into their business.

Note - The PRTS acquisition did add to cash flow the back 1/2 of 2006. However Partsbin's products have historically sold at a lower gross margin the PRTS products and the acquisition resulted in amortization charges on PRTS earnings sheet. So while the acquisition is adding cash flow and appears to be a potential growth driver for PRTS, short term it is dragging down gross margins and GAAP earnings. The result of this is that PRTS is actually doing much better financially then their recent earnings reports would indicate.

Competition - While there isn't a public pure play comparable for PRTS, there is intense competition in the aftermarket auto parts business. Historically this sector has been dominated by brick and mortar retailers such as Napa, Pep Boys, AutoZone, Advance Auto Parts etc...While all of those still derive the majority of their revenues from their retail outlets, each does offer an extensive parts catalog online as well. Also auto parts wholesaler LKQX has done very well since ipo in 2003. This is a very competitive niche, which indicated by PRTS gross margins sliding a bit annually the past few years as the 'brick and mortars' focus more attention on their online businesses.

Very low barrier to entry here for the established payers to compete effectively with a company such as PRTS. In fact the established companies may indeed have two very nice advantages, name recognition and deeper advertising pockets.


$1 1/2 per share in cash, no debt. PRTS is paying off on IPO all debt incurred in the Partsbin acquisition.

For full year 2005, Partsbin's revenues were approximately 63% of PRTS. PRTS booked $60 million in 2005 revenues, Partsbin $38 million. Backing Partsbin into 2005 numbers results in total revenues for 2005 of $98 million. Gross margins for PRTS business in 2005 were 42%, for Partsbin 24%. Gross margins for the combined companies was 35%.

Note the acquisition of Partsbin will mean approximately $0.25 in amortization charges for PRTS in 2006/2007/2008. This will not effect cash flow, but will impact the GAAP bottom line by that $0.25 annually.

2006 - Through first nine months combined PRTS/Partsbin revenues appear on track for $140-$145 million a strong 45% increase over the combined PRTS/Partsbin 2005 revenues. Gross margins have slipped a bit for the combined entity to 33%. Really though not much of a drop for the % revenue increase. It would appear then that much of the revenue increase has been organic and not a result of PRTS slashing prices heftily to boost revenues.

Folding out the amortization charges, operating expenses look to be 25% of revenues. This is an improvement on 2005's 27% which covers for the gross margin erosion.

GAAP and non-GAAP. For a small online ipo, that $0.25 in annual amortization charges due to the Partsbin acquisition is really going to impact GAAP earnings. We'll take a look at the net margins and earnings with and without that amortization charge. Normally I like to only look at the official bottom line number, however the Partsbin acquisition appears as if it will 1) grow PRTS business/reach nicely, 2) add products PRTS has previously not offered, 3) not add any debt to PRTS balance sheet thanks to the ipo, 4) add to cash flows as the business is integrated. To me the potential positives here outweigh the anchor of the $0.25 annual amortization charge through 2008.

2006 net margins and earnings without amortization charge: Through first 9 months, net margins appear as if they will be 6%-6 1/2%. Net for full year of approximately $0.30. On an $11 pricing, PRTS would be trading 37 X's 2006 earnings.

2006 with amortization charges: net margins of 2 1/2% and earnings per share of $0.12. In my opinion the $0.30 number is more reflective of PRTS current operations then the $0.12 number.

2007 - the 2006 revenue growth for the combined entity was outstanding. I would not expect similar 45% growth in 2007. However based on the strong 9/06 quarter of nearly $40 million in revenues, PRTS would appear to be gaining strong traction in the online aftermarket auto parts niche. Their growth the past three years has easily outpaced the sector and it appears the Partsbin acquisitions has opened up new customer bases for the company. I would be surprised if PRTS is not able to hit $180 million in 2007 revenues. As always I prefer to be a bit conservative with projections, especially since we've yet to see the 12/06 quarter. I would expect a bit more gross margin contraction, which should be made up on operating expense decline. Without amortization charges then PRTS could quite conservatively earn $0.40-$0.45 in 2007. On an $11 pricing, PRTS would be trading approximately 25 X's current year earnings. Official earnings will be much less of course with the amortization charges, $0.20 or so.

Note - 2007 estimates are a ballpark projection. We'll have a much better idea after the 12/06 quarter, which should be released in the next month or so. Also, once again, keep in mind PRTS through 2008 will actually be doing much better operationally then the official GAAP earnings number.

Conclusion - Lot of competition in this sector and PRTS does not appear to have anything proprietary to push revenue growth. However PRTS continues to rapidly grow revenues. The 2006 revenue growth was simply outstanding. This with even backing in the Partsbin acquisition as if it occurred 1/1/05. The revenue growth here is what interests me. They've managed to grow in a competitive niche without killing their gross margins. That revenue growth would seem to indicate the company is doing something very 'right' to attract business. Yes I'm concerned with the brand name brick & mortar operations competing online with PRTS. As of now though, PRTS is more then weathering that competition, they're organically growing revenues in the face of it. This is an ipo whose quarterly reports must be watched very closely for signs of gross margin deterioration. However I'm recommending this deal in range, based entirely on their 2006 revenue ramp in a very competitive sector.

note - for first 2 years public due to the amortization charges, PRTS will appear much more expensive on a PE ratio then the underlying business actually represents. I would imagine this perceived 'pricey-ness' would tend to grow the short interest here on any move up.

February 9, 2007, 12:17 pm

CHIP - VeriChip

Analysis pieces on all 13 of this week's ipos available at http://www.tradingipos.com

CHIP - VeriChip

CHIP - VeriChip plans on offering 4.95 million shares at a range of $6 1/2 - $8 1/2. Merriman Curhan Ford is lead managing the deal, Kaufman and CE Unterberg are co-managing. As far as I can tell, Merriman as currently structured has not led an offering previously. Post-offering CHIP will have 11 million shares outstanding for a market cap of $82.5 million on a $7 1/2 pricing. IPO proceeds will be used by CHIP to market their VeriMed system as well as for general corporate purposes.

Applied Digital Solutions will own a little over 50% of CHIP's outstanding shares post-ipo. CHIP Chairman of the Board and CEO, Scott R. Silverman was CEO of ADSX from 3/03 - 12/06. He resigned that position in order to take the CEO position with CHIP. Note that Mr. Silverman received a substantial pay package in 2006 as part of this switch. Total 2006 compensation for Mr.Silverman was approximately $4.7 million. ADSX 2006 revenues were a little under $30 million. Yes, approximately $3.5 million of this compensation was part of a deal in which Mr. Silverman waived certain accrued incentives/options with ADSX. Still this was quite a nice payout for the CEO of such a small operation as CHIP. Note also, that Mr. Silverman has a $100,000+ annual expense allowance as CEO of CHIP. This is over/above his salary, bonus and stock awards.

From the prospectus:

'We are primarily engaged in the development, marketing and sale of radio frequency identification, or RFID, systems used to identify, locate and protect people and assets. The healthcare industry represents the principal market for our radio frequency identification systems. Our goal is to become the leading provider of radio frequency identification systems in the healthcare industry.'

CHIP had no revenues really through 2004. They exist as a combination of two Canadian operations purchased and put together by ADSX.

CHIP derives nearly all their revenues from two RFID based lines and plans to begin marketing a third:

1) Infant protection systems that help to prevent mother-baby mismatching and infant abduction.

2) Wander prevention systems that help to protect and locate residents in nursing homes and assisted living facilities. This one has raised a number of protests as it can involve implants into those being monitored.

3) CHIP has just begun marketing an asset/staff location and identification system to hospitals and other healthcare facilities. Thus far they've sold three of these systems.

RFID Technology - Involves the use of radio frequency, or RF, transmissions, typically achieved through communication between a microchip-equipped transponder and a receiver, for identification, location and other purposes. A 'tag' containing a microchip is attached to the item to be identified or located which wirelessly transmits stored information to a receiver.

VeriMed Patient Identification System:

CHIP is also in the process of rolling out what can be described as a somewhat controversial product, the VeriMed Patient Identification system. This system is the first and only human-implantable radio frequency transponder system cleared for use for patient identification and health information purposes. Yep, chips implanted under the skin in a person’s upper right arm. Unlike in other CHIP products, these implantable chips would be 'passive' meaning they would not transmit to a receiver intermittently. Instead they would only be 'turned on' when scanned by a receiver. The chips would also not contain any patient information themselves, only a 16 digit identification number. That number would then link to medical/identification information stored in the receiver database. Note that CHIP is currently trying to create the market for this device; they've not derived revenues from this thus far.

Target market for The VeriMed system consists of people who are more likely to require emergency medical care, persons with cognitive impairment, persons with chronic diseases and related conditions, and persons with implanted medical devices. CHIP believes their system will be of use for emergency personnel and first responders. Personally, I foresee a myriad of technology issues here. If these systems are sold to healthcare plans, hospitals or individual potential patients, to hold any value whatsoever the unresponsive future patient would have to be at or taken to a facility using the database with that patient’s information. If these were purchased by facilities, they're already going to have medical information readily available for their patients in their existing databases. This system would only have value if a patient is brought in 'cold' meaning a hospital or facility would have no existing information on this patient. That is the entire purpose of reading the implanted chip. In that case, what really would be the odds that an implanted patient would just happen to end up being taken to a facility or hospital that bought the system and has access to the database linking the patients implanted chip with the patient information????

Say this chip was implanted in someone in the target market with say 'cognitive impairment'. How many potential future emergency rooms or first responders are actually going to work for operations that bought this system and able to read the implantable chip in case of emergency? If the person is institutionalized, that institution will already have information readily available for this person in case of an emergency, so an implant would be of little added help. These would work and be of use only in situations in which the responders had no information on an unresponsive patient...and would require a lot of luck in matching up an implanted patient with a facility that purchased access to the database.

I'm at a real loss here in trying to determine where revenues will be derived from this implantable VeriMed Patient Identification System. Apparently so is CHIP. The system was cleared in 2004, yet to date, CHIP has been unable to generate really any revenues from this implantable system. From the prospectus: 'To date, we have only generated approximately $0.1 million in revenue from sales of the microchip inserted kits, significantly less than we had projected at the beginning of 2006'. Note that CHIP does not expect more than nominal revenues from the VeriMed Patient Identification System over the next 18 months. Between the lines: CHIP thought they were onto something, projected sales for this product to begin ramping in 2006. It hasn't happened and now CHIP doesn't expect much revenue from this system through 2008. Not pretty. CHIP however will be devoting substantial expenses to the implantable system.

In the prospectus, CHIP mentions negative publicity as one reason for the lack of revenues from this implantable system. To me, logistics are the big problem here. It just isn't workable as designed and for the cases in which it would be workable, the facilities don't need an implantable system as they've already got information/identification for their patients readily accessible. Really, the CHIP business plan for these implantable systems seems quite poorly constructed. According to CHIP- ' Our plan also anticipates our deriving significant and growing recurrent revenue from subscriptions to our database by persons implanted with our microchip.' Somehow chronically ill and/or those with mental illness and/or incapacitated will somehow pay CHIP annually for this service? Really, huh. Good luck with that one CHIP. This is one of the more ridiculous business plans I've ever seen. These are the people most likely unable to pay for additional medical costs, let alone monthly for one, on the random and unlikely chance that in case of emergency they'll be taken to a hospital emergency room that just happens to have access to the CHIP database! This company is really building a business around this plan??????

There is also another reason why this implantable system of CHIP's is dead on arrival: cost of the microchip implant procedure is not covered by Medicare, Medicaid or private health insurance. If that doesn't change (and it doesn't appear imminent) CHIP will never derive significant revenues from their implantable system. No health care operator will buy and operate this identification system without third party payer reimbursement, period. Really that is the end of the story with this ipo and CHIP's grand plans for their implantable system. The fact that internally CHIP apparently projected significant revenues from this product in 2006 without 3rd party reimbursement would lead me to question management.

CEO and Chairman of the Board, Mr. Silverman really seems to be 'earning' his $4.7 million in 2006 compensation and that additional $100,000 annual expense allotment.

Patent rights to the VeriMed technology appear hazy. It doesn't appear as if CHIP is infringing on patents, but CHIP also will not have any patent protection in this area either.


$2 per share in cash.

Revenues again have been thus far derived almost entirely from the infant bracelet protection systems and the nursing home and assisted facility wander prevention bracelets. It appears revenue for 2007/2008 will also be derived predominantly from these two.

Revenues for 2005 (assuming the companies added were purchased 1/1/05) were $25 million. For 2006, revenues were $27 million, actually slowing in the back half of the year. Gross margins for 2005/2006 were 58%. GSA expenses ate up all gross margins each year. CHIP lost $0.55 per share in 2005 and $0.50-$0.55 per share in 2006.

I would not expect revenues to grow much at all here next few years as their revenue drivers are in mature slower growing businesses. CHIP does not expect to make money over the next few years. In fact they should continue to lose at least $0.50 per share through 2008.

Conclusion - Market cap here is quite small and VeriChip has apparently gained some sort of cult status out there. For the life of me I can't see why anyone would take their implantable system seriously as it really looks to me to be built upon a number of faulty assumptions... plus it is a moot point anyway without 3rd party reimbursement, which it does not have nor appears to be coming anytime in the foreseeable future. What CHIP does have is a stable business selling RFID monitoring systems for infant monitoring and to nursing homes and long-term care facilities. Unfortunately CHIP appears set on throwing a lot of expense money into their implantable system, which should ensure significant losses per share into the foreseeable future. This ipo is ugly, simply for the fact I don't see the implantable system of CHIP's ever gaining traction or bringing in much in revenue. Pass here. Note: this is a micro cap small float single digit ipo with some attention focused on it. It is conceivable it does okay in the short term due to this, however this is as shaky a business model/plan as I've seen for a company coming public.

January 31, 2007, 8:09 am


Our pre-ipo piece on HF. As always, we put together in depth analysis pieces on every ipo well before they price/open....including all four of todays ipos HF/AHII/EIG/DEP.


Disclosure: at time of this blog post tradingipos.com does have a position in HF at 18.20

HF - HFF Holdings

HF - HFF Holdings plans on offering 16.5 million shares(assuming over-allotment) at a range of $15-$17. Goldman Sachs and Morgan Stanley are lead managing with BofA, Wachovia, JP Morgan and Lehman co-managing. Post-offering HF will have 39 million shares outstanding for a market cap of $624 million on a $16 pricing. Approximately 3/4 of the ipo proceeds will go to pay partnership holders as HF converts from a partnership to a publicly traded company. 1/4 of the ipo proceeds will go to repay debt.

As HF was structured as a partnership prior to ipo, management, board and employees will own essentially all outstanding shares not sold on ipo. Assuming over-allotment is exercised that equals 55%-60% of ownership in HF. Note that these shares will still be listed as partnership units post-ipo, much as the Evercore IPO was structured.

From the prospectus:

'We are a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry based on transaction volume and are one of the largest private full-service commercial real estate financial intermediaries in the country.'

HF is an expertise operation. Expertise ipos rely heavily on their employees/management, one reason why HF was structured as a partnership pre-ipo. Expertise ipos tend to do rather well overall. We've seen a number of successful 'expertise' ipos the past few years including GFIG/EVR/GHL/LAZ and HF's direct comparable CBG. Note that CBG is up approximately 500% since the 2004 ipo, reason enough to take this HF offering seriously.

HF operates out of 18 offices in the US staffed by 130 transaction professionals. In 2005, HF advised clients in transactions covering 44 states and 500 cities. Revenues are derived from client fees on a transaction by transaction basis.

HF operates as 'one stop shop' for commercial real estate including debt placement, investment sales, structured finance, investment banking/advisory, private equity, note sales and commercial loan servicing.

Note what HF does not do: They are not involved in leasing or property management nor does HF engage in principal commercial property investing. HF feels this allows them to provide objective advice to clients and to act as impartial broker to both sides of their deals.

A quick look at HF's services:

Debt placement - Construction loans, adjustable and fixed rate mortgages, entity level debt, mezzanine debt, forward delivery loans, tax exempt financing, and sale/leaseback financing. Clients are owners of various types of property, including, office, retail, industrial, hotel, multi-family etc... Debt is placed with every imaginable possible debt placement client including life insurance companies, investment banks, commercial banks, thrifts, agency lenders, pension funds etc.... Keep in mind HF is transacting and placing the debt, not carrying the mortgages on their own books. HF makes money from the deal flow, not the appreciation or depreciation of the assets in the future. In 2005 HF's value in debt placements was approximately $22 billion, an approximately 11% share of the entire US commercial debt placement market.

