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.

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