Following piece was available to subscribers on 6/28/08 at http://www.tradingipos.com


2008-06-28
ERII - Energy Recovery Devices

ERII - Energy Recovery Devices plans on offering 14 million shares at a range of $7-$9. Insiders are selling 6 million shares in the deal. Citi and Credit Suisse are lead managing the deal, HSBC, Janney Montgomery and SEB Enskilda are co-managing. Post-ipo ERII will have 49.9 million shares outstanding for a market cap of $399 million on a pricing of $8. IPO proceeds will be used for working capital and general corporate purposes.

Arvarius will own 20% of ERII post-ipo. Arvarius (a Norwegian company) is selling 2 million shares on ipo.

From the prospectus:

'We are a leading global developer and manufacturer of highly efficient energy recovery devices utilized in the rapidly growing water desalination industry.'

Water desalination definition: 'The removal of salt, esp. from sea water to make it drinkable.'

ERII operates in the sea water reverse osmosis (SWRO) segment. With SWRO, high pressure is used to drive sea water through filtering membranes to produce fresh water. Historically this has been a very expensive endeavor, however technology is improving to make desalination more cost competitive. Companies such as ERII are driving the technology that recovers the energy used in the desalination process. After initial capital expenditures, energy consumption is the primary cost factor in the the SWRO process. ERII's main products do not actually filter the water. ERII's primary product, the PX Pressure Exchanger helps optimize the energy intensive SWRO process by recapturing and recycling up to 98% of the energy in the high pressure reject stream. ERII's PX devices reduce overall energy consumption in the SWRO process by 60%. ERII's products make SWRO more efficient, which in turn helps make the process more cost effective. The more cost effective desalination becomes, the greater the growth possibilities.

**Think of ERII as a company that makes a product that allows the formerly cost prohibitive water desalination process become much more cost effective. This ipo fits into exactly what has been working in the stock market lately. Energy efficiency focused on a sector whose growth going forward should be strong due to continued worldwide population growth.** Energy efficiency and built in sector demand growth, a very nice combination here. If the financials are at least decent, ERII is a definite recommend in range.

As of 3/31/08, ERII had shipped over 4,000 PX devices to desalination plants worldwide. ERII estimates they have reduced energy consumption at desalination plants by 300 megawatts annually relative to comparable plants with no energy recovery devices. In dollar terms ERII believes this represents an annual electricity cost savings of approximately $210 million. ERII's devices are in use in plants located in China, Algeria, Australia and India.

Industry

The world's population continues to grow, with much of that growth being in locations lacking in abundant fresh water sources. The United Nations expects the global consumption of water to double every 20 years. That is a pretty remarkable statistic and it means there is most likely not enough current freshwater sources in many locations worldwide to handle this expected demand growth.

There are an estimated 13,080 desalination plants worldwide. Desalination capacity is approximately 39.9 million cubic meters per day as of 12/05. Installed capacity is estimated to grow 13% annually over the next decade.

The SWRO market has been focused in geographic areas with a lack of freshwater sources, but extensive salt water nearby. The Middle East has been, by far, the market leader in desalination. Saudi Arabia's desalination plants account for about 24% of total world capacity. The world's largest desalination plant is in the United Arab Emirates. World-wide, 13,080 desalination plants produce more than 12 billion gallons of water a day. Saudi Arabia recently announced more than $12 billion worth of planned water and power projects that will supply an additional 2.24 million cubic metres of water per day and 2,750 mega-watts of power in the next few years.

US market - ERII's PX device is currently in use in the pilot program for a proposed desalination plant in Carlsbad, CA. If approved, this desalination plant would be the largest in the US.

By 2015, the five largest countries in water desalination based on planned capacity will be Saudi Arabia, United Arab Emirates, The United States, China, and Spain. ERII believes they've a foothold into the growth in China.

ERII strengths - ****Unique and efficient*** - From the prospectus: 'we manufacture the only commercially available rotary isobaric energy recovery device, which we believe is more effective at recovering and recycling energy than any other commercially available energy recovery device. The PX device incorporates highly-engineered corrosion resistant ceramic parts that require minimal maintenance, and a modular design that allows for system redundancy resulting in minimal plant shutdowns. Our rotary device has only one moving part and a continuous flow design, which complements the continuous flow of the SWRO process. We believe these unique benefits lead to lower life cycle costs than competing products.'

Geida accounted for approximately 25% of revenues the 15 months ending 3/31/08. Geida is a Spanish construction consortium involved in water desalination plants primarily in Algeria and Spain.

ERII has 5 current US patents and 9 international patents. In addition, ERII has applied for 2 new US patents and 14 new International patents.

Risks:

1 - ERII currently does not receive residual revenues from their energy recovery devices. Eventually ERII will receive revenues from replacement devices, however as their installed base is fairly new that is still a ways off. To grow revenues, ERII needs water desalination capacity to continue to grow at a solid clip. Any factors slowing capacity growth would also slow ERII's revenue stream.