Investment Sales - HF provides investment sales services to commercial real estate owners who are seeking to sell one or more properties. Essentially HF acts as a commercial real estate agent. In 2005 HF was the agent for $7.6 billion in investment sales, which was approximately a 3% US market share.

Structured Finance - Alternative investment expertise in mezzanine, preferred equity, participating and/or convertible debt structures, bridge loans. HF will participate in structuring these alternative financing options to fit the clients needs. In 2005 HF acted as broker/dealer in approximately $2.1 billion of structured finance

Private equity, Investment banking, and Advisory services - HF serves as a real estate investment banker/adviser for clients desiring to access the private equity investment market as well as advising clients in financial transactions. Services include commercial real estate investment banking/advising services for direct private equity investments, joint ventures, private placements, management buyouts,and mergers and acquisitions(M&A). HF really just kicked off their real estate investment banking/advisory services in 2005. HS was involved in $100 million in total transactions in this niche in 2005 and over $1 billion through the first 9 months of 2006. It appears this niche will be a prime growth driver for HF going forward as they grab commercial real estate M&A market share.

Typical clients for HF's services include both users of capital, such as property owners, and providers of capital, such as lenders and equity investors.Clients will often act as both users and providers of capital in different transactions. Over the past three years no single client represented more then 4% of overall revenues.

Growth plan - Expand geographic penetration, increase market share and capitalize on cross-selling opportunities. HF's growth focus will be to locate and bring on board commercial real estate transaction professionals in smaller US market not currently covered by HF. Also note that HF has quickly grown their commercial real estate M&A arm in 2006, from essentially start-up stage in 2005.

Risks - HF is heavily leveraged to overall commercial real estate activities. To make money, HF needs to see sustained interest in commercial real estate transactions. As HF notes in the prospectus, 'Historically, commercial real estate markets, and in particular the U.S. commercial real estate market, have tended to be cyclical and related to the condition of the economy as a whole and to the perceptions of the market participants as to the relevant economic outlook.' Overall the commercial real estate market has been in a cyclical upswing for most of the US after a 2002/2203 trough.


no substantial cash or debt on the books post-offering.

No dividends planned.

Revenues - HF has grown revenues annually throughout the decade, with strong growth of 40%-55% coming in 2004-2005. For full year 2005, HF booked revenues of $206 million. As with most expertise companies, compensation to producing partners is the greatest expense line. HF's transaction professional are primarily paid in commissions, salary and bonus. The direct expense line for all employee compensation appears to be approximately 65% of revenues the past 18 months. Expect this % to remain fairly robust as is common with this type of operation.

In 2005 HF had operating margins of 23%, fully taxed net margins of 16% and earnings per share of $0.82.

2006 - Through the first 9 months of 2006, HF appears as if they will grow revenues 15% for the full year to $235-$240 million. Operating and net margins will be in the same ballpark as 2005. Full year 2006, HF should earn approximately $1 per share. On a $16 pricing, HF would be trading 16 X's 2006 earnings.

2007 - As long as the commercial real estate market remains active, HF is positioned to have a very good year. With their burgeoning private equity placement and M&A arm to go with their strong debt placement and commercial agent segments, another 10%-20% revenue growth year should be achievable. The largest expense item, employee compensation, does not look to drop as a % of revenues so there will not be a significant margin increase as revenues increase. At a 15% 2007 revenue increase that would mirror 2006's % increase, HFF should earn $1.15-$1.20. This number is a ballpark number only at this point and could change each way depending on HF's success in garnering a larger slice of the pie and general commercial real estate activity. I would surmise that the earnings per share would not be a whole lot lower then this forecast unless the US economy ran into a recessionary climate the back half of 2007. At those estimate, HFF would be trading 13-14 X's 2007 earnings on a $16 pricing.

Concern - I would prefer to see a smaller employee related expense % here. 65% total appears rather steep and it doesn't appear as if HF has any plans on lowering that number going forward. Many of the broker/dealer and investment banking ipos we've seen the past 3-4 years have committed to capping employee compensation going forward at 55%-60%. HF's 65% is a bit above there.

CBG is HF's closest publicly traded comparable. Keep in mind that CBG is a behemoth in the sector, much larger, more diverse and covers a larger geographic area then HF. A quick glance at each:

CBG, $8 billion market cap. Currently trades 24 X's 2006 earnings and 19 X's 2007 estimates with a projected 25% 2007 revenue growth, fueled in part from acquisitions.

HF, $624 million market cap on a $16 pricing. At $16 would trade 16 X's 2006 earnings and 13-14 X's conservative 2007 estimate with a projected revenue growth in 2007 of approximately 15%.

CBG is up 500% since ipo late in 2004. If the commercial real estate market just remains stable, HF is a solid ipo coming at a very reasonable multiple. Really I would only be concerned in pricing range if the US economy slows in a recession like climate. Otherwise the multiple is reasonable enough in range that HF should do quite well. Whenever an ipo's closest comparable is up 500% from offer, you've got to take notice. Factor in also that 'expertise' ipos have as a rule done very well this decade and HF should work quite well. I like this deal quite a bit.

HF is not a direct play on the valuation and strength of the real estate market. They're a play on the transaction growth this decade of structured finance and debt placement in the commercial real estate market. In a fashion this is similar to the growth of derivatives and the resultant effect on the broker/dealer and exchange sector. For HF, the underlying price does not matter so much as long as there is sustained demand for transactions, refinancings, alternative debt structuring, debt placement etc...This is a big reason that CBG's chart looks a lot like those of the derivatives exchanges and derivatives broker/dealer GFIG since ipo. They've all benefited from the heavy growth in transaction flow in their markets, not the overall valuation of the underlying assets. This is a key difference to a business linked directly to the underlying prices involved in said transactions.

Yes a sustained downturn in the commercial real estate market would have an impact on these activities. However it would most likely take a pretty severe overall economic downturn to curtail HF's core revenue streams. HF stands to do well as long as commercial real estate transaction activity overall remains fairly strong, regardless of the underlying pricing fluctuations. In very simple terms, if the US economy avoids recession, HF should do quite well.

January 23, 2007, 4:07 pm


AVAV debuted earlier today and it is this week's free ipo blog piece. As a reminder the subscriber section of http://www.tradingipos.com has an analysis piece on every single ipo before they price/open. Also on our forum we track pre-opening indications for the interesting nasdaq stocks such as AVAV. In addition, on the forum we post trading entries/exits on these ipos. As if that is not enough we've a also a very lively discussion group on said forum.

All this from the perspective of someone that has made a living trading ipos in the aftermarket for going on 8 years now. Alright, end of commercial.

disclosure - at time of posting tradingipos.com does hold a position in AVAV at an average price of $23.

AVAV - AeroVironment

AVAV - AeroVironment plans on offering 7.7 million shares(assuming over-allotment) at a range of $14-$16. Insiders plan on selling 2.2 million shares in the deal. Goldman Sachs is lead underwriting this deal, Friedman Billings, Jefferies, Raymond James, Stifel, and Weisel are co-managing. Post-offering AVAV will have 19.2 million shares outstanding for a market cap of $288 million on a $15 pricing. IPO proceeds will be used for general corporate purposes.

Founder & Chairman of the Board Paul MacCready and President & Chief Executive Officer Timothy Conver will each own approximately 25% of AVA outstanding shares post-offering. Dr. MacCready, age 81, founded AeroVironment in 1971 and has had a very distinguished career. Dr. MacCready is an inventor and entrepreneur who invented the Gossamer Condor, which in 1977 made the first sustained controlled flight powered solely by its pilot’s muscles. Dr. MacCready has received the Engineer of the Century Gold Medal from the American Society of Mechanical Engineers, the NASA Public Service Grand Achievement Award and Aviation Week’s Aerospace Laureate designation. In addition, Dr. MacCready was selected Graduate of the Decade by the California Institute of Technology and was named one of the 100 greatest minds of the 20th century by Time Magazine. Pretty impressive to say the least.

From the prospectus:

'We design, develop, produce and support a technologically-advanced portfolio of small unmanned aircraft systems that we supply primarily to organizations within the U.S. Department of Defense, and fast charge systems for electric industrial vehicle batteries that we supply to commercial customers.'

AVAV has two business segments, unmanned aircraft systems(UAS) and fast charge battery systems designed for industrial vehicles such as forklift trucks and airport ground support equipment. The ipo driver here is the UAS segment. Unmanned aircraft systems accounted for 80% of revenues the past 18 months and have been the growth driver for AVAV. AVAV is coming public because of their unmanned aircraft systems, not the fast charge battery systems.

Unmanned aircraft systems(UAS)

Due to founder Dr. MacCready, AVAV was a pioneer and now a leader in unmanned aircraft systems(UAS). Nearly all AeroVironment's UAS are sold directly to the US Department of Defense. AVAV's UAS are designed to be launched and operated by a single person through hand held controls. They're electrically powered, configured to carry electro-optical or infrared sensors, provide real-time situational awareness and intelligence, fly quietly at speeds reaching 50 miles per hour and travel up to 20 miles from their launch location on a modular, replaceable battery pack. AVAV believes these features make their UAS optimal for intelligence, surveillance and reconnaissance missions.

Thus far the US Department of Defense has awarded two competitively bid small UAS contracts. AVAV has won 100% of both contracts. Just like founder Dr. MacCready's career, pretty impressive.

War is good for AVAV's unmanned aircraft systems sales. The bulk of AVAV's UAS sold to the DoD have been deployed in Iraq and Afghanistan. Current funded backlog is $64 million, much of which is in the form long-term, high-volume contracts. Current contracts are sole supplier contracts with the U.S. Army, U.S. Marine Corps and U.S. Special Operations Command, or SOCOM. The U.S. Army projects its total demand for AVAV's Raven small UAS at approximately 1,900 new systems, of which AVAV had delivered approximately 25% as of October 28, 2006. AVAV's small UAS fit nicely with the US Department of Defense initiatives to shift towards information based network-centric warfare, which emphasizes networked and distributed forces with enhanced situational awareness.

Currently DoD represents essentially 100% of AVAV's UAS sales. AVAV does believe there is a market for their UAS in local law enforcement, border control and homeland security. Additionally AVAV plans to focus on growing sales to international governments allied with the US.

PosiCharge fast charge systems - Account for 14% of AVAV's revenues the past 18 months. Designed to improve productivity and safety for operators of electric industrial vehicles, such as forklifts and airport ground support equipment, by improving battery and fleet management. Using proprietary technology the PosiCharge system recharges electric industrial vehicle batteries rapidly during regularly scheduled breaks or other times the vehicle is not in service, eliminating the need to remove and replacing the battery. PosiCharge is able to recharge a typical electric industrial vehicle battery up to six times faster than a conventional charger. Customers include Ford Motor Company, SYSCO Corporation, Southwest Airlines and IKEA.


Nearly $4 per share in cash post-offering.

2.7 X's book value on a $15 pricing.

Winning two exclusive DoD UAS contracts have been the revenue driver here. Revenues doubled in FY '05(ending 4/30/05) to $105 million, as the first of those contracts resulted in heavy order flow for AVAV's unmanned aircraft systems. Revenues increased 33% in FY '06(ending 4/30/06) again driven by the increase in order flow of the UAS to the Department of Defense. Through the first 6 months of revenues appear on track to increase 7%-10% in FY '07 to $150 million or so.

Note that AVAV's revenues would appear to have plateaued the past four quarters, as there has been very minimal revenue growth during this period. This is indicative in the slowing annual growth rates from 100%+ in FY '05 to 33% in FY '06 to the current pace of 7%-10% for FY '07. Why? The revenue driver for UAS has been winning 100% of the two DoD small unmanned aircraft systems contracts. Both of those contracts hit their stride about four quarters ago. UAS is only 25% or so through fulfilling those contracts so they should each continue to provide steady revenues going forward. However for UAS to take that next step up revenue wise from the $150 million area, they will need to find other revenue streams for their small unmanned aircraft systems.

FY '06(ending 4/30/06) - Total revenues of $139 million. Gross margins of 41%. UAS sales accounted for 80% of overall revenues and essentially the entire 33% revenue growth over FY '05. Research & Development as well as SGA both increased at a faster pace then revenues, reducing operating margins from FY '05. It appears UAS ramped up both in an attempt to open up additional sales avenues for their small unmanned aircraft systems. Operating margins were 11% down significantly from FY '05's 19%. Again you do not want to see declining operating margins as the company is growing revenues. Net margins(factoring in full taxes) were 7 1/2%. Earnings per share were $0.57. On a $15 pricing, AVAV would be trading 26 X's FY '06 earnings.

FY '07(ending 4/30/06) - Through first 2 quarters(ending 10/28/06) revenues appear on track for $150 million. As noted the slowing growth is due to the two DoD contracts plateauing at a strong level. Gross margins appear on track for 40%. Operating margins look to be in the same ballpark as FY '06 13% or so. Net margins are currently on track for 8%. Earnings per share for FY '07 should be in the $0.65 - $0.70 range. On a $15 pricing AVAV would trade 22 X's FY '07 earnings.

note - there is a chance that FY '07 projections may be a bit conservative. To grow revenues AVAV will need to develop additional customers and contracts for their UAS. AVAV realized this and ramped up R&D and SGA expense lines the past 18 months in an effort to broaden and grow their UAS program. In September/October 2006 there may be initial indications they've made inroads in doing so: 1) AVAV received a full-rate production decision from the U.S. Army/SOCOM for the new Raven B program in October 2006; 2) AVAV entered into a proof of concept development contract with the DoD in October 2006 for a hand-held, lethal small UAS; 3) AVAV entered into an advanced concept technology demonstration contract in September 2006 with the Office of the Secretary of Defense, SOCOM and the U.S. Army to develop advanced UAS technologies; 4) executed two commercial service agreements beginning in October 2006 for oil and gas pipeline and offshore platform monitoring using small UAS;

Winning sole providership of the Department of Defense only two open bid small UAS contracts is a key here. Also it appears that with the new development contracts with the DoD in late 2006, the US Department of Defense prefers AVAV's small unmanned aircraft systems technology over the competition. I would go so far to say it appears the DoD believes AVAV's UAS to be superior to the competition.

Risks/Concerns - AVAV needs warlike activities to increase Department of Defense contract flow going forward. Taken from AVAV, their UAS are designed to provide intelligence, surveillance and reconnaissance. These activities are more in need during a warlike environment then not. Quarterly revenues have been stagnant the past four quarters and AVAV will need to develop additional revenue streams for their UAS. It does appear they may be in line to be awarded additional contracts with the DoD going forward. To be a successful public company going forward though, AVAV will also need to begin selling to allied governments as well as other US departments and private industry. There are some indications of this beginning to occur with the small sale for energy platform monitoring as well as a pilot program monitoring the US/Mexico border.

Competition - AVAV does have competition. In the small UAS space AVAV competes with Advanced Ceramics Research, Applied Research Associates, Elbit Systems, L-3 Communications Holdings and Lockheed Martin. While Elbit, L-3 and Lockheed are all public companies, there is not a direct pure-play comparable to AVAV. With all three of the public competitors the small UAS is a segment of operations, not the company's primary revenue and earnings driver.

Conclusion - Easy recommend here in pricing range and a bit above. Yes there are a few concerns here with the stagnant revenues the past four quarters. However AVAV has carved out a dominant position in the small unmanned aircraft systems space. The multiple here is also very reasonable for a company with such a promising future. At a projected $288 million initial market cap(assuming a $15 pricing) there is plenty of room for appreciation mid to long term here. Strong ipo overall.

January 14, 2007, 11:24 am


LGCY - Legacy Reserves

LGCY - Legacy Reserves plans on offering 4.3 million units at a price of $18.50 - $20.50. Note that LGCY filed an additional offering registration back in November. It appears the total number of shares that will be offered over in January 2006 will actually total 7.7 million units at a range of $18.50 - $20.50. Essentially all the shares in this offering will be coming from selling shareholders. There are no proceeds going to LGCY from this offering.

Wachovia will be lead managing the deal. Post-offering LGCY will have 25.4 million units outstanding for a market cap of $495 million in a $19.50 pricing.

LGCY was formed in 10/05 by combining various oil and gas properties in the Permian Basin of Texas and New Mexico. Controlling ownership post-ipo is made up of the original majority owners of those properties.Moriah Properties will own 32% of all outstanding units post-offering and along with Brothers Production will control the general partnership. Note that LGCY's general partnership will have no incentive distribution rights.

