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.