2 - Lumpy revenues. ERII has a greater risk than most young companies in missing revenues/earnings in any given quarter due to the structure/timing of their revenues. ERII's revenues are seasonal. Due to the cyclical nature annually of SWRO plant construction, ERII tends to see a seasonal increases in shipments of their PX devices in the fourth quarter annually. Also in any given quarter ERII depends on just 1-3 projects for the bulk of their revenues for said quarter. Backloaded annually depending on a few projects is a recipe for choppy revenues quarter to quarter even if the underlying business remains strong.

Competition - ERII's main competition is a private Swiss company, Calder AG. ERII believes their energy recovery devices have greater efficiency at 98% recovery than Calder's.

Financials

$1.20 per share in cash post-ipo.

ERII does not plan on paying a dividend.

Seasonality - As noted above ERII tends to generate greater revenues in the fourth quarter, expect annual revenues and earnings to be somewhat backloaded.

Revenues have steadily grown annually. In 2005 ERII booked $10.7 million in revenues, in 2006 revenues were $20 million and in 2007 revenues were $35.4 million.

Gross margins annually have been solid at 56% in 2005, 60% in 2006 and 58% in 2007.

ERII has been profitable annually since 2005.

Note that nearly all historical revenues are international and not derived from the US. ERII expects that trend to continue into the near future.

2007 - Revenues were $35.4 million, a strong 77% gain over 2006. Gross margins were 58%. Operating expense ratio was 31% (down from 41% in 2006), quite solid for a young fast growing company. Strong revenues growth coupled with solid gross margins declining operating expense ratios are exactly the trends you want to see. Operating margins were 27%. Net margins after taxes were 17%. Earnings per share were $0.12.

ERII is the type of ipo in which the trends and space are more important than the trailing PE. With an uncertain US economy, ERII is situated in a space that looks to grow worldwide over the next decade. Factoring in the strong revenue growth, solid gross margins and operating margin growth trends make the trailing PE of 67 X's earnings more palatable.

2008 - Again we note ERII's 2008 should be backloaded. Based on the first quarter and our usual somewhat conservative approach, ERII should grow revenues approximately 30% in 2008 to $47 million. ERII looks to continue to grow revenues without losing gross margins. Gross margins for 2008 should be in the 2006-2007 ballpark of 58%-60%. GSA expense increased significantly in the first quarter, for the most part due to increased personnel and legal/accounting expenses in preparation of the ipo. As such I am not plugging in any improvement in the operating expense ratio for full year 2008 and in fact would anticipate a slight slide to 26%. Due to increased cash on hand and added interest gains the second half of 2008, net margins should remain similar to 2007 at 17%. The flat net margins with strong revenue gains here look to be more a matter of added costs in being a public company. If ERII performs strongly the second half of 2008, there is the distinct possibility that my operating and net margin projections could be a little low. I'd rather err on the side of caution however. Earnings per share for 2008 should be $0.17. On a pricing of $8, ERII would be trading 47 X's 2008 earnings.

Conclusion - ERII is positioned well here. Water may very well be a huge story over the next decade or two. The world's population continues to grow and often in areas of the globe lacking sufficient freshwater sources to meet this growth. Desalination is a story we will be hearing much more from in the coming years. ERII has a unique product in a sector which should continue solid worldwide growth over the next decade. In this sector ERII creates greater energy efficiency by allowing energy use to be recovered through the desalination process. This uniqueness has allowed them to outgrow the sector annually while maintaining strong gross margins. Yes on a strict pe and price to sales basis, ERII looks a bit pricey on ipo. Keep in mind two things however: 1) ERII is one major project away from rapidly increasing revenues, and 2) ERII should regain operating margin growth momentum in 2009. As with any small and young company many things can occur to derail the story. However the potential positives going forward here outweigh the risks involved. This is a sector which should continue to see increased investor attention going forward and ERII in their short history has grown revenue rapidly with solid gross margins and impressive operating expense control. Definite recommend in range, even with the 'apparent' pricey initial valuation. ERII has the potential to be a 'story stock' down the line if all breaks right for the company and has all the makings of a strong ipo

following ipo piece was available to tradingipos.com subscribers prior to FSC pricing their ipo at $14. FSC is currently trading at approximately $10 1/4. Sometimes it is as important to save money by passing on ipos as it is on catching a 'hot' one. FSC has been a disaster and was one to avoid.

also we've a complete write-up for subscribers on this week's ipo ERII.

http://www.tradingipos.com


2008-06-11
FSC - Fifth Street Capital

FSC - Fifth Street Capital plans on offering 10 million shares at a range of $14.12 - $15.12. Goldman Sachs and UBS are lead managing the deal, Wachovia, BMO and Stifel are co-managing. Post-ipo FSC will have 22.5 million shares outstanding for a market cap of $329 million on a pricing of $14.62. FSC will use the bulk of ipo proceeds to invest in small and medium size pre-ipo stage companies.

Toll Brothers(TOL) founder and former President Bruce E. Toll will own 9% of FSC post-ipo. Mr. Toll is the father in law of FSC CEO and President Leonard M. Tannenbaum. In addition Genworth Life and Greenlight Capital will each own 5% of FSC post-ipo.

From the prospectus:

'We are a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. We define small and mid-sized companies as those with annual revenues between $25 million and $250 million.'