Note that in 10/06 LGCY held a private equity offering for accredited investors. The price of this offering was $17.25 per unit.

From the prospectus:

'We are an independent oil and natural gas limited partnership, headquartered in Midland, Texas, focused on the acquisition and exploitation of oil and natural gas properties primarily located in the Permian Basin of West Texas and southeast New Mexico...Our primary business objective is to generate stable cash flows allowing us to make cash distributions to our unitholders and to increase quarterly cash distributions per unit over time through a combination of acquisitions of new and exploitation of our existing oil and natural gas properties.'

Via acquisition, the formation of LGCY and exploitation of their properties, as of 12/31/06 LGCY has: proved reserves of approximately 20.0 MMBoe, of which 70% were oil and 81% were classified as proved developed producing. Proved reserves to production lifespan is 16 years.

As a unit offering, LGCY will distribute essentially all cash on hand to unit-holders quarterly. LGCY plans on paying $0.41 quarterly to unit holders, $1.64 on an annualized basis. On a pricing of $19.50, LGCY would be yielding 8.4% annually. This is a strong initial yield. Keep in mind however that since LGCY is primarily an oil E&P operation, they've substantial yield reliance on the underlying price of oil. LGCY is similar in structure and scope of two recent E&P ipos, CEP/ATN. The biggest difference is that CEP/ATN focus primarily on natural gas exploration and production, while LGCY's is mostly oil. Also LGCY does not have the strong 'parent' relationships that CEP/ATN possess. At current prices ATN/CEP both yield approximately 7 1/2% annually. E&P unit offerings due tend to trade at a higher yield level then the traditional midstream asset unit ipos dues to 1) the underlying resource price risk to yield and 2) E&P activities generally require a hefty amount of capital expenditures, which can effect future cash flows and in turn future yield growth.

Permian Basin - LGCY's properties are all located in the Permian Basin, one of the largest oil and natural gas producing basins in the US. The Permian Basin extends over 100,000 square miles in West Texas and southeast New Mexico and has produced over 24 billion Bbls of oil since its discovery in 1921. The top five producers in the Permian Basin account for 40% of production.

Hedging - Much like previous E&P unit ipos, LGCY does participate in hedging a significant amount of their forward production. As of 12/31/06, LGCY has hedged approximately 69% of expected oil and natural gas production through 2007 and approximately 61% of expected production from 2008-2010. This hedging does help protect the yield going forward, however with 30-40% of expected production next 4 years currently unhedged, there does remain commodity price risk for LGCY. However, since LGCY hedges their oil production up to 4 years out, the company actually received a higher price in 2006 for unhedged production. Unhedged oil sales were over $60 per barrel, while total sales factoring in hedging were $49 per barrel. LGCY has actually hedged future production at much higher levels then overall in 2006. For example 2007 hedged oil production is over $67 per barrel. In fact LGCY has locked in such a large % of oil production through 2010 at $60+ per barrel, I would expect any drop in oil prices going forward to have little effect on LGCY's yield until 2011+.


Debt post-offering of $107 million. This will not impact LGCY's operations all that much. Debt servicing costs however will total approximately $0.30 per unit annually. I would fully expect LGCY to lay on greater debt going forward as they acquire additional properties in the Permian Basin.

Capital expenditures are expected to total roughly $10 million in 2007. This includes the costs of drilling 22 development wells.

LGCY has made numerous acquisitions, including the formation in October 2005. Due to the recent formation and these acquisitions, historical financials are not relevant here. Total net production will be 1,356 MBoe for the year ending December 31, 2007. LGCY is projecting cash levels to be strong enough to pay full dividend for 2007. Note however that LGCY has projected higher oil/natural gas sales prices on their unhedged production then current commodity prices. LGCY however is projecting approximately $0.15-$0.25 more available cash on hand per unit in 2007 then current expected distribution of $1.64 annually. I think LGCY can easily make the full 2007 distribution, with a good possibility of a bit of an increase later in the year.

Conclusion - Much like similar offerings over the past year, the strong yield here makes this deal work. On a pricing of $19.50, LGCY will yield 8.4%. In an environment in which long term treasuries yield below 5%, LGCY's strong yield is enticing. Also LGCY has hedged a substantial portion of their oil production through 2010 at $60+ per barrel. That alone should mean a fairly secure yield going out a few years, even if oil prices fall. LGCY is not as strong a deal as ATN/CEP, due to the strong 'parent' companies involved in those deals. However, I would put it in the class of 2006 E&P unit ipos LINE/BBEP/EVEP. The current yield on all those ipos is in the 6 1/2% - 7 1/2% range. At 7% yield, LGCY would trade at $23 per unit. I would expect LGCY to trade in that $19 - $24 range over the next year or so and yield in the 7% ballpark. Recommend in range due to strong yield. I'll be a buyer here on a muted pricing/open. Any initial pricing/open enthusiasm however will come close to pricing in that yield going forward. The higher the initial yield here, the more I'm interested - in other words the lower the pricing/open, the more attractive LGCY looks to me.

January 7, 2007, 2:12 pm

2007's first ipo

the first ipo of 2007 is on deck this week with LGCY. a Complete analysis piece for this one is available in the membership section. We'll be analyzing an expected 200+ ipos here at http://www.tradingipos.com in 2007.

this week's free blog piece is one of the larger ipos of 2006, MPEL. This piece was available to subscribers of the site well before pricing/open.

MPEL - Melco PBL Entertainment

MPEL, Melco PBL Entertainment plans on offering 61 million ADS(assuming over-allotment is exercised) at a range of $16-$18. Credit Suisse, Citigroup and UBS are lead managing the deal, CLSA, JP Morgan, CIBC and Deutsche Bank co-managing. Each ADS represents three ordinary shares. Post-offering, MPEL will have 395 million ADS equivalent shares outstanding for a market cap of $6.715 billion on a $17 pricing.

MPEL is a 50/50 joint venture between Hong Kong company Melco and Australian company PBL.

Melco is a leisure, gaming and entertainment business whose main focus is Macau gaming. In 2004 Melco acquired the Mocha Slot Group which through 9/30/06 garnered 30% slot market share by gross gaming machine revenues in Macau. Chairman and CEO Lawrence Ho is credited for initiating all of MPEL's Macau projects and appears to be extremely well connected. His connections were integral in Melco receiving Macau gaming licenses. Mocha Slots is part of the MPEL joint venture, however Melco's non-gaming assets are not. Those include an investment banking business a casino IT infrastructure operation and two restaurant chains.

PBL is Australia’s largest listed diversified media and entertainment company. PBL owns and operates the Crown Casino Melbourne and the Burswood Casino, in Perth, Australia. PBL also owns and operates the Australian television network Nine Network and Australia’s largest magazine publisher, ACP Magazines. PBL recently announced plans to sell 50% of their interest in the television and magazine network. None of PBL's Australian assets will be part of the MPEL joint venture.

MPEL then is a venture between Melco's Macau gaming licenses and PBL's casino operating expertise. Both PBL and Melco will be receiving monies from MPEL post-ipo through management and expertise contracts.

From the prospectus:

'We are a developer, owner and operator of casino gaming and entertainment resort facilities focused exclusively on the rapidly expanding Macau market. Our subsidiary Melco PBL Gaming (Macau) Limited, or MPBL Gaming, is one of six companies authorized by the Macau government to operate casinos in Macau.'

Wynn and Las Vegas Sands are two of the other 5 companies that possess Macau gaming licenses. Both stocks(WYNN/LVS) ipo'd earlier this decade and each is up significantly in large part due to the potential of their Macau gambling operations.

MPEL currently has two casino projects under development and a third planned. First is the Crown Macau Hotel Casino targeted to open in the second quarter of 2007. Second The City of Dreams casino complex phase I is expected to open in late 2008. Additional phases of The City of Dreams will open later. Third is a conditional agreement to develop a property located on the shoreline of the Macau peninsula. There is not a defined expected opening date for this last project.

In addition as mentioned above, MPEL currently operates six Mocha Clubs located in Macau featuring a total of approximately 1,000 slot machines.

In 2006 revenues generated in Macau will exceed those generated in Las Vegas. Through 9/30/06 revenues generated in Macau were $4.9 billion, compared to $4.8 billion in Las Vegas. In fact Macau has been a speeding train of gambling growth compared to Las Vegas and Atlantic City. It has been a good decade for gaming with Las Vegas growing revenues overall by 5% annually this decade, excluding sports and racing books. Macau however has been growing 23% annually. If trends/forecasts hold true Macau five years from now will be bringing in far greater gambling revenues annually then Las Vegas.

Macau is the only in Greater China to offer legalized gambling. Located about an hour hydrofoil ferry ride from Hong Kong(and Hong Kong's 7 million residents), Macau is within a 2500 mile radius of Taiwan, Japan, Korea, Thailand, Malaysia, Singapore, Indonesia and the Philippines.Until 2002 gaming in Macau was controlled by a single operator. China has since opened up bidding for gaming licenses. 3 gaming concessions have been awarded to SJM, Galaxy, Wynn. Those three were permitted to each grant(sell) one sub-concession. the three sub-concessions were awarded to Venetian, MGM and MPBL Gaming(MPEL). No additional gaming concessions will be awarded until April 2009. The bulk of the ipo proceeds from this MPEL ipo will go to repay debt laid on to pay Wynn for the sub-concession.

Competition in Macau is growing as the 6 licensees are all in the process of opening and/or constructing Las Vegas style hotels and casinos.

MPEL's future operations:

Crown Macau - Construction kicked off in 12/04, with a target opening in 2nd quarter of 2007. While all current Macau casinos and hotels target the day trip and weekend traveler, the Crown Macau will target the high roller and those seeking luxury accommodations. Think of the Bellagio of Macau.

City of Dreams - Construction kicked off in the 2nd quarter of 2006, with opening target for first phase in late 2008. The first phase will include all casino operations, retail space and two of the four planned hotels. The 2nd phase consisting of the other two hotels is targeted for completion the 2nd quarter of 2009. Unlike the Crown Macau, the target market is the mass market patron. From the prospectus: 'The City of Dreams is planned to feature an underwater-themed casino with approximately 450 gaming tables and 2,500 gaming machines, and four luxurious hotels with a total of approximately 1,600 rooms, consisting of: (1) a luxury premium hotel designed with the aim of exceeding the average five-star hotel in Macau to be operated under the Crown Towers brand by us with approximately 260 rooms, suites and villas; (2) two hotels to be operated under the Grand Hyatt and Hyatt Regency brands with a total of approximately 970 rooms and suites; and (3) a themed hotel to be operated under the Hard Rock brand with approximately 380 rooms and suites. The complex will also feature a performance hall that will be designed and built to the specifications of Dragone Entertainment GmbH, or Dragone, and which is expected to offer world-class performance shows. The complex will also feature an upscale shopping mall and a wide variety of mid- and high-end food and beverage outlets.'

Mocha Clubs - 6 slot only clubs in an upscale atmosphere.The Mocha Clubs will be MPEL's sole source of revenues until the Crown Macau opens in the spring of 2007.

Macau Peninsula site - if purchase is completed,MPEL would begin construction on a project for a mixed-use casino and hotel facility targeted primarily at day-trip gaming patrons, and target its opening in the middle of 2009.

The combined costs of all projects are expected to be approximately $3.3 billion.


MPEL will not begin to bring in substantial revenues until the opening of the Crown Macau in spring of '07.

$1.6 billion in debt post-offering. the debt is being brought on to finance construction costs.

Revenues to date have been derived from the Mocha Slot Clubs operation. Total revenues for 2006 should be approximately $25 million. MPEL is not coming public with a near $7 billion market cap on current operations however. They're coming public on the hope that the Crown Macau and City of Dreams will be raking in billions total by 2008/2009. In the meantime MPEL will lose $25-$30 million in 2006, mostly due to construction expenses on Crown Macau and City of Dreams.

The large risk here is that MPEL currently is not much more then a large construction project. Yes with the successful 'Crown' brand name, there is every indication the Crown Macau should do quite well. However keep in mind any delays in the Crown Macau and/or City of Dreams opening dates will undoubtedly put a dent in the market cap. MPEL is not a cheap stock and there are extensive future revenues built into the initial market cap. Should something(anything) go awry to slow or push out those revenues, MPEL's stock will fall.

In addition anything economically or politically in Greater China that could negatively impact the extent of gaming would hurt MPEL's properties...and stock price.

Conclusion - How to value a $6.7 billion operation that has not yet opened their revenue generating properties? Good question. A look at WYNN may help a little. WYNN currently owns and operates two destination resort hotels, one in Las Vegas and one in Macau. WYNN's current market cap is $9.6 billion. MPEL is planning to have two destination resorts in Macau by the end of 2008. Initial market cap for MPEL is $6.7 billion. I would submit that WYNN should currently trade at a nice premium to MPEL as both WYNN's properties are in operation and generating significant revenues and earnings. It doesn't appear though that MPEL's initial valuation is too much out of synch though. If both properties in Macau are in operation and as successful as anticipated it would not be out of the realm of possibility for MPEL's market cap to approach WYNN a few years from now. I honestly don't know if $6.7 billion is too much to pay here. Too much depends on revenues that won't be seen for 6 months in one case and 2 years in another. If the Crown Macau and City of Dream are both successful, I would expect MPEL's stock price to be higher then $17 two years from now. I suppose that is the best way to look at this ipo. This looks like a deal to me you accept on allocations and put away for a couple of years to see these projects to completion. LVS/WYNN have been on a roll the past year or so, predominantly because of their operations and pending operating in Macau. MPEL is going to be a big player in Macau. I also think that if MPEL prices and opens aggressively, the market cap might be valuing in an awful lot of success.

Even at the size of the offering, I think this deal works initially. Recommend in range and a bit above as a spec play on the strength of Macau gaming stocks. Over time, everything will depend on MPEL putting the two casinos into operation on time and then having them generate the expected significant revenues. Macau is soon to be the worlds largest gaming destination. MPEL has one of 6 concessions and sub-concessions. At even a $6.7 billion market, that combination is worth the risks. Keep in mind this is a very large offering and a $6.7 billion market cap mid-range on what is essentially a construction project at this point. This ipo is not a cheap one any basis and if conditions alter in Macau or Macau related stocks, MPEL could lose a significant chunk of market cap. This is a rather high risk type recommend for me....and if pricing and open gets carried away to the upside, I'll be neutral on the deal. In range though a speculative recommend.

December 19, 2006, 11:13 am

FFHL, final blog piece of '06 and...Happy Holidays

Well throughout the year we've been putting pretty much one free analysis piece on the blog each week, usually Sunday/Monday. Most often the piece has been one that debuted the previous week. With the holidays approaching we'll publish our final free analysis piece for 2006.

Keep in mind we do an analysis piece on every ipo before it hits the market. They're all available to subscribers at http://www.tradingipos.com

This week's is a promising little China ipo that debuted earlier today. Note that tradingipos.com does have a position in FFHL at approximately $8.55.

Happy Holidays from tradingipos.com!

FFHL - Fuwei Films Holdings

FFHL - Fuwei Films Holdings plans on 4.3 million shares(assuming over-allotment) at a range of $8-$10. Maxim Group will lead underwrite the deal, with WR Hambrecht and Chardan Capital Markets co-managing. Post-offering FFHL will have 13 million shares outstanding for a market cap of $117 million on a pricing of $9. IPO proceeds will be invested in a new production line and to further FFHL's technology and operations.

From the prospectus:

'We develop, manufacture and distribute high quality plastic film using the biaxial oriented stretch technique, otherwise known as BOPET film (biaxially oriented polyethylene terephthalate). Our BOPET film is widely used in consumer based packaging (such as the food, pharmaceutical, cosmetics, tobacco and alcohol industries), imaging (such as masking film, printing plates and microfilms), electronics and electrical industries (such as wire and cable wrap, capacitors and motor insulation), as well as in magnetic products (such as audio and video tapes).'

FFHL, which commenced operations in 2003, believes they are one of the top BOPET manufacturers in China. FFHL sells to over 300 customers in China, The United States, Japan and Southeast Asia. Customers include some of the largest companies engaged in flexible packaging, including Alcan.

Printing film, stamping film and metallization film accounts for 65% of revenues. Specialty products such as anti-counterfeit film, laser holographic base film and single/double surface matte account for 15% of revenues. The largest segment of revenues comes from the packaged foods industry. Majority of sales are to packaged goods companies in the eastern section of China. Companies in China account for 80% of 2006 revenues, outside of China 20%. FFHL estimates that revenues outside of China will continue to increase as an overall % of revenues.

Not being an expert on BOPET, I'm going to quote from the prospectus on FFHL's BOPET film:

'BOPET is a high quality plastic film manufactured using the biaxial oriented stretch (transverse and machine direction) technique. Our advanced production process improves the physical properties of the plastic film such as its tensile strength, resistance to impact, resistance to tearing and malleability. The high dimensional stability of the film over a wide range of humidity and temperature fulfills the basic requirements for flexible packaging. The film is light-weight, non-toxic, odorless, transparent, glossy, moisture-resistant, and retains high barrier resistance, making it suitable for many forms of flexible packaging, printing, laminating, aluminum-plating and other processes. In addition, it retains high dielectric strength and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. The three-layer structure of CBOPET gives the film added properties which enables us to develop high quality BOPET products...BOPET film is manufactured from polyethylene terephthalate (PET) resin, which is a petrochemical product. BOPET film is produced by melting the granulated PET resin and extruding it into a flat sheet. This sheet is stretched to 3.0 to 3.6 times its original length, and then horizontally to 3.6 times its width, before being heat-set and finally wound into reels.'

Products: 1)Printing base film used in printing and lamination; 2)Stamping foil base film used for packaging of luxury items to increase the aesthetic presentation of an item; 3) Metallization or aluminum plating base film used for vacuum aluminum plating for paper or flexible plastic lamination; 4)Laser holographic base film which may be used as anti-counterfeit purposes and can also be used in packaging to help enhance the aesthetic appeal of food, medicine, cosmetics, cigarettes and alcohol; 5) Matte film used for printing, metallization, stamping and transferring; 6) High-gloss film used for aesthetically enhanced packaging purposes. 6) Thick BOPET film to targeted to replace the the higher priced imported thick BOPET film. FFHL will commence manufacturing of thick BOPET film after ipo.

FFHL has a 100% market share in China for their Matte film and Laser Holographic base film.

As noted in #6, FFHL will be utilizing ipo monies to invest in new production lines capable of increasing the capacity of the production as well produce thicker films of 50 to 200 microns. FFHL expects to expand into the electrical and electronic film markets with these thicker films. Targeted will be thin film LCD screens. Currently much of the film used in LCD screens in China is imported. FFHL believes they can use their low cost production capabilities in China to manufacture and sell their new films cheaper then the imports.

FFHL is seeing an increase in their raw materials costs, namely polyethylene terephthalate(PET). Raw materials costs were 81% of total product costs through 6 months of 2006, up from 77% in 2005.


$2 1/2 per share in cash post-offering.

2 X.s book value on a $9 pricing.

Since inception in 2003, revenues have grown steadily...although revenues were flat year to year from 2004-2005. Revenues both years came in at approximately $43-$45 million US. Revenues have picked up in 2006, although the third quarter was relatively a weak one for FFHL.

Production utilization was approximately 87% in 2005.

2006 - Full year revenues appear on track for $51-$54 million, a 20% increase over 2005. Gross margins are rather slim at 23%. Due to rising costs of raw materials gross margins for '06 are actually down a bit from '05's 25%. FFHL has a very low tax rate currently. That should continue for the foreseeable future hitting no higher then 7% the next 3 years. Net margins for FFHL in 2006 appear as if they will be in the 15% range. Earnings per share for 2006 look to be in the $0.55 - $0.60 range. On a pricing of $9, FFHL would be trading 15-16 X's 2006 earnings.

Looking into 2007, I would expect revenues to accelerate a bit more then 20% due to FFHL's new production capacity coming on line. In addition FFHL will be manufacturing thicker film for the electronics industry, I would expect at least 25%-30% revenue growth in 2007. I would expect earnings per share to increase at approximately the same pace as revenues. I would not be surprised to see FFHL earn $0.75+ per share in 2007. If FFHL does earn $0.75 in 2007, at $9 it would trade 12 X's forward earnings.

FFHL is a small Chinese microcap showing solid growth and ipo'ing at a very reasonable multiple. The initial market cap of $117 million on a $9 pricing really leaves a lot of potential longer term upside should FFHL continue to perform. I like the initial valuation here and recommend FFHL in range and a bit above.

December 18, 2006, 6:15 pm

and 2006 ipo market comes to a close

9 deals this week to end the bloated December calendar. With all the aggressive pricings and opens, most of the December ipo crop has not been able to hold initial opens short term. It has been a fantastic environment for those high fee generators able to grab large allocations. For the individual though, it has been a tricky period...almost the opposite of August/September/October when no one was paying attention to ipos and many of the good ones opened in the aftermarket at very good risk/reward levels.

DBTK - Double-Take Software

DBTK - Double-Take Software plans on offering 7.5 million shares at a range of $9 - $11. 2.5 million shares of the offering will be sold by insiders. Cowen and Weisel are lead managing CIBC and Pacific Crest co-managing. Post-offering DBTK will have 20.5 million shares outstanding for a market cap of $205 million on a $10 pricing. 1/4 of the ipo proceeds will go to pre-ipo preferred shares, 3/4's for general corporate purposes.

ABS Capital Partners is the primary selling shareholder and will own 30% of DBTK post-offering. ABS is a venture capital firm involved in a number of ipos over the years. Portfolio highlights the past several years have been Symbion(SMBI) and Liquidity Services(LQDT).

From the prospectus:

'Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments and that our business is distinguished by our focus on software license sales, our productive distribution network and our efficient services infrastructure.'

DBTK backs up primary servers by replicating data on them. By continuous replication of data and applications changes on a company/organization's primary servers, DBTK's software provides and instant back-up in case of primary server failure. The duplicate server is ready to go in an instant should the primary go down. DBTK's software products have been around awhile, since 1995. In the ever changing tech world that nearly makes DBTK ancient. Note that prior to 2006, Double-Take was doing business as NSI software. They altered the name to match their primary product, Double-Take software.

DBTK's software monitors and captures file system activity and replicates only changed files. It also protects data. DBTK's software works primarily with servers running Microsoft and Microsoft Windows type file applications. These servers and applications include Microsoft Exchange Server, Microsoft SQL Server, Microsoft SharePoint Portal Server and Oracle Database. DBTK recently released a version of their software for virtual networks.

DBTK's solutions costs approximately $4,000 and easily loads onto servers. Price point for the DBTK software has not materially changed since 2003. To date DBTK has sold over 100,000 licenses to over 10,000 organizations including over half the Fortune 500. DBTK sells through distribution partners including manufacturers Dell and Hewlett Packard and distributors such Tech Data and Bell Microproducts.

Competitors in this space include EMC owned Legato, Neverfail Group, Symantec owned Veritas. and CA owned XOsoft.

In 5/06, DBTK purchased Sunbelt System Software which they renamed Double-Take EMEA. Purpose of the acquisitions was to increase sales outside the US. Revenues of Sunbelt accounted for 10-15% of DBTK's 2005/2006 revenues.

In 12/05 DBTK resolved a lawsuit filed by EMC's Legato unit. In the agreement, DBTK agreed to pay EMC/Legato $3.6 million and purchase $500,000 of product annually from 2007-2010.


$2 a share in cash post-offering, no debt. No dividends planned.

Software licenses account for 65%, maintenance and service fees 35%.

DBTK's revenues were fairly small through 2001. In 2003 and 2004 revenues increased to the $20+ million annual level. Fueled in part by growing organic demand as well as the purchase of Sunbelt, revenues have increased more strongly in 2005 and through the first 9 months of 2006. Assuming the Sunbelt purchase had been made 1/1/05. DBTK would have booked $51 million in revenues in 2005. Backing out the one time legal settlement charge, 2005 would have been the first year DBTK booked positive net earnings.

2006 - Through 9 months revenues are on track for $62-$65 million in revenues for the full year, a 25% increase. As is often the case in the software sector, gross margins are strong at 85%. As is also customary in this sector, operating expenses are dominated by sales and marketing expense. Total operating expenses for '06 look to be approximately 73% of total revenues. This is an improvement on 2005's 83% operating expense margin. DBTK seems to be moving in the right direction with expenses, to really become profitable however they'll need to get the operating expense margin down closer to 50%.

Plugging in full taxes, net margins for 2006 look to be in the 8% range. Earnings per share should be approximately $0.25 per share. Note that due to loss carry forwards, DBTK will have a very low tax rate in 2006 and their actual earnings per share numbers will be reported higher. I like to plug in full taxes in order to have a better view of the company going forward post-ipo. On a pricing of $10, DBTK would be trading 40 X's 2006 earnings.

Looking into 2007, much depends on DBTK's ability to grow the top-line. Based in growth since 2001, there does appear to be a solid organic demand growth for DBTK's software. The price point of $4,000 coupled with the critical need fulfillment of DBTK's product really should prevent a steep revenue decline if enterprise spending on technology slows appreciably. If we assume 20% revenue growth in 2007, DBTK should be able to expand net margins due to better operating expense ratios. If DBTK is able to book $75-$80 million in 2007 revenues they should earn $0.35 - $0.40 per share. At $10, DBTK would be trading 27 X's forward earnings.

DBTK's Double-Take software product has been around for a decade. It appears to be one of the more cost-efficient and easy to implement data protection and replication products on the market. Data and application protection is a good spot to be. As is usual with these small tech ipos, DBTK will not be priced at bargain levels. They will need to continue to book solid revenue growth to grow into initial valuation. At a $200 cap though in a solid sector booking 25% revenue growth in 2006, this deal should work in range. Solid small cap software ipo

December 10, 2006, 7:04 am


18 on the ipo schedule this week. There simply is not enough demand to soak up this supply if they continue to price anything decent at range or above...and then open them well up from there. As always we'll have a complete analysis piece on this week's ipo crop before they come to market. http://www.tradingipos.com

piece below was written and published to site for subscribers more then a week before HLYS priced and opened. As the piece indicates, yes HLYS is a fad and yes I like it under $30 short to mid-term.

HLYS - Heelys

HLYS - Heelys plans on offering 7.2 million shares(assuming over-allotment is exercised) at a range of $16-$18. Insiders plan on selling 4 million of the 7.2 million shares. Bear Stearns and Wachovia are lead managing the deal, JP Morgan and CIBC co-managing. Of note Wachovia was also the lead manager in the VLCM and ZUMZ ipos, two successful ipos with a similar demographic base as HLYS. Post-offering HLYS will have 27 million shares outstanding for a market cap of $486 million on a $18 pricing. roughly 40% of ipo proceeds will go towards repaying all outstanding debt, the remainder towards expanding HLYS infrastructure, include sales, support and manufacturing.

Capital Southwest Ventures will own 34% of HLYS post-offering.

From the prospectus:

'We are a designer, marketer and distributor of innovative, action sports-inspired products under the HEELYS brand targeted to the youth market. Our primary product, HEELYS-wheeled footwear, is patented, dual-purpose footwear that incorporates a stealth, removable wheel in the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to skating by shifting weight to the heel. Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel.'

The HEELYS footwear product accounts for nearly all of HLYS revenue. All manufacturing is outsourced to Asia. First product was introduced in 2000.

The slogan is a tad corny, "Freedom is a wheel in your sole." Target demographic is girls and boys ages 6-14 and those with an 'action sports' interest. 'Action Sports' equals skateboarding, snowboarding, in-line skating etc...

HEELYS are sold through a distribution network and can be purchased in sporting goods retailers, specialty footwear retailers and department stores. A sampling of locations that sell HEELYS include Dicks Sporting Goods, The Sports Authority, Modell's, Nordstrom, Journeys and Mervyn's. They are also available at various online retailers including zappos.com. Over the past 2 years sales at The Sports Authority and Journeys has each accounted for 10%-12% of all revenues.

Sales in the US account for 85% of revenues currently. HLYS estimates that HEELYS are available in over 5,000 locations currently.

HEELYS list fro $50-$100 per pair.

HLYS marketing historically has focused on event driven marketing. In the past year, HLYS has made substantial increases in their television advertising budget currently airing commercials on ABC Family, Nickelodeon and The Cartoon Network.

The growth curve took awhile to get moving, but sales of HEELYS footwear have skyrocketed the past 2 years. HLYS, HEELYS brand wheeled footwear sold 697,000 pairs in 2004, 1.4 million pairs in 2005 and 3.9 million pairs in the nine-month period ended September 30, 2006. That kind of recent growth puts this deal in a similar category as CROX.

Patents - Much like with CROX, HLYS is highly susceptible to knock-off products. Part of CROX continued strength has been their success in protecting their patents over the past year. Much like CROX, HLYS depends on one unique footwear product for nearly all revenues. To protect that product HLYS has 77 patents issued or pending in more than 25 countries. In addition to the patents HLYS has an exclusive worldwide license to use intellectual property related to the technology used in the grind-and-roll HEELYS-wheeled footwear. While it appears HLYS has been successful in keeping competitors out of the US market, they've not fared as well in Asia. Net sales in Asia decreased from $12.1 million in 2003 to $5.4 million in 2004, primarily due to the presence of lower priced counterfeit, knockoff and infringing products in certain Asian markets, In addition HLYS Japanese patent was found to be invalid. The growth in US sales has eclipsed these Asian revenue losses, one will need to keep a close high going forward on HLYS ability to protect their HEELYS products in the US. Thus far HLYS has been quite successful in defending their patents and intellectual property in the US.


$1 per share in cash post offering, no debt.

Revenues from 2001-2004 were essentially flat in the $20-$25 million range. The first half of 2005 was more of the same. After that HLYS revenues went stratospheric. Their past 7 quarters of revenue beginning with the 3/05 quarter(in millions rounded): 3/05 - $5; 6/05 - $11; 9/05 - $13; 12/05 - $15; 3/06 - $14; 6/06 - $31; 9/06 - $73.

I'm not certain I've seen a company make a quarterly revenue leap like this. for four years HLYS was booking $5-$6 million a quarter in revenues and then they made a nice little jump for 4 quarters beginning 6/05 to $11-$15 million quarterly. That was a nice increase, however the past two quarters of $31 million and $73 million are nothing short of amazing fast growth. Yes accounts receivable have grown the past 2 quarters, however they've not grown out of line with the revenue growth. The only reasonable explanation appears to be that even though these HEELYS were around for 5 years, it took until the summer of 2006 for them to really catch on.

4th quarter historically has been the strongest, responsible for 30% of annual revenues.

With this growth in 2006, looking at 2004/2005 become irrelevant.

2006 - I'm going to be conservative and factor in sequentially flat quarterly revenue for 4th quarter. HLYS recognizes revenues upon shipment and revenues their past three quarters have been $14 million, $32 million and $73 million. There is a chance that HLYS shipped too much product third period, just based on the recognized revenue growth. I think conservatively HLYS does $200 million in 2006 revenues, which would be an $80 million fourth quarter. Yes there is a chance HLYS exceeds this by quite a bit, however the recent growth here is so powerful it does make it difficult to continue to assume similar going forward. Should note that a search on news articles brings many mentions of HEELYS being sold out in certain areas for Christmas as soon as they hit the shelf, so again there is a chance that $80 million in 4th quarter revenues is too low.

$200 million in '06 revenues would be 350% increases over 2005. 35% gross margins, strong operating margins of 24%. HLYS is really spending very little overall on GSA compared to revenues past 2 quarters. Net margins for '06 should be 16%. Earnings per share should be $1.20. On a pricing of $18, HLYS would be trading 15 X's 2006 earnings.

15 X's '06 earnings for a company that should book 350% revenue growth isn't close. I would expect HLYS to price and open much higher then $16-$18 pricing range.

Note - HEELYS are on nearly every 'worst' or 'most dangerous' toy list by consumer safety groups. One would assume sneakers with wheels would be on these lists and would also generate their fair share of injuries to the wearers.

Is HLYS a fad? Oh most certainly. I would submit that since HLYS popularity is dependent on the whims of those 15 and younger, HLYS is far more a fad type company then CROX. CROX is at least a footwear choice one can make over a long period of time and a number of years and pairs. HLYS look like a one-shot deal by kids that 'gotta' have them now'. I would expect HLYS stock to receive similar massive short interest as CROX. The revenue growth in 2006 has been so powerful though, short and mid-term that will be the driver here.

conclusion - I'm really not 100% sure CROX are a fad that will fade sooner then later. HLYS I am certain is a fad that will fade. Oh yes this is as much a fad stock as you'll find. At pricing range it doesn't matter if HLYS is a fad though, Currently they're hitting it out of the park, and worries of a fad type stock really wouldn't come into play until a much higher valuation then pricing range. I would submit that any price under $30 and all the fad talk in the world doesn't matter when HLYS blows out their 4th quarter 2006,,,,which they will. If the market gets carried away on valuing HLYS initially then yes worries of when the fad will end come into play.