FSC commenced operations in 2/07. FSC is a private investment operation that makes 'piggyback' investments in pre-ipo stage companies. We've seen a number of private equity 'quick flip' ipos this decade. Nearly all of them come saddled with hefty debt. Debt that was placed onto the back of the underlying entity to fund the purchase by the private equity operation. FSC helps fund these acquisitions by lending money to the underlying entity. That money usually ends up in the hands of the private equity firm to help fund the takeover.

FSC is managed by Fifth Street Management headed by 36 year old Leonard Tannenbaum. Mr. Tannenbaum has led the investment of approximately $450 million since 1998.

As of 3/08, FSC's portfolio totaled $192 million and comprised investment in 19 companies. The bulk of FSC's investment is debt based, usually straight first or second tier loans coupled with a samll($200k or so) equity investment. Average investment size is $5-$40 million. Their average annual yield on their debt investments is a substantial at 16.7%. The high yield on investments would appear to indicate that FSC's investments are placed with many companies unable to leverage themselves via normal credit routes. This fits with FSC's profile of doing deals in conjunction with private equity sponsored investments.

Note that if FSC prices in range it will increase FSC's assets under management by approximately 70%.

FSC's management fee structure mirrors that of a hedge fund. For the type of investments FSC makes and the return since inception the fee structure looks excessive. FSC is essentially a lender working with private equity operations. Yet they want public shareholders to pay them as if they're running a top tier high return and in demand hedge fund. FSC's management fee structure post-ipo will be 2% of gross assets annually as well as 20% of net investment income/capital gains. In other words, 2% of assets under management and 20% of any/all returns.

**FSC is essentially a 'high risk' lender, yet they want public investors to pay management fees akin to successful hedge and investment funds. In the prospectus FSC estimates that if they are able to generate a 5% annual return their first five years public investor fees/expenses would total $300 on a $1000 investment.

Portfolio companies - FSC's current portfolio companies can be found here: http://www.fifthstreetfinance.com/portfolio.html

Risk - All of FSC's originations have been first or second lien on the investment company's assets. However the bulk of FSC's investment portfolio are small to mid-size consumer discretionary operations, with the remainder all relying on US economic health in one form or another. That in and of itself is not really a negative even with the difficult current economic climate as long as solid due diligence is in place. the issue here is that FSC's investments/loans are in conjunction with private equity leveraged investments, meaning the underlying companies in which FSC invests are taking on significant debt in order to fund the private equity investment. High leverage always increases the odds of default down the line and FSC's business plan pretty much guarantees they will be making these type of investments going forward.

Note that FSC does plan on leveraging their investments. Prior ipo FSC had approximately $35 million in debt at an average interest rate of 4.15%. FSC does plan on borrowing at lower rates to lend at higher rates going forward. Again FSC mirrors a high risk lender more than a private investment fund.

Financials

FSC will have approximately $150 million in cash post ipo. This cash will be utilized to lend to and invest in small businesses in accordance with business plan.

Assuming a pricing of $14.62, book value post-ipo will be $13.80.

FSC does plan on distributing essentially all net income quarterly to shareholders.

Fiscal year ends 9/30 annually. FY '08 will end 9/30/08.

FSC marks their investment to market quarterly. For the six months ending 3/31/08, FSC's unrealized depreciation on their investments lost $2 million.

For the six months ending 3/31/08, FSC had interest and fee income of $12.3 million. Management and incentive fees totaled 22% of revenues. Other operating expenses totaled 13%. Factoring in depreciation on investment loss, net income per share was $0.25.

Going forward we can expect FSC to put the ipo monies to work which should increase FSC's interest income going forward. I would estimate, assuming no massive investment depreciation, net income for FY '08 will total approximately $0.60 per share.

Assuming again no defaults and no massive investment writedowns, I wold expect distributions shareholders to total $0.60-$0.75 FSC's first four quarters public. On a pricing of $14.62, FSC would yield approximately 4%-4 1/2% first year public. Conclusion - I don't see a compelling reason to own this ipo in range. This is essentially a high risk lender cloaked as a closed end investment fund coming public above book value. I'm not a huge fan of the hefty incentive fee structure here as well as the risky nature of FSC's investments assisting the funding of private equity buyouts. In a sluggish US economic climate lending at an average of 16.7% yield to companies loading up on leverage to fund private equity investments does not interest me.

Our pre-ipo piece on CFX available to subscribers 5/1/08. CFX priced at $18 per share on 5/8.

analysis pieces on all ipos available at http://www.tradingipos.com

three year anniversary and still going stong.

2008-05-01
CFX - Colfax

CFX - Colfax plans on offering 18.8 million shares at a range of $15-$17. Insiders are planning on selling 11 million shares in the deal. Merrill Lynch, UBS and Lehman will be lead managing the deal; Robert Baird, BofA, Deutsche Bank, and KeyBanc will be co-managing. Post-ipo CFX will have 41.2 million shares outstanding for a market cap of $659 million on a price of $16. Approximately 1/3 of ipo monies will be used to repay debt, 2/3's will go to insiders in the form of bonuses, dividends and reimbursements.

Capital Yield Corporation will own 21% of CFX post-ipo. Capital Yield is the selling shareholder on ipo.

From the prospectus:

'We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves.'

CFX specializes in rotary positive displacement pumps. What is a displacement pump? According to wikipedia it is a pump that causes a liquid or gas to move by trapping a fixed amount of fluid and then forcing (displacing) that trapped volume into the discharge pipe.

The key to this ipo is CFX end market segment users which include commercial marine, oil and gas, power generation, global navy and general industrial. From previous ipo pieces we know that the next few years will bring unprecedented new ship builds spurred by commodity demand in places such as India, China and Brazil. Similarly the historical high oil and gas prices have spurred exploration which means more equipment is needed. Power generation infrastructure around the world is also in need of massive upgrades due to age and inefficiencies. CFX's end markets look solid even in a slowing world economy.

Pumps are marketing under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names.

CFX has production facilities in Europe, North America and Asia. Asia production facilities include operations in both India and China. Products are sold through 300+ person direct sales team and more than 450 distributors in 79 countries. **67% of 2007 revenues were derived outside the US** with no single customer accounting for more than 3% of revenues. Customers include Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world.

CFX has a large installed product base which leads to significant aftermarket sales and service revenues as well as eventual recurring replacement sales. In 2007 25% of revenues were derived from aftermarket sales and service.

Pumps (including pump aftermarket sales/service) account for 85% of revenues.

The worldwide pump and valve sector is highly fragmented. CFX believe their sector is ripe for consolidation and they've made numerous acquisitions and plan on making more in the future. Recent acquisitions include Zenith Pump in 6/04, Portland Valve in 8/04, Tushaco Pump in 8/05, Lubrication Systems in 1/07, and Fairmount Automation in 11/07.

A quick look at CFX end markets:

Commercial Marine/Naval - Fuel oil transfer; oil transport; water and wastewater handling;

Oil and Gas - Crude oil gathering; pipeline services; unloading and loading; rotating equipment lubrication; lube oil purification;

Power Generation - Fuel unloading, transfer, burner and injection; rotating equipment lubrication;

General Industrial - Machinery lubrication; hydraulic elevators; chemical processing; pulp and paper processing; food and beverage processing;

Looking ahead - In their S-1, CFX exudes a confidence in 2008 that is rarely seen in ipo filings. To quote from the S-1: 'We believe that we are well positioned to continue to grow organically by enhancing our product offerings and expanding our customer base in each of our strategic markets. During 2007, we experienced strong demand in the majority of our strategic markets, and we expect favorable market conditions to continue throughout 2008.'

CFX sees growth coming from the following core markets:

1) In the commercial marine industry, CFX expects growth in international trade and high demand for crude oil to continue to create demand for container ships and tankers;

2) CFX expects activity within the global oil and gas market to remain favorable as capacity constraints and increased global demand keep oil and gas prices elevated;

3) In the power generation industry, CFX expects activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects;

4) In the global navy industry, CFX expects that sovereign nations outside of the U.S. will continue to expand their fleets as they address national security concerns. In the U.S., Congress is expected to continue to appropriate funds for new ship construction for the next generation of naval vessels as older classes are decommissioned;

5) In the general industrial market, CFX expects that the continued economic development of regions throughout the world will continue to drive increased capital investment and will benefit local suppliers as well as international exporters of fluid handling equipment;

Asbestos - Two of CFX subsidiaries have substantial asbestos liability. CFX took an asbestos related charge annually from 2003-2006 averaging $25 million annually. They took the charge because one of their primary insurance carriers claimed it had exhausted resources to pay further asbestos claims. This changed CFX liability and they took a charge annually to include this increase in liability from the insurance carrier to CFX itself. In 2007, CFX actually gained approximately $50 million on the asbestos expense line thanks to a settlement with said insurance carrier. CFX will continue to book a gain or loss on annual earnings as their asbestos liability estimates shift. It appears that CFX may book another asbestos related accounting gain in 2008 as they continue to factor in less liability due to insurance settlement. Currently on the balance sheet CFX lists $376 million in asbestos liability with $305 million in insurance coverage for said liability. It appears CFX took on their insurance carriers and won. Barring a change in the 2007 settlement I would expect minimal additional asbestos charges for CFX going forward. As such I will be folding out asbestos charges and gains from earnings and projections.

**Assuming the financials appear promising, CFX looks to be a very nice way to play the Asian growth engine. Looking at their core markets, my first thought was that CFX is positioned very nicely. Reading the prospectus it is clear CFX feels the same as they essentially come out and write in an SEC filing they fully expect strong growth to continue in 2008.

Financials

$168 million in debt post-ipo. While not enough to derail operations, I would rather have seen insiders hold off on selling in this deal to allow CFX to repay more debt. CFX plans on acquiring companies going forward and a cleaner balance sheet would make those acquisitions far more accretive. In addition to the debt, CFX will have nearly $50 million in cash on hand post-ipo. I'd expect CFX to utilize this cash for future acquisitions. Overall for a company that has been rather aggressive acquiring over the past four years, the balance sheet here is in decent shape.

Revenues grew steadily from 2003-2006 and exploded in 2007. Revenues were $345 million in 2005, $394 million in 2006 and $506 million in 2007.

Gross margins were 36% in 2005, 35% in 2006 and 35% in 2007. In 2007 CFX was able to grow revenues by 28% while maintaining gross margins. Approximately 50% of that growth was organic from existing business with the remainder from acquisitions and currency benefits.