The massive 2006 revenue growth makes HLYS a buy in range and nicely above. Fad or not, pricing range is too cheap for this massive recent revenue growth.

December 5, 2006, 12:49 am

Year end ipos

Looks like 20+ ipos on the calendar for the remainder of 2006. Investment banks are trying to jam as many as they can into the market before holiday break. When we've a week like next with 14-15 scheduled, it tends to mute initial aftermarket performance.

pre-ipo analysis as well as an active forum at http://www.tradingipos.com

OMAB - Grupo Aeroportuario Del Centro Norte

OMAB - Grupo Aeroportuario Del Centro Norte(Central North Airport Group) plans on conduction a dual offering in the US and Mexico. In the US, OMAB plans to offer 12 million ADS. In Mexico, OMAB plans to offer an equivalent of 12 million ADS in the form of actual shares. Both offerings assume the over-allotment is exercised. A total of 24 million ADS and ADS equivalent shares will be offered combined in the US and Mexico at a range of $14.50 - $16.50. All of the shares will be sold insiders, in this case the majority shareholder. Much like 2006 IPO PAC, this ipo is being conducted as a step by the Mexican Government to divest and privatize airport ownership. The selling stockholder is a trust established by the Ministry of Communications and Transportation with NAFIN, a Mexican development bank owned and controlled by the Mexican government. Through this offering, the Mexican government will be 100% divested of OMAB, assuming over-allotment is exercised.

Citigroup is lead managing the ipo, UBS and Scotia co-managing. Post offering OMAB will have an ADS equivalent of 50 million shares/ADS outstanding for a market cap of $775 million on a $15.50 pricing.

There is no use of proceeds as all ipo monies will be going to the trust set up by the Mexican government.

Post-offering an entity owned 75% by Empresas ICA and 25% by Aeroports de Paris will own 15% of outstanding shares but will control OMAB through a separate class of shares. In addition ICA itself will own another 35% of OMAB's common shares post-ipo. ICA is Mexico's largest engineering, procurement and construction company. Essentially ICA will be the majority and controlling shareholder of OMAB.

From the prospectus:

'We were incorporated in 1998 as part of the Mexican government's program for the opening of Mexico's airports to private investment. We hold concessions to operate, maintain and develop 13 airports in Mexico, which are concentrated in the country's central and northern regions. Each of our concessions has a term of 50 years beginning on November 1, 1998.'

Of the 13 airports, only one is in a major metropolitan area, Monterrey. Traffic in the Monterrey airport accounts for nearly 45% of OMAB's traffic for all 13 airports. In addition to Monterrey, OMAB operates airports in 3 tourist destinations(Acapulco, Mazatlan and Zihuatanejo) as well as 9 smaller cities including Chihuahua, Tampico and Ciudad Juarez. All cities combined have a population base of 24 million.

Total airport traffic in all of OMAB cities totaled 15% of all Mexican airport traffic in 2005. Traffic in OMAB's airports will be close to 12 million passengers in 2006.

Mexico was the eighth largest tourist destination in the world in 2005 in terms of international arriving tourists. Mazatlan is the 5th largest tourist destination in Mexico, Acapulco the 7th.

Monterrey - 3rd largest city in Mexico in population with 4.2 million in the greater metro area. The Mexican government has recently created an initiative to decrease passenger and cargo traffic in Mexico City. As part of the plan Monterrey has been chosen as one of the alternative transportation hub airports.

Domestic airlines account for 75% of OMAB's passenger traffic with Aeromexico accounting for 25% itself. International airlines. accounts for 25% of OMAB's total passenger traffic.

Traditionally air travel in Mexico was too expensive for any but upper class citizens and international travelers. A driver for these Mexican airport ipos is the fairly new proliferation of low cost carriers commencing and/or expanding operations throughout the country. This has opened up air travel for a much wider cross section of the Mexican population.

Regulation. About 80% of OMAB's annual revenues are derived from aeronautical services related to the use of facilities and primarily consist of a fee for each departing passenger, aircraft landing fees, an aircraft parking fee, a fee for the transfer of passengers from the aircraft to the terminal building and a security charge for each departing passenger. All of these services are regulated by the Mexican government under a 'maximum rate' per workload structure. Note that while this means OMAB can not charge more then the 'maximum rate' per workload set at each airport, OMAB is not restricted from generating higher revenues due to increased traffic.

20% of OMAB's revenues is unregulated revenues, predominantly car parking fees and royalty fees from airport concessions. Like many airports throughout Mexico, OMAB has modernized many of their terminals and expect to continue to grow the commercial revenue royalty base going forward.

Risks - OMAB is highly dependent on overall passenger traffic in their airports. In both the 80's and 90's Mexico experienced periods of economic instability which resulted in runaway inflation and the devaluation of the currency. While the country has stabilized and grown throughout this decade, economic slowdowns have historically effected the Mexican economy to a much greater degree then in the US. If the US slips into a recession, it is a pretty safe assumption that the Mexican economy will suffer to a greater extent. Really anything that slows air travel in Mexico will have a negative impact on OMAB.


$3 a share in cash post-offering, no debt.

1.1 X's book value on a $15.50 pricing.

OMAB does plan on paying an annual dividend. It appears it will be paid in an annual lump sum and will consist of a minimum of $0.60 annually plus and additional funds available for distribution. In 9/06 OMAB declared a dividend of $0.78 for the full year ending 9/30/06. Assuming a similar payout in 9/07, OMAB would be yielding 5% annually.

After slowing air traffic post 9/11 and recession, OMAB has steadily grown revenues the past 3 years. Overall revenues in 2005 were $122 million, an 11% increase over 2004.

2006 - After a strong 3rd quarter, through 9 months of 2006 overall revenues appear poised to increase 19% to $145 million for the full year. Operating margins are a strong 38%. Net margins an equally impressive 32%. Net earnings in 2006 should be in the $0.90 - $0.95 range. On a pricing of $15.50 OMAB would be trading 17 X's 2006 estimated earnings.

A quick comparison with similar PAC. PAC ipo'd in February 2006 at $21 a share and currently trades at $38 a share.

PAC - $2.15 billion cap, trades a bit over 1 X's book value and 25 X's 2006 earnings. PAC yields 2.6%.

OMAB - $775 million at $15.50. Would trade a bit over 1 X's book value and 17 X's 2006 estimates. At $15.50, OMAB would be yielding 5%.

Conclusion - This is a solid offering in a space that has already seen an earlier ipo appreciate 80%+. OMAB has a quasi monopoly in each of their markets being the only airport in each area. As long as nothing seriously derails overall passenger and cargo traffic in their cities, OMAB should trade well above ipo price mid-term+. Recommend strongly.

November 28, 2006, 3:13 pm


pre ipo analysis on the entire calendar week in and week out at: http://www.tradingipos.com

WLDN - Willdan Group

WLDN, Willdan Group plans on offering 2.8 million shares at a range of $9-$11. 800k of the offering will be coming from selling insiders. Wedbush Morgan is the sole book-runner here. Wedbush Morgan has not led many offerings, although they co-managed the Baby Universe ipo and have placed small pieces of successful ipos such as crox/lend/ikan/ggxy/jmdt. Post-offering WLDN will have 6.7 million shares outstanding for a market cap of $67 million on a $10 pricing. Yes WLDN is a microcap ipo. Roughly 25% of ipo proceeds will be going to insiders as part of the conversion from an S Corporation, the remainder will be used for general corporate purposes.

Directors and executives will own approximately 25% of WLDN post-offering.

From the prospectus:

We are a leading provider of outsourced services to small and mid-sized public agencies in California and other western states.'

Well we've seen a number of Federal Defense outsourcing ipos this decade as well as a number of managed care Medicaid providers, why not a company that focuses on outsourcing at the county level. Actually the ipo WLDN most reminds me of in scope is the PRSC ipo, which came public in 2003 with a $92 million market cap. Today prsc totes a $320 million market cap. WLDN has a much different focus then PRSC, but each are small caps focusing on outsourced services at the state level and below.

WLDN's, outsourcing services focus on civil engineering, building & safety services, geotechnical engineering, financial consulting, economic forecasting, disaster preparedness and homeland security.

WLDN is primarily an engineering outsource firm, as 85% of contract revenues are engineering based. The focus of WLDN's engineering outsourcing operations are building out infrastructure, as well as the rehabilitation of aging structures, such as those related to aviation, bridges, dams, drinking water, energy (power), hazardous waste, navigable waterways, public parks/recreation, railroads, roads, schools, security, solid waste, transit, and wastewater.

The American Society of Civil Engineers(ASCE) estimates that 28 % of California's bridges are structurally deficient or functionally obsolete, and 71% of the state's major roads are in poor or mediocre condition. Additionally, the ASCE estimates that $17.5 billion will be needed over the next 20 years to meet the drinking water needs for the state. These are all part of WLDN's core business focus.

In 12/05 President Bush signed the Safe, Accountable, Flexible, Efficient Transportation Equity Act. The act was signed in response to growing concern over the condition of the nation's infrastructure.The act allocates more than $286 billion to infrastructure investment through 2009, a 40% increase over predecessor legislation. WLDN anticipates this act will filter down to greater city/county spending on infrastructure improvement.

WLDN, founded over 40 years ago has 20 offices throughout California(and other states) and a staff of just over 650. WLDN focuses on small to mid-size communities with populations of 10,000 - 300,000. The philosophy here is that since WLDN already has the infrastructure, they are able to utilize county dollars more efficiently as an outsource entity, then the smaller counties could by hiring staff, office, infrastructure etc. WLDN also focuses on these smaller counties as they feel they are underserved by the larger outsourcing agencies/companies.

WLDN provides services to approximately 60% of the 478 cities and over 60% of the 58 counties in California. 85% of revenues is derived from California municipalities.

WLDN is a direct play on local governments shifting to privatization in an attempt to accomplish more with finite resources. Factors driving this outsourcing/privatization trend include, 1) overall population growth without always a similar boost in county/city revenues; 2) sustained demand for services; 3) the creation of new municipalities, often in high growth suburban outlying areas; 4) Federal homeland security grants to local governments.


$2 a share in cash post-offering, negligible debt.

3 X's book value at $10.

Less then 1 X's 2006 expected revenues on a $10 pricing.

Revenues have grown steadily. $58 million in 2004 revenues grew 16% to $67 million in 2005. Through the first 9 months of 2006, WLDN is on track to grow revenues 16% to $80 million.

Expenses have been growing roughly at the same pace as revenues, eliminating any economies of scale. This is a thin margin business. Operating margins were 7% in 2004 and 2005 and are on track for 8% in 2006.

Net margins in 2005 were 4%-5%. Earnings per share were $0.45. On a pricing of $10, WLDN will be trading 22 X's trailing earnings.

For 2006 WLDN appears on track for net margins of 5%, thanks in part to a strong 3rd quarter. Earnings per share appear on track for $0.60-$0.65 fully taxed. On a pricing of $10, WLDN would be trading 16X's 2006 earnings.

Risk - the big risk here with the revenues concentrated in CA would be a severe economic downturn in the state. During the 1991-1992 economic downturn in California, WLDN experienced negative earnings and cash flow difficulties. Also outside of an economic downturn, budget cuts in CA would also negatively impact WLDN's revenues and profitability. On the other hand, a natural disaster in the state would most likely benefit companies such as WLDN as greater federal monies would flow into the effected CA municipalities.

WLDN has steadily grown revenues and should continue assuming A) the population of California continues to grow and B) the economy of California remains strong. Also much of California's infrastructure needs to be rebuilt and WLDN has worked with the majority of CA's municipalities. I would like to see a bit stronger growth here, as well as stronger operating margins. However both are right on par for the government outsourcing sector. Solid micro-cap ipo. These smaller offerings can filter good news to the bottom line fast and hard. PRSC ipo'd with similar multiples and has more then tripled market cap in 3 years. If WLDN can continue growth curve and gain a solid new contract win or two annually, the stock should perform well over time. Recommend on an in range pricing.

November 18, 2006, 4:24 pm



CEP - Constellation Energy Partners

CEP - Constellation Energy Partners plans on offering 5.2 million units at a range of $19-$21. Citibank and Lehman are lead managing the offering. Post-offering CEP will have 12 million units outstanding for a market of $240 on a pricing of $20. IPO proceeds(plus an additional $30 million in borrowings) will go to parent company Constellation Energy Group(CEG). Post-offering CEG will own 60% of CEP, essentially all non-public units. CEG will directly manage CEP's operations as well as control all the managing partnership units.

From the prospectus:

'We are a limited liability company that was formed by Constellation in February 2005 to acquire coalbed methane reserves and production. We are focused on the acquisition, development and exploitation of oil and natural gas properties, or E&P properties, as well as related midstream assets.'

Another limited partnership ipo, CEP's main business is natural gas exploration and production. CEP plans on buying a quarterly dividend of $0.4625 per unit quarterly, or $1.85 per unit per year. On a $20 pricing, CEP would be yielding a strong 9.25% annually.

Estimated proved reserves are 100% natural gas and located in the Robinson's Bend Field in Alabama's Black Warrior Basin. Proved reserves are 112.0 Bcf, 80% of which are classified as proved developed producing. Reserves have an estimated 25 year lifespan at current and anticipated production levels.

Robinson's Bend Field - The Black Warrior Basin is one of the oldest and most prolific coalbed methane basins in the country, with over 2,750 producing coalbed methane wells. These multi-seam vertical wells range from 500 to 3,700 feet deep, with coal seams averaging a total of 25 to 30 feet of thickness, per well.

CEP goal is to provide consistent cash flow and a growing annual yield to investors. To that end, CEP has hedged a large portion of anticipated future production. Currently CEP has hedged approximately 79% of expected production from October 2006 through December 2009. The policy going forward is to hedge 80% of up to five year expected production for each of their wells.

CEP will look to acquire complementary operations going forward as well as drilling low risk new wells on their Robinson's Bend field property.

CEG - The strength behind this offering is the back of CEG, Constellation Energy Group. CEG is a $12 billion market cap operation with $17 billion in 2005 revenues and $20 billion in assets. CEG operates in three energy segments, Merchant Energy, Regulated Electric, and Regulated Gas. Through these three segments CEG is engaged in numerous aspects of the energy industry, including oil and natural gas exploration and production, natural gas transportation, natural gas storage and physical and financial natural gas trading. CEP's stated goal is to increase yield over time, and CEG will be the driver here. Reading between the lines in the prospectus, it appears CEG will specifically acquire and develop potential E&P properties with an eye to shifting them over to CEP once they begin producing.

A 9.25% annual yielding MLP with the backing of a $12 billion dollar energy conglomerate is appealing. CEG will not allow CEG to sink -- They will most definitely look to shift yield baring assets to CEG in the future. It is a safe assumption to assume these assets will growth CEP's annual yield.


Debt is minimal at $22 million.

1 1/2 X's book value at $20.

CEP is a small operation with an anticipated $35 million in 2006 natural gas sales.

Ability to make quarterly distributions - While CEP does hedge 80% of production going out 5 years, there is still commodity price risk. If natural gas prices enter into a prolonged slump, CEP would have difficulty paying yield. This is a key factor that differentiates E&P unit offerings from midstream asset unit offerings. The midstream asset(pipelines/terminals/storage facilities) unit offerings for the most part make revenue off the flow of natural gas not the underlying price. While CEP is hedging 80% of production, the yield will still be subjected to natural gas price risk. Note that this can work both ways - if natural gas prices rise, yield could be higher.

2007 projections. CEP is projecting to easily have enough cash on hand to pay the initial dividend. However in making projections, CEP is assuming natural gas prices for full year 2007 of $8.35 higher then current prices. They have hedged at over $9MMBTU, which currently looks like a very nice hedge price for them. At $8.35 average price of natural gas for 2007, CEP would actually have cash on hand to distribute $2.25 per unit in 2007.

It would appear if natural gas stays in the $5-$7 range for 2007, CEP would easily be able to pay annual yield, thanks in large part to hedging 90% of production over $9MMBTU's. If natural gas prices rise to $8 or above for most of '07, I would expect a much stronger yield here then the anticipated for the full year '07.