2007 - Revenues were $506 million a 28% increase over 2006. Gross margins were 35%. Operating expense ratio was 20%. Operating margins were 15%. Plugging in interest expense and full taxes, net margins were 7.5%. Earnings per share were $0.90. On a pricing of $16, CFX would trade 18 X's 2007 earnings. *note* Preceding numbers take into account debt paid off on ipo and fold out the $50 million in asbestos accounting gains for reasons noted above.

2008 - In the current S-1, CFX has preliminary first quarter revenue and operating earnings numbers. Operating margins were a bit light but there was no breakout of expenses so I'm going to assume there were some asbestos accounting charges in those numbers. We'll know more when CFX officially releases first Q '08 results. I'm going to be slightly conservative in projections however based on the lower operating margins in first quarter 2008. Based on first quarter numbers and CFX own enthusiasm for 2008 growth, I believe CFX can grow revenues 10%-15% in 2008. Assuming slightly lower operating margins, net margins should be in the same 7.5% ballpark due to lower debt servicing to revenue ratio. Earnings per share should be $1.05. On a pricing of $16, CFX would trade 15 X's 2008 earnings.

Conclusion - Very solid ipo. Too often this type of industrial solid cash flow business has come public laden with LBO debt. That isn't the case here. Yes insiders could be selling less stock to allow CFX to pay off more debt, but the balance sheet here is in solid shape. Ideally I'd like to see all debt wiped off on ipo instead of 25%-30%. The ipo driver here is the current boom in worldwide shipbuilds, oil & gas equipment manufacturing and power infrastructure. These three sectors look to continue to grow strongly over the next 3+ years with much of that growth coming outside the US. CFX is positioned perfectly for that growth and 15 X's 2008 earnings is a very reasonable multiple here. Definite recommend in range and a bit above, I like this ipo.

Following piece was available to subscribers 4/11/08, well ahead of the 4/22/08 pricing date.

http://www.tradingipos.com

2008-04-11
AWK - American Water Works

AWK - American Water Works plans on offering 64 million shares (75.6 million if over-allotment is exercised) at a range of $24-$26. **Note** - All shares in this deal are being sold by insiders. AWK will receive no monies from this ipo. Fact is AWK is heavily leveraged and they most certainly could use ipo monies to pay off debt. However that is not going to occur.

Goldman Sachs, Citi, and Merrill Lynch are lead managing the deal. Co-managing will be nearly every firm on the street other than Bear Stearns. There are thirteen co-managing firms in all.

Post-ipo AWK will have 160 million shares outstanding for a market cap of $4 billion on a pricing of $25.

RWE will own essentially all non-floated AWK shares post ipo, an approximate 60% stake in AWK post-ipo. RWE is the selling shareholder in this deal, selling all 64 million shares, 75.6 million if over-allotment is exercised. RWE, a German operation, is one of Europe’s leading electricity and gas companies and supplies 20 million customers with electricity and 10 million customers with gas in Germany, the United Kingdom and Central and Eastern Europe. RWE purchased the then public American Water Works in early 2003 for $4.6 billion in cash.

This is a classic spin-off ipo as RWE plans on divesting themselves of their 60% stake in AWK as soon as possible (meaning right around that 180 day mark). Expect heavy future overhang here as RWE Aqua will be divesting approximately 90 million more shares of AWK sometime in late 2008.

Note - American Water Works has always toted around substantial debt. As a utility, in this case a water utility, it is common to see substantial debt as cash flows from this type of operation tend to be fairly predictable and not effected by economic cycles. When RWE purchased American Water Works five years ago, AWK had approximately $3.3 billion in debt. The public AWK in 2008 will have $5 billion in debt. It appears that a portion of the increased debt over the past five years has been due to RWE laying debt onto the back of AWK in order to fund payouts to RWE. If we look at the increased debt levels, RWE purchased American Water Works in for a total cash and debt-load interest of $7.9 billion. Assuming a pricing of $25, AWK post-ipo will have a total market cap plus debt consideration value of $9 billion.

Personally, I don't care what business one is in I'm always uncomfortable with a debt to capitalization level in AWK's post-ipo ballpark. $5 billion in debt and an expected initial market cap of $4 billion is a highly leveraged operation. So before we even look at the company, this deal has two serious strikes against it: 1) heavily leveraged with at least a portion of the leverage coming due to cash-out to parent company; 2) future overhang of approximately 90 million shares as RWE plans to completely spin-off their entire ownership of AWK by the end of 2008. I would expect these shares to come in the form of a hefty secondary as RWE is traded in Germany making a tax free dividend of AWK shares to RWE shareholders unlikely.

All things being equal the above is enough for me to pass on this ipo right here. Let's take a look at AWK the company to see if something might make me change my mind.

From the prospectus:

'Founded in 1886, American Water Works Company, Inc., which we refer to, together with its subsidiaries, as American Water or the Company, is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served.'

AWK provides approximately 15.6 million people with drinking water, wastewater and other water-related services in 32 US states and Ontario, Canada. AWK treats and delivers over 1 billion gallons of water daily. AWK's primary water business is regulated as a utility by the Public Utility Commission (PUC). AWK's regulated business accounts for nearly 90% of overall revenues.

Residential water services account for 61% of revenues. Revenues from Pennsylvania and New Jersey account for approximately 45% of overall revenues.

Sector - In the US water and wastewater utility sector, government owned and operated entities make up the bulk of operators. Government owned systems account for approximately 84% of all United States community water systems and approximately 98% of all United States community wastewater systems. Commercially operated systems such as those run by AWK are in the minority. Overall there are an estimated 53,000 community water systems and approximately 16,000 community wastewater facilities in the United States. A strategy going forward for AWK will be to selectively acquire community based and run water and wastewater systems. For example in 12/07 AWK signed an agreement to purchase the water system assets of Trenton, NJ.

For our purposes, AWK is a water utility regulated in a very similar fashion as other utilities. Their utility business does provide a predictable and stable cash flow, however the prices AWK can charge for their services are highly regulated and controlled by the PUC.

Capital Expenditures - AWK spends a hefty amount on capital expenditures annually as they're required to continue to keep their infrastructure operating on a baseline level. As WK puts it in the prospectus: 'The water and wastewater utility business is capital intensive.' In 2007 AWK spent $759 million on capital expenditures.

Impairment charges - Since being acquired by RWE in 2003, AWK annually has listed hefty impairment charge losses on their earnings statements. This is directly related to the amount of goodwill on AWK's books due to the acquisition. As of 12/31/07 AWK was carrying approximately $2.5 billion of goodwill on the books. Annually AWK re-evaluates their goodwill and any lowered amount gets written down as an impairment charge on the earnings statements. AWK has had impairment charges of $396.3 million in 2005, $227.8 million in 2006 and $509.3 million in 2007. The large impairment charge in 2007 is due to lowered customer demand expectations going forward; their debt being placed on watch for a potential downgrade; the upcoming ipo and RWE's ownership divesture; and the continued high debt levels expected post-ipo. While these impairments are not cash flow losses, they do heavily impact the GAAP bottom line. I would expect continued hefty impairment loss expenses annually going forward.

Competitors include Aqua America (WTR), American States Water (AWR) and California Water Services Group (CWT).

Financials

Debt is the issue here. Utilities tend to be heavily leveraged and AWK is no exception. Debt post ipo will be approximately $5 billion in debt. A huge drag on this deal is that AWK will not be receiving any of the ipo monies. AWK could really use ipo cash to pay off debt and better position themselves for future acquisitions. However this ipo is nothing more than an exit strategy for parent company RWE. RWE will pocket all the ipo cash.

Dividend - AWK does plan on paying a quarterly dividend of $0.20. At an annualized $0.80, AWK would be yielding 3.2% on a $25 pricing.

Revenues have been rather flat the past three years. Utilities are generally not a growth industry, and again, AWK is no exception. Revenues in 2005 were $2.1 billion, in 2006 $2.1 billion and in 2007 $2.2 billion.

Due to the impairment charges noted above AWK booked a significant GAAP loss in 2007.

2007 - Revenues were $2.2 billion. Debt servicing expenses totaled nearly 13% of revenues. For a slim margin utility business, this amount of debt servicing expense will kill margins with or without impairment charges. Operating margins (pre debt servicing and impairment charges) were 24%. When plugging in debt servicing and the $509 million impairment charge, losses after tax were $2.13. To get a clearer picture of operations, we'll fold out that $509 million impairment charge. Folding that out AWK earned a fully taxed $1.00 per share. This latter number of $1 per share in earnings gives us a better picture of AWK's operation and valuation.

2008 - AWK will most likely take another impairment charge in 2008, so we'll see a much lower GAAP number than 'actual' earnings. Until AWK does their own internal assessment in the second half of 2008 we have no way of determining what that impairment charge may be, making GAAP earnings forecasts here next to impossible. We can however forecast AWK's business fairly easily as 2008 should look quite similar operationally as 2007. I would expect revenues to once again be in the $2.1 - $2.3 billion range with earnings per share in that $1.00 - $1.10 ballpark.

On a pricing of $25, AWK will be trading approximately 24- 25 X's 2007 and 2008 earnings and will be yielding 3.2%.

A quick look at '08 estimates and yield for AWK's three public competitors.

WTR - 23 X's '08 earnings, yielding 2.6% with $1.3 billion in debt and $2.6 billion market cap.

AWR - 21 X's '08 estimates, yielding 2.7% with $305 million in debt and a $650 million market cap.

CWT - 23 X's '08 estimates yielding 2.9% with $300 million in debt and a $834 million market cap.

Conclusion - For the amount of leverage and the spin-off nature of this ipo creating substantial share overhang, AWK is a pass for me. Valuation seems a bit aggressive for a water utility with substantial leverage. However we should note that on a PE/yield basis AWK is not coming public out of line with the sector at all. Note though that AWK's balance sheet is a bit more leveraged than the competition. Also we'll be seeing 90-100 million shares coming for sale later in 2008 as RWE completes their divesture. AWK's leverage and high annual capital expenses here will mute future acquisition related growth. Other than acquisitions, AWK will be hard pressed to substantially increase the bottom line. I just don't see much growth here over the next few years, quite similar to the past 3-4 years actually. 25 X's earnings for 2008 looks to be a bit steep. Not interested in range.