Conclusion - I usually shy away from E&P unit offerings due to commodity prices directly effecting yield. Also E&P operations usually need to continually invest in new properties and wells as annual production depletes reserves. The latter does not mesh well with the MLP structure set up to turn over all cash on hand quarterly to unit holders. However I like this deal. The 9.25% initial annual yield is very strong here. Couple that yield with the strength behind CEP, Constellation Energy Group and this deal works. I believe CEG will develop properties for CEP going forward, taking much of the risk out of future CEP acquisitions. The risk here is of course a bear market in natural gas prices. If that occurs, CEP will have difficulty paying the yield and also difficulty hedging future production at a price strong enough to pay future yield. That is a real risk here and one reason why I suspect the initial yield is so strong at 9.25%.

Combination strong initial yield and parent company make this deal work in range and $1-$2 above.

November 11, 2006, 8:35 pm


Pre-ipo analysis and forum for subscribers at http://www.tradingipos.com

KBW - KBW Inc.

KBW - KBW Inc.(Keefe, Bruyette Woods) plans to offer 7.5 million shares(assuming over-allotment is exercised) at a range of $19-$21. Insiders are selling 3.75 million shares in this offering. Keefe, Bruyette and Woods will be self-underwriting their own offering. Merril Lynch will joint lead managing the offering with 6 other houses co-managing. Post-offering KBW will 30.4 million shares outstanding for a market cap of $608 million on a $20 pricing. IPO proceeds will be used for general corporate purposes.

Directors and Executive Officers of KBW will own 23% of shares outstanding post-ipo, all employees as a whole 80%. Pre-ipo entire firm is employee/director owned with no single individual owning more 4.2% of outstanding shares.

From the prospectus:

'We are a leading full service investment bank specializing in the financial services industry. Since our founding in 1962, our commitment to this large and growing industry, our long-term relationships with clients and our recognized industry expertise have made us a trusted advisor to our corporate clients and a valuable resource for our institutional investor customers.'

We've seen a number of boutique investment banking ipos the past few years including Lazard, Greenhill, Evercore, Cowen and Weisel. They've broken down into two types: 1) The M&A(mergers & acquisitions) based group that has ridden the wave of consolidation the past few years, showing strong operating results and robust stock market appreciation. This includes Lazard, Greenhill, and Evercore. 2) The underwriting based group that has struggled to show revenue growth the previous 2-3 years, Cowen and Weisel.

Group one ipos have been 3 of the best performing ipos of the past few years, while group 2 has struggled.

The key to this deal is the following line from the prospectus: 'Number one ranking as U.S. M&A advisor to financial services companies in each of the years 2005, 2004 and 2003, ranked by number of deals.' Bingo. Note though that KBW focuses on smaller capitalization companies, so was #3 in M&A in the financial services sector in 2005(and #9 in 2004) based on value of the deals. Still a strong player in this sector though.

KBW's operations break into 3 segments:

1) Investment banking. This includes the M&A component as well as ipo and secondary offering underwriting. KBW has been a solid underwriter of financial related ipos the past few years, carving out a nice little niche for themselves there. In fact they've been #1 in managing U.S. IPOs and follow-on equity offerings for financial services companies in both 2005 and 2004(again based on number of offerings). We've noted above they're also the #1 financials services M&A advisor on deals getting done.. A few recent M&A deals: pending sale of North Fork Bancorporation to Capital One Financial Corporation; the acquisition by Bank of America Corporation of MBNA Corporation; the sale of Household International to HSBC; and the pending sale of Texas Regional Bancshares to BBVA.

Of the 190 clients for whom KBW executed investment banking transactions in 2005, approximately 45% were companies for which they'd executed other transactions during the previous five years.

KBW is a strong player in the small and mid-cap financial services niche. In fact they dominate that niche in both M&A and equity deals. Deals involving financial services companies accounted for 31% of all M&A fees and 21% of all underwriting fees in 2005. If the earnings/expenses for KBW look solid, this is enough here to recommend this deal. M&A has boomed the past few years driven by record corporate cash levels and billion in private equity being put to work. Those trends look to continue going forward. To stress again though: KBW plays in the smaller company space, this far they've not really broken into the large M&A deals. Their specialty is regional bank mergers and buyouts.

KBW in 2006 has seen a sharp increase in structured finance private placement deals.

Investment banking historically has accounted for 50% of revenues.

2) Trading. KBW focuses trading efforts on the sector they know: banking. they've the #1 ranking by trading volume as trader of U.S. bank stocks with less than $5 billion market Also one of the leading traders in the Nasdaq 100 financial index stocks. Commission have historically accounted for 30% of annual revenues, proprietary trading 10%.

3) Research. Number one in five of the seven categories of their research coverage, and second place in the other two categories. Named "Best of the Boutiques" in a survey by Institutional Investor. KBW's research analysts currently cover 489 companies.

Strategies going forward are to expand the European business and expand the asset management business. Currently KBW manges/advises two related hedge funds.

Compensation Expense: Overall compensation is always the largest expense line with these type operations and one needs to make certain that the investment banking entity is not funneling all the profits to management/employees but also growing shareholder value. KBW plans to limit total annual compensation and benefit expense to 55%-60% of total revenues. This is in line with similar firms, although should note it is higher then EVR's 50% target.

History - KBW was founded in 1962 with a focus on the financial services sector. Headquartered in the World Trade Center, 67 employees died on 9/11, approximately 1/2 of KBW's New york staff. Included in this number were five of 9 board members including the co-CEO and Chairman of the Board. KBW planned an ipo in 1999 but that was set-aside after an insider dealing scandal involving the then CEO and a porn star. The ceo resigned and the ipo was scrapped. Not surprisingly there is no mention of this latter event in the prospectus --- if there is they buried it well enough that I didn't find it.


$1.75 X's book value on a $20 pricing.

Revenues in 2005 at $307 were flat coming off a strong 2004. Revenues in 2006 however have really picked up thanks to strong increases across the board in investment banking, commission trades and proprietary trading. Of note the strong gains in investment banking for 2006 are due to underwriting and private placements. M&A is actually down substantially in 2006 from 2005 for KBW.

Based on first 6 months of the year, revenues for full year 2006 appear to be on track for $400-$425 million, a 34% increase.

2005 - Employee compensation expense was 61%, slightly above the post-ipo target. Non-compensation expenses were 29%. Operating margins were 10%, net margins 6%. KBW earned $0.58 a share in 2005. On a $20 pricing, KBW would be trading 34 X's trailing earnings. As a point of comparison, EVR's earnings per share for 2005 were $0.63.

2006 - Earnings will be much stronger due to the anticipated 34% revenue growth to $400-$425 for the year. Employee compensation expense of 58%, well within target. Non-compensation expenses on pace for 24% of revenues. Operating margins anticipated at 17%, net margins 10%. Anticipated earnings per share for 2006, $1.20 - $1.25. No matter how you slice it, KBW is having a great 2006 through the first 6 months. On a pricing of $20, KBW would be trading 16 X's 2006 earnings.

Comparisons. At the top of the piece, we looked at two different types of investment banking ipos. The M&A focused group has fared much better in the market and also carry a much hefty valuation. A quick look at GHL/EVR two M&A focused firms and COWN/TWPG, two underwriting focused firms.

GHL - $1.95 billion market cap, trading 6 1/2 X's revenues and 16 X's book. Trading 27 X's 2006 earnings with an expected 10% revenue growth rate.

EVR - $1.05 billion market cap, trading 5 X's revenues and 6 X's book. Trading 37 X's 2006 earnings with an expected 30% revenue growth rate.

COWN - $217 million market cap, trading. 0.6X's revenues and below book value. Trading 14 X's 2006 earnings. with a 10% revenue growth rate.

TWPG - $420 million market cap, trading 1.5 X's revenues and 1.6 X's book value. Trading 19 X's 2006 earnings with a 10% revenue growth rate.

KBW - $608 million market cap on a $20 pricing. Trading 1.5 X's revenues and 1.75 book value. Trading 16 X's 2006 earnings with a 30%+ revenue growth rate.

So should KBW be valued with the M&A focused firms or the others? I submit it is somewhere in between. KBW has a strong M&A business, historically accounting for 15% of annual revenues. Part of KBW also resemble TWPG. I would define KBW as resembling TWPG but focused on the financial services sector with a much stronger M&A component. KBW is also having a strong 2006, even though the M&A segment has lagged a bit this year. While I don't believe KBW should valued as dearly as EVR, there is definitely room for appreciation here from ipo range. I would value KBW somewhere between TWPG and EVR.

Conclusion - Solid deal. KBW with their strong financial sector M&A operation(#3 in dollar value in 2005), resembles two of the strongest ipos of recent years GHL/EVR. While I don't see this deal quite as strong as those two, they have built a solid niche for themselves in the investment banking sector. Recommending this deal strongly in range.

November 7, 2006, 6:40 am


There were 3 satellite ipos last week. 2 ugly ones and one worth owning. This one:

RRST - RRsat Global Communications

RRST - RRSat Global Communications, an Israeli company, plans on offering 4.4 million shares(assuming over-allotment is exercised) at a range of $11-$13. CIBC and Thomas Weisel are lead managing the offering. Post-offering RRST will have 17.2 million shares outstanding for a market cap of $206 million on a $12 pricing. The majority of ipo proceeds will be utilized to to acquire or establish teleports in the United States and Asia.

From the prospectus:

'We provide global, comprehensive, content management and distribution services to the rapidly expanding television and radio broadcasting industries. Our content distribution services involve the worldwide transmission of video and audio broadcasts over our RRSat Global Network infrastructure. Our comprehensive content management services include producing and playing out TV content as well as providing satellite newsgathering services (SNG).'

Our 3rd satellite ipo of the week. RRST differs from the previous two in that they are a broadcast distribution company, not a voice/data communications provider. RRST provides services to 265 television channels and 80 radio stations in over 120 countries. Continuous distribution customers include Canal Europe, Fashion TV, GOD TV, I Media, Kurdsat, Russia Today, Thai Global Network, and Turkish Radio and Television. Occasional distribution customers include CBS, Fox News, Israeli Channels (2, 5 and 10), Al Jazeera, NBC News, NTV Russia, and RAI Middle East.

Europe accounts for 40% of revenues, North America 20%. Majority of revenues are booked via five year contracts.Current contracted backlog is $101.7 million through 2016, of which $72.0 million is expected to be booked by 2008. RRST utilizes a direct sales force for the majority of business.

Teleports are the ground-based side of a satellite transmission network. RRST's principal teleport is located in southern Israel and provides direct access to satellites that can transmit directly to all the major population centers in North America, South America, Europe, Asia, Africa and Australia. This is an advantage RRST holds as no single location teleport can boast of the same geographic reach. RRST also hosts 7 other satellites, 3 in Israel and 4 others around the globe. From these teleports RRST transmits to 21 satellites and receives transmissions from 48 satellites.RRST does not own the satellites or other transmission capacity such as the fiber optic lines they utilize. Instead they lease time/space. This has kept RRST's capital expenditures fairly low in comparison to companies launching their own satellites.

RRST also provides a few other services. 1)RRST links their teleports to the internet on 4 continents to procure internet capacity. 2) RRST's content management services involves digital archiving and compilation of a customer's programming for the purposes of providing automated targeted programming for a specific channel. RRST provides these playout services to more than 65 television channels for distribution through the RRSat Global Network.

3) Satellite newsgathering services (SNG) through a fleet of ten fully-equipped vans......The bulk of RRST revenues however are content transmission and distribution to and from a fleet of satellites.

Industry - The driver is the globalization of content. The number of satellite television channels worldwide grew from approximately 1,000 in 1995 to more than 13,000 in 2005, and is expected to grow to more than 29,000 television channels by 2013. RRST believes HDTV will lead to increased bandwith needs and should be a revenue driver into the future. The teleport sector generated revenues of approximately $13 billion in 2005.

Barriers to entry - RRST believes there is a significant barrier to entry for their business. From the prospectus: 'to offer global content distribution services, it would be necessary to procure a critical mass of transponder capacity on multiple satellite platforms, which would entail negotiations with multiple suppliers. In addition to incurring the cost of the acquisition of this capacity, a potential new entrant would need to incur a substantial long-term financial commitment for the capacity, without any assurance of corresponding revenues (particularly since our business entails a lengthy sales cycle, typically 6 months to a year, before receipt of a customer commitment).' In other words a new entrant into this space would need to make a substantial commitment of capital well before receiving revenues.


$2 a share in cash post-offering, no debt.

4 X's book value on a $12 pricing.

RRST receives most of their revenues in US dollars, however most expenses are in Euros or New Israeli Sheckels(NIS). There are also certain embedded derivatives involved when RRST enters into contracts with customers in which the method of payment is not the principal denomination of that country. RRST believes the gains/losses from these embedded derivatives are not material to operations.

At least 10 straight quarters of revenue growth. Revenues were $24 million in 2004, and $31.3 million in 2005.Through the first 9 months of 2006 appear on track $43 million in 2006, a 37% annual increase.

2005 - $31.3 in revenues with a 37% gross margin. Operating margins were 24%, net margins 17%. Earnings per share were $0.31. On a pricing of $12, RRST would be trading 39 X's trailing earnings.

2006. Based on results through first 3 quarters, RRST should grow revenues by 37% to $43 million. Gross margins in the 36% range with operating margins of 24%. Net margins should again be in the 17% range with earnings per share full year of $0.43. On a pricing of $12, RRST would be trading 28 X's 2006 earnings.

Conclusion - RRST has carved out a nice niche in an evolving and growing sector, global satellite broadcasting. This is a well managed company growing revenues consistently quarter after quarter. Because very few worldwide broadcasters have their own distribution network(the big US broadcasters being an exception) demand for RRST's services should continue to grow annually the next 5+ years. This is a far better deal then the other 2 satellite ipos this week. I like this deal. Solid growth, strong management and a small offering with plenty of room to appreciate mid to longer term. Recommend.

November 4, 2006, 11:51 pm

week of 11/6

Well for the 2nd week in a row, the free blog ipo piece will be a 'pan'. When things get a little too enthusiastic, we at tradingipos tend to pull in the reigns a tad. We passed on 3 of this weeks offerings at ANY price, recommending just one. 3 of the past week's deals broke pricing, including one that was beyond ugly, orbc...hint, 9% gross margins do not make a viable business model...orbc has 9% gross margins. who were the suckers taking stock in that deal? did they know the margins were that ugly? We did like one of the three satellite deals quite a bit...it is the one that didn't break pricing.

Alright, the promise here is next week to actually put a positive piece on the free blog...there is one in the 11/6 week we're quite high on here at http://www.tradingipos.com

16 on the schedule in the next 2 weeks...we'll have pre-ipo analysis pieces on them all in the subcriber section of the site...We also have a lively forum discussion on ipos and many other market topics...plus accurate pre-ipo open indications for the good deals.

GSAT - Globalstar

GSAT - Globalstar plans on offering 7.5 million shares(assuming over-allotment) at a range of $16-$18. Wachovia and JP Morgan are joint book runners, Jefferies co-manager. Post-offering GSAT will have 82.5 million shares outstanding for a market cap of $1.402 billion on a $17 pricing.

The outstanding shares number includes shares yet to be purchased. GSAT for funding purposes has made a deal with Thermo Funding Company for Thermo to purchase a little over 12.4 million shares by 12/31/11 at a fixed price of $16.17 per share. Thermo Funding may purchase these shares at any time regardless of GSAT stock price. 180 day lock-up period applies to any purchases. Thus far Thermo has purchased just under 1 million shares. It does not appear that Thermo must purchase these shares, just that they've a right to if they desire. Obviously if at some point GSAT's share price is well above $16.17, Thermo Funding will be purchasing these shares. If below they will not. This is really not ideal for new shareholders as it presents a pretty significant potential future stock price drag and shareholder dilution on shareholders post-ipo. If Thermo fulfills their purchase, GSAT shareholders would be diluted 15%+. For this sort of deal, I would much prefer a longer lock-up then 180 days for these shares. That's not the case though, Thermo will be free to sell any shares purchased at any time, 180 days from purchase. Also other insiders have the same rights as Thermo for just under 800,000 shares, which can be bought anytime until 12/31/11 at $16.17 a share. In order to give as accurate a picture of market cap, I counted all of these shares into current share count.

Entities of Thermo will own 70% of GSAT prior to these upcoming transactions. Note that while it appears Thermo will be paying near ipo price for 12 million shares going forward, the 70% they already own on ipo were essentially free shares. Thermo's full position in GSAT assuming they purchase all shares would be roughly $3 a share overall. This is even a bit more deceiving as Thermo will only be a purchaser of additional shares if they're already 'in the black' and trading over $16.17.

From the prospectus:

We are a leading provider of mobile voice and data communications services via satellite, with an estimated 10.2% share of global subscribers in the mobile satellite services industry in 2005.

GSAT is one of three satellite communications companies ipo'ing this week. GSAT operates 43 in-orbit satellites and 25 ground stations to offer wireless services where traditional wireless and wireline do not and cannot. GSAT provides voice and data communications services in over 120 countries. In operation since 2000, GSAT currently has 236,500 subscribers.

GSAT offers voice communications, 1-way data communications and 2-way data communications over 27.85 MHz. GSAT owns a global license for this frequency. GSAT also owns a license to operate over 'ancillary terrestrial components(ATC) in conjunction with their satellite services. GSAT's ATC component allows them to operate in dense urban areas and inside buildings. GSAT services only operate with equipment designed specifically for their network. Equipment includes the usual communications devices such as data modems and fixed & mobile phones.

History - Globalstar was founded in 1993 by Lorel and Qualcomm. Much like ORBCOMM, Globalstar borrowed heavily to launch their initial fleet of satellites in the late '90's. This story is very similar to the landbased fiber build-out of the late 90's. Globalstar(symbol GSTRF) ipo'd in 1995 and reached a high of $50+ in early 2000. By 2001, Globalstar was swamped in debt and a lack of revenues and customers. Unable to service the debt, Globalstar filed for bankruptcy in early 2002. The stock which had fallen below $1 ended up worthless. Creditors now own a chunk of the new Globalstar, while equity holders of the old Globalstar lost their entire investment.

GSAT has contracted with Alcatel to build 48 new satellites for GSAT by 2013. GSAT plans on launching these satellites as they are ready(they'll be delivered in 2 'batches' of 25 and 23). the total cost through 2014 is budgeted at $1 billion. GSAT plans on paying for this over the next 7 years through proceeds from this offering, a $100 million credit line drawdown, the $200 million stock purchases from Thermo Funding and through cash flows. GSAT anticipates approximately $600 million in cash flows over the next 7-8 years going towards these satellites. The bulk of the new satellites will be replacing current satellite constellation and GSAT expects these launches to provide service through 2025. Keep in mind that if GSAT has overestimated cash flows, a repeat of the original Globalstar could occur.

Also GSAT plans to heavily invest in their ATC network, apparently in an attempt to compete with existing wireless companies. GSAT expects this to cost $2-$3 billion and anticipates a future joint venture to accomplish this.

GSAT largest market/customer group are US federal, state, and local government. US government entities accounted for 15% of 18 month revenues ending 6/30/06.

Key competitive strengths are the ability to operate inside buildings and in areas shielded from the sky. Also GSAT believes their global license provides an edge as well. Also GSAT is the only satellite network operator currently using the patented Qualcomm Incorporated CDMA technology. Not so coincidentally Qualcomm is the only GSAT compatible manufacturer for voice communications working on GSAT's network.

Competition - GSAT expects newer satellite competition from Iridium, ICO and TMI all three of which have 2G satellite licenses. The big threat to me though is the advances being made in traditional wireless coverage areas. This is the real threat in my opinion. As the branded wireless companies continue to expand their service areas into rural and mountain regions, the possibility exists for a lessening in demand for GSAT's services. GSAT has positioned themselves as an operator of wireless voice/data services for places not traditional serviced by the branded terrestial wireless entities. With billion in capital expenditures on GSAT's horizon, they could potentially be in some trouble if the wireless services expand into GSAT's 'turf.'.


Factoring in future stocks sales to Thermo and the additional debt coming on and planned capital expenditures: No cash and $150 million in debt. Note that GSAT will have $5 a share in cash just after offering. All of this cash however is committed to Alcatel for replacement satellites. Note that even though the debt levels are not all that high, the annual interest rate here is a lofty 11%. It would appear after this business model resulted in bankruptcy a few years back, GSAT will have to pay through the nose to borrow going forward.

There were material weaknesses found in GSAT's audited 2005 statements. These appear to be a bit more serious then the usual. The usual these days being that small companies coming public just didn't have enough accounting staff on hand through the fast early growth stages. GSAT's issues appear more related to internal inventories and receivables, two areas I do not ever like seeing internal control deficiencies being reported.

Revenue have grown steadily since the bankruptcy. $84 million in 2004, to $127 million in 2005 to an anticipated $150 million in 2006. That would put 2006 revenue growth at 15% or so. Note however that the bulk of the growth here is from equipment sales. Direct costs to Qualcomm for this equipment grew at a faster rate then equipment sales growth. In other words, it appears there is a chance here that this is not actual equipment sales growth. GSAT lost money on this increased equipment revenue through first 6 months of 2006 - They're paying Qualcomm more for this additional revenue then they sold the products for.

2005 - Gross margins were 50%. Operating margins were 17%. Unfortunately pro forma debt(the debt that will be taken on post-ipo) would have eaten up 3/4's of operating earnings. Net margins were 3%(again factoring in planned future debt levels). Earnings per share were $0.05. On a pricing of $17, GSAT would be trading 340 X's trailing revenues.

2006 - through first 6 months it appears GSAT will grow revenues roughly 15% to $150. Much of that growth is due to equipment sales. This growth is sketchy to me as expenses to Qualcomm for these revenues increased faster. GSAT buying revenue growth ahead of ipo? This shows in gross margins, which dipped first 6 months of 2006 to 43%. Operating margins declined all the way to 8%. Factoring in future debt levels, GSAT will show a loss in 2006. Due to a tax benefit pre-ipo,
GSAT will actually book a nice bottom line number in 2006, but don't be fooled. GSAT appears as if they're set-up to post a loss or breakeven number for 2007 based on '06 operations.

A very complicated internal structure here with a bunch of deals with major holder Thermo and former co-founder Qualcomm. I'm always leery when there are so many deals internally and with closely related partners. This is one of the more convoluted deals in this regard I've seen in a while.

Conclusion - A number of things I don't care to see: 1) Too many convoluted internal/external deals. 2) A very aggressive market cap based on revenues. GSAT on a $17 pricing will be trading nearly 10 X's 2006 anticipated revenues. This for a data/voice communications provider. Sprint for example, trades under 1 X 2006 revenue. 3) this business model has previously gone bankrupt. Yes the plan is a bit different this time, although it would appear to me GSAT's cash flow projections the next 7 years are a bit aggressive. 4) the annual debt interest rate is steep here, showing an unwillingness of bans to lend to this model. 5) the operating margins and earnings don't really justify the current market cap. GSAT has a lot of growing to do to justify initial in-range pricing market cap. 6) This big one: 2nd time around for this company. the first time around they loss stock investors 100% of their investment. In a world full of stocks, why buy one that lost previous investors everything they invested. Pass.

October 28, 2006, 11:35 am


GHS pulled off a succesful offering this past week. But then of course we seem to be in the type environment in which a lemonade stand might be able to pull off a succesful ipo --- Not quite 1999 here, but we're seeing more enthusiasm for ipos across the board then anytime since early 2000.

The equity interest by Fortress in GHS got the deal done and gave it an initial pop. Fortress is a 'roll-up' specialist whose past success with BKD attracted investors to this deal.

One note here - While GHS has the trend of an aging US population at it's bac, BKD has the headwind shift away from print advertising trend to deal with. GHS is exactly the type of company that goes bankrupt during difficult economic times --- they're laying on hefty debt to acquire businesses that are annually not able to grow revenues in a 3%-4% GDP environment.

Again though we're in an ipo period here when 'little things' such as that are glossed over by investors as greed has begun to take over. Interesting the lessons that need to be repeated over/over and over again.


below is our pre-ipo piece for GHS.

GHS - GateHouse Media

GHS - GateHouse Media plans on offering 13.25 million shares at a range of $16-$18, assuming over-allotment is exercised. Goldman Sachs is lead managing the deal, Bear Stearns, Wachovia, Allen and Lazard co-managing. Post-offering GHS will have 34.5 million shares outstanding for a market cap of $587 million on a $17 pricing. The bulk of ipo proceeds will go to repaying debt. Both Goldman and Wachovia are creditors here so they will be receiving both underwriting fees and a portion of the proceeds as debt repayment.

Fortress Investment Holdings will own 61% of GHS post ipo. The segment of Fortress here is their private equity group. Fortress took control of GHS in 7/05. Fortress has recently brought two of their portfolio companies public in BKD/AYR. Both have done quite well in the aftermarket. Fortress plan appears to buy into a sector as a starting point. Then they'll utilize that initial purchase and begin 'rolling up' additional companies and/or assets in that sector with an eye towards becoming the leading player. They appear to be doing similar with GHS. On 6/6/06 GHS acquired all of the assets of CP Media and Enterprise NewsMedia, two Northeastern news publishing companies. These acquisitions essentially doubled GHS annual revenues. Each were brought into the fold by laying $400 million in new debt on GHS. Some of that debt will be paid off on offering, however GHS will be burdened with substantial debt post-ipo.

From the prospectus:

'We are one of the largest publishers of locally based print and online media in the United States as measured by number of daily publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve.'

GHS current holdings include: 1) 75 daily newspapers with total paid circulation of approximately 405,000; 2) 231 weekly newspapers (published up to three times per week) with total paid circulation of approximately 620,000 and total free circulation of approximately 430,000; 3) 117 "shoppers" (generally advertising-only publications) with total circulation of approximately 1.5 million; 4) over 230 locally focused websites, which extend our franchises onto the internet.

This is a very curious offering in that print newspaper stocks have not performed well at all the past 2 years.

According to the Newspaper Association of America, total gross ad spending in local newspapers nationwide is still below total gross spending for the year 2000. In fact total local ad spending in all mediums is still below that of 2000. The growth in overall ad spending has been nationally, driven by two mediums: Cable TV and the Internet. Every other national/local advertising segments have been unable to significantly surpass gross ad spending from 6 years ago, with all local advertising performing the worst. GHS predominantly relies on local print advertising, a sector that has flatlined the previous 6 years.

Advertising accounts for 75% of GHS revenues.

In addition overall circulation of daily newspapers has declined annually this entire decade while overall circulation of weekly newspapers has flatlined for 10 years. GHS owns 75 daily newspapers and 231 weeklies.

The two blue chips in this segment are the Washington Post(WPO) and The New York Times(NYT). WPO's stock price is currently down 25% since the late 2004 highs, while NYT is down 40% from the highs in late 2004. The reasons are in the preceding two paragraphs. Note that GHS plans on achieving ad growth via the internet route for their dailies and even some of their weeklies. However both NYT/DPO has top of the line well trafficked websites, yet it has not been enough to a) overcome stagnant ad rates in and overall circulation of their newspapers and b) given any boost to the stock prices.

GHS strategy here seems pretty clear. They're attempting to consolidate a very stagnant sector and achieve operating growth through rolling up otherwise zero growth businesses. I imagine the endgame is to achieve operating efficiencies overall to squeeze out earnings growth. Still, we're looking at a stagnant(at best) sector here, with the two blue chips in the group not able to see their stocks gain any traction for two years.

The big risk for GHS going forward is an economic slowdown. The past few years during a 3%-4% growing economy, the local dailies/weeklies have not seen any real overall revenue growth. I would imagine a flat to slowing economy would mean pretty significant overall drops in local newspaper advertising. For a company like GHS whose strategy is to lay on hefty debt, rolling up acquisitions in the sector, a sharp drop in advertising revenues, could spell disaster. In fact it is a recipe for disaster, you do not want to be anywhere in the vicinity of a company like GHS in a slowing or stagnant economy.

GHS dailies and weeklies have been around for quite awhile, as is the norm in this sector. 70% of their dailies have been published for 100+ years. GHS generates revenues from 286 markets across 18 states with 1.75 million classified ads placed in the papers in 2005.


Debt is significant at $586 million. These debt levels to equity in a stagnant organic growth sector mean an automatic pass from me on this ipo. The annual interest rate on the debt is fairly low overall at 5% or so. GHS plans to continue to acquire, expect debt levels here to increase going forward.

GHS does plan on paying a dividend. It appears as if it may be in the ballpark of $0.50 a share annually. On a pricing of $17, GHS would be yielding approximately 3% annually.

Negative book value post-ipo.

Due to the recent large acquisitions, coupled with Fortress taking control in 2005, revenues/earnings are not comparable pre 2005.

Taking into account all acquisitions, revenues for 2005 were $384 million. Operating margins were 13%. Unfortunately interest expense wiped out 81% of operating earnings. When folding out all acquisition related expenses and other non-recurring expenses, GHS net margins for 2005 were 1 1/2%. Earnings per share were $0.17. On a pricing of $17, GHS would be trading 100 X's trailing earnings. This in a stagnant sector.

For 2006, through 9 months it appears revenue for GHS will be flat. I would expect 2006 revenues to come in around $390 million, a small increase from 2005's $384 million. GHS has experienced a bit of operating expense growth in 2006 though, predominantly SGA and depreciation. This has knocked operating margins down to 10%. Debt servicing through first 9 months more then ate up all operating earnings. Expect a loss for GHS in 2006.

Note there is approximately $0.70 a share in annual depreciation expense. So while GHS will be booking a small loss overall in 2006, cash flows will be a little bit better. the dividend will come out of these cash flows.

Conclusion - Fortress is attempting to do with GHS something akin to their operating strategy with BKD. With BKD though their strategy plays into the overall trends of an aging US population. The wind is at their back in that sector, high debt levels be darned. The wind is not at their back in the local print advertising sector. If anything it is a bit of a headwind. While overall economic conditions should not effect Fortress plan with BKD, a decent size US economic slump could very well derail GHS. Factor in too, that GHS is not growing revenues at all without acquisition and not booking a bottom line profit. I'm passing on this deal.

October 20, 2006, 6:42 pm


EXLS debuted strongly today. Following is the tradingipos.com pre-ipo piece available to subscribers over a week ago. Of note, on the tradingipos.com subscriber forums we provide pre-opening indications for nasdaq offerings to assist subscribers in after-market entry.

We also have a number of solid traders posting there throughout each market day and I post all position entries/exits on site same day(usually very close to realtime). We help subscribers make money period.


(disclosure) at time of posting on blog(10/20) tradingipos.com owned shares of EXLS from $16.

EXLS - ExlService

EXLS - ExlService plans on offering 5.75 million shares at a range of $10- $12, assuming over-allotment is exercised. Citigroup and Goldman Sachs are lead managing the offering, Merrill Lynch and Thomas Weisel co-managing. Post-offering EXLS will have 28.25 million shares outstanding for a market cap of $311 million on $11 pricing. 20% of IPO proceeds will be utilized to purchase preferred shares and repay insiders, the rest fro general corporate purposes.

Post-offering Oak Hill Capital Partners will own 35%+ of EXLS. Senior management will own 20%+ of EXLS post-offering.

From the prospectus:

“We are a recognized provider of offshore business process outsourcing services, primarily serving the needs of Global 1000 companies in the banking, financial services and insurance sector. We provide a broad range of outsourcing services, including business process outsourcing services, research and analytics services and advisory services. The business process outsourcing services we provide involve the transfer to us of select business operations of a client, such as claims processing, finance and accounting and customer service, after which we administer and manage the operations for our client. “

This is the 2nd Indian outsourcing IPO we've seen recently. The first has been the hugely successful WNS offering. BPO(Business Process Outsourcing) IPOs in general have done quite well, so that is reason alone to look closely at EXLS. We've seen onshore/offshore BPO firms run successful offerings the past couple of years including PSPT/WNS/INWK.

Since EXLS began operations, they've transferred more than 225 processes from 22 clients to EXLS operations centers. Most of EXLS outsourcing business to date has been focused on the banking, financial services and insurance sectors. These 3 sectors accounted for 85% of 2005 revenues. EXLS has 7800 employees Three largest clients are Norwich Union, American Express, and Dell(including Dell Financial Services).These three accounted for 63% 2005 revenues with Norwich accounting for 39% by itself. Each is under contract until at least 2009. Contracts typically range in length from 3-7 years.