A 'massive' amount of ipos on the schedule for the week of 4/21, four! We've analysis pieces in subscriber section currently for American Water Works, Whiting Trust and Intrepid Potash and will have Digital Domain published for subscribers by Thursday evening.

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A few new filings as well so we should see the ipo pace pick up a bit for May. Tradingipos.com is still here analyzing ipos, the market and actively trading and posting in our site forum....and we'll be here through every tough market too.

Yes we're still here. The ipo market has been quite quiet in 2008 with the market turmoil, economic slowdown and credit crisis. For first time since tradingipos.com went live three years back we've had very few ipos to analyze over the past few months. Here is our piece on Visa that was published for subscribers on 3/1. Off pricing this is a good deal and one of few in '08 to grab all allocations possible. Aftermarket this morning I felt it opened a bit too 'hot' at $60+ in this climate and would look at a print near $50 to enter for those not allocated.

Tradingipos.com pre-ipo piece:

2008-03-01
V - Visa

V - Visa plans on offering 446.6 million shares (assuming over-allotments) at a range of $37-$42. JP Morgan and Goldman Sachs are lead managing the deal, BofA, Citi, HSBC, Merrill Lynch, UBS and Wachovia co-managing. Post-ipo, V will have 849.2 million shares outstanding for a market cap of $33.54 billion on a pricing of $39.5.

If priced at $39.5, V's net proceeds (minus underwriter fees) from the ipo will be approximately $17.1 billion. V plans on utilizing ipos proceeds as follows: $3 billion placed in escrow to be used in possible litigation settlements; $10.2 billion to redeem class 'B' and class 'C' shares on ipo; $2.4 billion to redeem shares in 2008 (which will reduce overall share-count for V in '0; and the remaining $1.7 billion for general corporate purposes.

*Note - With share redemptions planned in 2008, V is forecasting a 10/08 share-count of 818 million total shares outstanding. At a price of $39.5, V will have a market cap of $32.3 billion come 10/08 assuming they fulfill their share redemption plans.

Post-ipo, JP Morgan Chase will own 8% of V and Bank of America will own 4%. JP Morgan Chase and Bank of America are Visa's two largest customers globally and each generates more than twice the issuing volume of Visa's next largest customer.

Until 10/07 Visa was organized into five separate entities Visa U.S.A., Visa International, Visa Canada, Visa Europe and Inovant. In 10/07, in preparation for this ipo, Visa reorganized, and all but Visa Europe came under one umbrella for the ipo Visa (V). Visa Europe opted to not become a subsidiary of the soon to be public V; instead remaining owned by a consortium of member financial institutions. Much of the planned share repurchased in 2008 will be shares owned by Visa Europe.

From the prospectus:

'Visa operates the world’s largest retail electronic payments network and manages the world’s most recognized global financial services brand. We have more branded credit and debit cards in circulation, more transactions and greater total volume than any of our competitors. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.'

Worldwide there are an estimated 1.5 billion cards carrying the Visa brand.

The direct comparable here is Mastercard (MA). MA and V's primary competitors are large banks that utilize the payment processing platforms for consumer credit cards, debit cards, prepaid credit and commercial payments. The business driver here is the ongoing worldwide shift from paper-based payments such as cash and checks to card based and other electronic payments. These card transactions globally have grown an average of 14% annually over the past 6 years. Over the next five years annual growth is expected to be 11%, led by strong growth projected in Asia.

Revenues are generated from card service fees, data processing fees and international transaction fees. As with Mastercard, Visa does not issue cards, set customer fees or determine credit card interest rates.

Visa has three core aspects to their business: transaction processing services, product platforms and payments network management.

Transaction processing services - Routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between Visa issuers, which are the financial institutions that issue Visa cards to cardholders, and acquirers, which are the financial institutions that offer Visa network connectivity and payment acceptance services to merchants.

Product platforms - These are actual cards with the Visa logo. Visa offers their platforms to financial institutions to brand with their bank name. Visa platforms include credit cards, debit cards, prepaid cards and business cards/accounts.

Payments network management - Visa's advertising segment to promote their transaction processing services and product platforms....in other words to promote the Visa brand name.

In 2006 Visa cardholders conducted over 44 billion transactions, nearly double Mastercard's $23.4 million transactions. Total transaction volume was $3.2 billion, well above Mastercard's $1.9 billion. A key to Visa's success has been grabbing the bulk of the debit card market from the large US financial institutions. Over the past decade as debit card use has increased annually at a rapid rate, Visa has been able to annually grow their market share in this niche.

In FY '07 Visa increased their number of transactions annually by 13%. Thus far in FY '08 that transaction growth rate has been 12%.

Thus far in FY '08 Credit cards accounted for 56% of dollar transaction volume, debit cards 32% of dollar transaction volume, and commercial(and other) 12% of dollar transaction volume. In the US debit volumes have surpassed credit volumes, however credit revenues dominate in V's International segment.

Visa makes an average of $0.07 per transaction. The US accounts for approximately 66% of annual revenues with Asia/Pacific accounting for 14%.