Industry- BPO (Business Process Outsourcing) has been a worldwide trend. Companies can save salary and benefit costs by utilizing BPO firms to handle various operating segments. As EXLS puts it: 'BPO providers work with clients to develop and deliver operational improvements with the goal of achieving higher performance at lower costs.' Due to the large amount of time/effort/expense involved, when a company shifts to a BPO firm, it is usually with the idea of it being a long term relationship.

Offshore BPO is expected as a sector to grow 37% annually over the next 5 years to $55 billion by 2010. Banking and insurance are expected to make up 50% of this offshore BPO business. India outsourcing companies accounted for 46% of offshore BPO revenues in 2006. The Indian BPO business is expected to grow evenly with the rest of offshore BPO. Indian BPO's projected to have approximately 45%-50% chunk of that anticipated $55 billion in 2010 revenues.

EXLS recently acquired Inductis, a provider of research and analytics services. the acquisition closed 7/1/06 and EXLS is planning on using Inductis to grow into more outsourcing segments then Banking, Insurance and financial services.


3 1/2 X's book value at $11.

$2 per share in cash post-offering, no debt.

When factoring in the Inductis acquisition, 2005 revenues were $95 million, a 58% increase over 2004. Through the first 6 months of 2006, revenues appear on track to hit $125-$130 million, a 34% increase over 2005.

EXLS shifted into profitability in 2004. Gross margins the past 18 months have been 37%. Operating expense ratios have actually been ticking up, 27% in 2004, 28% in 2005 and 30% through first 6 months of 2006. This is mostly due to stock compensation expenses added in as EXLS got closer to IPO stage. However EXLS does note that a portion of this ratios growth is due to rising wages in India. Ideally you want to see operating expense ratios declining as revenues grow, we'll need to keep an eye on this ratio going forward with EXLS.

EXLS has a 10 year tax holiday which will not expire until 2010. With debt paid off on IPO and with no taxes, operating margins will equal net margins for EXLS through 2009. Operating/ net margins were 10% in 2005. Earnings per share were $0.33 per share. On an $11 pricing EXLS would be trading at 33 X's trailing earnings.

Through first 1/2 of 2006 operating/ net margins are down slightly due to the increased operating expense ratio. That should improve a bit the back 1/2 of the year; however I would expect margins to be a bit lower for full year 2006 then 2005. I would expect the bottom line to hit roughly $0.40 in 2006. On a pricing of $11, EXLS would be trading 28 X's 2006 earnings.

To really grow the bottom line, EXLS is going to need to bring in a 4th big revenue generating client.

Comparing EXLS briefly with two recent offshore BPO's WNS and PSPT:

EXLS, $311 million market cap on an $11 pricing. Trading 2.4 X's 2006's revenues and 33 X's '06 earnings.

WNS, $1.07 billion market cap. Trading 4 X's revenues and 46 X's 2006 earnings. WNS priced at $20 this summer and currently trades over $30.

PSPT, $349 million market cap. Trading 5 X's revenues and 31 X's 2006 earnings. PSPT IPO'd at $7 in 2004 and currently trades $18 1/2.

Risks- EXLS is going to need a few more contracts going forward they're heavily dependent on three clients. The big risk to this deal would be if EXLS not only does not bring in a new client, but losses one of their big three. Also Norwich has the option to purchase certain EXLS facilities in 2011. These would be facilities that service Norwich and accounted for 20% of 2005 revenues.

Conclusion- Notice the lofty multiples WNS/PSPT carry. This has been a very good sector to be and the growth going forward should continue to be strong. EXLS is coming public in the 'right' space. Is it the 'right' company? EXLS will need to bring in another large client or two over the next couple of years to justify appreciation from IPO price. With the India BPO businesses growing so quickly the odds are pretty favorable that will occur. Really all one needs to look at here though is large Indian BPO firm WNS IPO. WNS priced strong and is currently up 50% from pricing in just under 3 months. EXLS looks solid enough to recommend just on the WNS performance. There is demand for these offshore BPO stocks and I would expect EXLS to do well short and mid-term. Recommend .

October 18, 2006, 12:40 pm

full calendars

stacked ipo calendar here these two weeks....pre ipo analysis available on each offering at http://www.tradingipos.com

This week's free blog piece is another government contracting ipo. SAI was one of three strong ipos that debuted Friday. Tradingipos.com was quite high on both apkt/ehth. However each is now well above ipo price making a free blog posting of the pre-ipo analysis piece for each a bit late...pieces on each were available on the site to subscribers well ahead of ipo date. I will not post an analysis piece on the blog for free until after ipo date, usually at least 3-5 days after.


SAI, SAIC Inc plans on offering 89million shares (yes, that is 89 million) at a range of $13-$15, assuming over-allotment is exercised. Morgan Stanley and Bear Stearns are lead managing the offering, seven houses co-managing. Post-offering SAI will have a total of 401 million shares outstanding for a market cap of $5.8 billion on a $14 pricing.

SAI does not have a specific use for the offering proceeds. Note however that just prior to this offering SAI is utilizing all pre-IPO cash on hand to pay out a $1.6- $2.4 billion dividend to insiders. Post-offering then SAI will have roughly $1 billion in cash on hand and just over $1 billion in debt. SAI will have less cash on hand post-offering them pre-IPO.

Vanguard will own 38% of SAI outstanding shares post-offering.

From the S-1:

“We are a leading provider of scientific, engineering, systems integration and technical services and solutions to all branches of the U.S. military, agencies of the U.S. Department of Defense, the intelligence community, the U.S. Department of Homeland Security and other U.S. Government civil agencies, as well as to customers in selected commercial markets.”

A large Federal government IT contractor offering. SAI does not make weapons, they provide information technology services. SAI does most of their contracting with the Department of Defense. 89% of revenues are from the US government, 69% from the Department of Defense. SAI has over 43,000 employees and 9000 active contracts. 20,000+ Revenues from the Army account for 16% of revenues, Navy 14% and Air Force 11%.

SAI is ranked the #3 information technology (IT) Federal contractor behind Lockheed Martin and Northrop Grumman. Post 9/11, this has been a growth sector. Department of Defense budgets have increased annually and the creation of the Department of Homeland Security has also fueled government contractor growth. This area figures to continue robust spending regardless of the outcome of the 2006 or 2008 elections. SAI puts it quite well in the prospectus:

“Following the September 11, 2001 terrorist attacks, U.S. Government spending has increased in response to the global war on terror and efforts to transform the U.S. military. This increased spending has had a favorable impact on our business through fiscal 2005. Our results have also been favorably impacted by increased outsourcing of information technology (IT) and other technical services by the U.S. Government. However, these favorable trends have slowed in fiscal 2006 and 2007 as a result of the diversion of funding toward the ongoing military deployment in Iraq and Afghanistan.”

SAIs funded backlog has grown steadily the past 3 years due to acquisitions and Federal spending growth. Funded backlog was $3.65 billion in FY '05(ending 1/31/05), $3.89 billion in FY '06 and $4 billion through 7/31/06.

The defense contracting space has been consolidating rapidly the past few years. A number of defense contracting IPOs this decade have been scooped up by larger entities, General Dynamics recent purchase of Anteon being the latest. SAI has a long history of growth through acquisition and I would absolutely expect that to continue. Due to their size, SAI will definitely be an acquirer, not an acquiree. They've acquired over 70 companies in the last decade alone. My take is that SAI is coming public in order to be able to use their stock to make larger acquisitions.


SAI will have a little over $1 billion in cash and $1 billion in debt post-offering. SAI will not pay a dividend as public company, however as noted they will be giving insiders a pre-IPO payout of $1.6- $2.4 billion.

Revenues have grown steadily this decade, although the pace has slowed the past 18 months. Revenues for FY 2005 (ending 1/31/05) were $7.2 billion and for FY 2006 (ending 1/31/06) $7.8 billion an 8% increase. Through the first 6 months of FY '07, revenues appear to be on a pace for $8.1 billion, a 4% increase. Revenues have actually been quite flat the past 5 quarters. Again at this point I would expect SAI to attempt to grow through acquisitions going forward, most likely public companies in the Federal contracting space.

Operating margins are relatively slim in this sector. SAI has been in the 6.5%- 7% historically. Net margins have been in the 4% range. Based on these margins and FY'07's revenue run rate, I would anticipate SAI to earn $0.90- $1.00 a share this year. On a $14 pricing SAI would be trading 15 X's current year earnings.

Going forward I would expect slow organic growth, mostly due to the sheer size of SAI. I would expect future revenue growth to be driven by acquisition. Again due to SAIs size, I would anticipate they'll be in the market for public companies in their sector that can be immediately accretive to the bottom line.

SAIs closest pure play comparables are CAI/SRX/MANT. This has been a very good sector to be in this decade with a number of highly successful IPOs including MANT/ SRX/ SINT/ MTCT. Also a number of other IPOs in this sector have been bought out at hefty premiums including ANT/VNX. This is a sector I'm quite familiar with having owned all seven of these companies stocks as various times, CAI's back when it was on the nasdaq as CACI. A quick comparison of a few with SAI:

SAI (on a $14 pricing) - $5.8 billion market cap, trading 0.7 X's revenues and 15 X's earnings. Net margins in the 4% range, expected revenue growth in the 5% ballpark.

CAI- $1.75 billion market cap, trading 0.85 X's revenues and 19 X's earnings. Net margins in the 5% range, expected revenue growth in the 8% ballpark.

SRX- $1.6 billion market cap, trading 1.2 X's revenues and 24 X's earnings. Net margins in the 5% range, expected growth in the 12% ballpark.

MANT- $1.1 billion market cap trading 1 X's revenues and 21 X's earnings. Net margins in the 5% range, expected growth in the 12% range.

SAI is coming cheaper on a PE basis, but due to size, the expected growth rates are a bit slower then CAI/SRX/MANT.

Conclusion- I'm neutral on this deal. I suspect the sheer size of the offering will mute short and mid-term performance. However they appear to be pricing it at an attractive multiple to 1) get the deal done and 2) have an opportunity for longer term appreciation. My preference in this niche is for the smaller players that have a good chance to be swallowed up at a premium by the likes of SAI. However SAI is a big player in a sector that has done quite well this decade. The 89 million shares being floated are a bit much for my tastes; however SAI should be a solid longer term play in a sector that should continue to perform well. Expect numerous acquisitions by SAI over their first year public, most likely a number of them being stock based acquisitions.

A Large offering coming at an attractive enough multiple to get it done successfully in range

October 9, 2006, 7:19 am

An overlooked recent ipo

5 on the schedule this week, 9 more next. Analysis pre-ipo on all as usual at:


ICFI - ICF International

ICFI, ICF International plans on offering 5.5 million shares at a range of $14-$16, assuming over-allotment is exercised. 1 million shares of this offering will be sold from insiders. UBS will be lead managing the offering, Stifel, William Blair and Jefferies will be co-managing. This is a rather weak underwriting team overall. Post-offering ICFI will have 13.6 million shares outstanding for a market cap of $204 million on a $15 pricing. IPO proceeds will be used predominantly to pay down debt.

CM Equity Partners will own 56% of ICFI post-offering.

From the prospectus:

“We provide management, technology and policy consulting and implementation services primarily to the U.S. federal government, as well as to other government, commercial and international clients. We help our clients conceive, develop, implement and improve solutions that address complex economic, social and national security issues.”

ICFI is an expertise as well as contracting company. 72% of '05/'06 revenues were derived from the US Federal Government. ICFI focuses their expertise and contracting business in 4 general areas: defense and homeland security; energy; environment and infrastructure.

ICFI pretty much defines their reason for existence thusly, “Increased government involvement in virtually all aspects of our lives has created increasing opportunities for us to resolve issues at the intersection of the public and private sectors.”

ICFI has provided consulting services to the U.S. Environmental Protection Agency [EPA] for more than 30 years, the U.S. Department of Energy for more than 25 years, and the DOD for over 20 years.

What does ICFI do? 3 things:

1) Advisory Services: ICFI provides advisory and management consulting services including needs and markets assessment, policy analysis, strategy and concept development, management strategy, and program design.

2) Implementation (contracting): based on the results of advisory services, ICFI provides implementation services including information technology solutions, project and program management, project delivery, strategic communications and training.

In other words, ICFI advises the Federal government that the Feds should hire ICFI to contract! In IFCI's words, “Because of our role in formulating initial recommendations, we are often well positioned to capture the implementation services that often result from our recommendations.”

3) Evaluation and Improvement Services - ICFI provides follow-up evaluation to their advisory and contracting services.

The specific areas in which ICFI has provided these services include terrorism, federal budget deficits, emergency preparedness for natural disasters and national security threats, rising energy demands, environmental changes and an aging federal civilian workforce, among others. ICFI has consulted and provided services for Homeland Security, energy policy expertise, transportation infrastructure, immigration, population growth, and health care.

ICFI has made a few acquisitions over the past 2 years to expand their scope; however they're still a pretty small player in the government consulting/contracting space. There is one huge contract however that has not only opened up the window for them to come public, but makes this IPO an interesting and viable offering.

Road Home Contract - In June 2006, ICFI was awarded a contract by the State of Louisiana to serve as the manager for The Road Home Housing Program. This program, being funded by a Federal Block Grant (from HUD) of $8.1 billion, is designed to assist the population affected by Hurricanes Rita and Katrina to repair, rebuild or relocate by making certain reimbursements to qualified homeowners and small rental unit landlords for their uninsured, uncompensated damages. ICFI was awarded the contract due to a prior advisory relationship post-Katrina with the State of Louisiana. ICFI is managing this contract not receiving the $8.1 billion. However ICFI estimates that the maximum amount payable to ICFI and its subcontractors to the first four-month phase of the contract will be $87.2 million. ICFI will subcontract to itself 50-60% of this as well as derive fees for managing this contract. ICFI has $208 million in total revenues in 2005, so even if one were to lowball estimates here for the Road Home Contract just won, it is going to have a major impact on ICFI's top and bottom line going forward beginning with the 3rd quarter of 2006(the current quarter). Only the first phase (the $87.2 million) is guaranteed, but that is just business as usual and ICFI is in a great position to continue to derive significant revenues from this program over the next 3 years. I'm even more certain of this after looking at the Louisiana state website and reading, “The Road Home is now being administered by ICF International” which was contracted by the Office of Community Development to oversee the program through to its completion. A “big deal” for a little player like ICFI as they state, “by far our largest individual contract.”

So we've a small Federal government contractor that just landed a huge management contract win.


Note that revenues through the most recent reported quarter 6/06 do not include any of the Road Home contract revenues. Those will kick in beginning the 9/06 quarter. Prior to this contract ICFI has managed to post 9 straight quarter of sequential quarterly revenue growth.

No real cash on hand as the bulk of offering proceeds will go to pay down debt. There will be a bit of debt post-offering, $12 million; however this is down substantially from $50 million pre- IPO. Debt was laid on in acquiring complementary businesses.

Due to an acquisition revenues ramped in 2005 49% to $208 million. Gross margins were 41%. SGA expense ratio was 34%. Operating margins were a slim 4% and net earnings after tax/ interest payments were 3% rounded. Note as always I've folded out debt servicing costs for the debt paid off on offer. ICFI made $0.44 in 2005. On a pricing of $15, ICFI would be trading 34 X's 2005 earnings.

Growth looks to have been muted through the first 1/2 of 2006 at 6-7% or so. That obviously will change drastically when ICFI starts receiving the Road Home monies the back half of '06. Frankly until they post a quarter with these monies, it is difficult to say for certain how much revenues will be derived and how much will filter to the bottom line. The following forecasts for full year 2006 DO NOT include any projections from the Road Home contract. I'm not ducking out of a tough projection here either. ICFI themselves state, "Because the contract is in its start-up phase, it is not possible for us to predict the level of revenue or profit we will earn during the first four-month phase or through the balance of the contract”. I do believe revenues for ICFI from this contract will be significant in the 2nd half of 2006, in 2007, in 2008 and possibly beyond. An $8+ billion program is a big one and ICFI is the sole manager of the first phase of this program and would seem to be in line to manage the future phases as well.

So without the Road Home contract factored in at all, ICFI stood to being in roughly $220 million in revenues in 2006. Gross margins and SGA expense ratios would mirror 2005. Net margins again appeared to be headed for the 3% ballpark. Net earnings without the big contract win looked headed for approximately $0.55- $0.60 per share. On a pricing of $15 ICFI would be trading at 26 X's 2006 earnings.

Risks- The biggest is should ICFI lose the Road Home contract. As is typical, the contract itself and ICFI's involvement is only guaranteed through the first phase with both needing renewal before phase II and then before phase III. I see this as ty