Top five customers account for 22% of annual revenues. Largest, JP Morgan Chase accounts for approximately 7% of annual revenues.

Legal

Since 2005, there have been approximately 50 class action and individual lawsuits filed by merchants over interchange fees. Interchange fees are the fees received by issuing financial institutions when one of their cards is used in a transaction. The fee is ultimately paid by the merchant with whom the transaction took place. Visa sets default interchange fees and acts as a 'middle-man' in collection and remittance of interchange fees. The suits allege that Visa setting their own interchange default rates violate federal and state antitrust laws.

Also American Express and Discover filed suit against both Mastercard and Visa claiming they restrained competition by prohibiting client banks from also offering Discover and American Express cards. In 11/07 Visa reached a settlement with American Express.

Visa is setting aside $3 billion of the ipo money for settlements and future judgments. Visa believes that insured coverage as well as the ipo money set aside will be sufficient to cover the above legal issues.

Financials

$5 per share in cash.

V intends to pay a quarterly dividend of $0.105 per share. At an annualized $0.42, V would yield 1.1% on a pricing of $39.5.

Historically V's fiscal year has ended 6/30 annually. With the reorganization it appears Visa has shifted their fiscal year to 9/30 annually. Financials in the prospectus have shifted to 9/30 so that is what we will go with.

Note - Much as with Mastercard, Visa does not have credit exposure. Visa derives their revenues from service and transaction processing fees. There is economic slowdown risk here as a slowing economy may mean less use of credit and debit cards. The overall organic shift to use of plastic instead of paper should mitigate some of that risk however. In addition, Visa is banking on the increased use of plastic in Asia/Pacific to fuel the majority of growth going forward.

As Visa recently consolidated their operations, historical comparisons are not valid. In the prospectus V does breakdown FY '06 and FY '07 'pro forma' as if the consolidation had occurred prior to FY '06. Going back further than FY '06 doesn't offer a valid comparison on the financials here.

V had a fantastic FY '07(ending 9/30/07). We'll look at V's financials for both FY '07 and FY '08. Note that these numbers are pro forma and take a look historically at the numbers as if V was structured then as they will be post-ipo. Also V had a litigation settlement charge in FY '07 concerning the American Express settlement that impacted the bottom line. I folded that out as it is a non-recurring charge and only serves to cloud V's operational picture post-ipo.

FY '07(ending 9/30/07) - V has a phenomenal fiscal year 2007. Revenues were $5.2 billion, a 33% increase over FY '06. Asia/Pacific and US debit card usage were the key growth drivers. V does issue volume and support incentives back to their financials customers and those rebates are included in the $5.2 billion number. For a middle man type business V had strong operating margins at 29%. The Visa brand name and worldwide market leadership play into the strong operating margins. In comparison, Mastercard's operating margins for FY '07 were 25%. Plugging in full taxes, net margins were a solid 19%. Operationally, EPS was $1.23 after taxes in FY '07. **Note the actual GAAP numbers show a loss for FY '07. This is due to the American Express litigation settlement set-aside.. On a pricing of $39.50, V would trade 32 X's trailing earnings.

FY '08(ending 9/30/0

V's previous four quarterly revenue run rates: 3/07 - $1.19 billion; 6/07 - $1.36 billion; 9/07 - $1.46 billion; 12/07 - $1.488 billion.

The pace of V's growth has definitely slowed as the US economy has slowed in the back half of 2007. Still Visa has been able to grow quarterly sequential growth 7% in 9/07 and 2% in 12/07 amidst a more challenging environment. The growth again has been fueled by increased revenues in Asia/Pacific/Latin America and by continued shift to increased debit card usage. Those two factors should allow Visa to grow revenues in '08 even if V's US credit card segment slows.

Revenues for FY '08 should be in the $6 billion range. This would represent a solid 15% revenue increase over FY '07 and models in a very conservative figure for US revenue growth. Fueling revenues in FY '08 is a policy initiated in the second half of 2007- rolling out more aggressive fees outside the US. The new fees are specifically designed to maximize V's profit margins outside the US and look to favorably impact operating margins.

Operating margins look to increase driven by the increased non-US fees. Also Visa has aggressively implemented an outsourcing program and significantly reduced headcount throughout 2007. Visa has a nice double-shot here of pricing power internationally while able to keep operating expenses fairly stable due to outsourcing savings. V's strong margin quarter has historically been the 12/07 quarter as they tend to put on the books heavier advertising expenses in their last quarter of the fiscal year (9/30). Still based on the 12/07 quarter, combined with recent trends I could see V increasing gross margins in FY '08 to 34%, a strong gain on FY '07's 29%. Net margins should be 22%. Earnings per share should hit $1.60 driven by both solid revenue growth and the increased operating margins. On a pricing of $39.50 V would trade 25 X's FY '08 earnings.

A quick comparison with V and MA

MA - $24.9 billion market cap, currently trading 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.

V - On a $39.50 pricing, would have a 33.5 billion market cap and trade 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.

The pricing range here is not an accident. Visa is being priced to match Mastercard's valuation. The key difference and driver here is Visa is larger than Mastercard and has a stranglehold on the important US debit card market. Visa is also being very aggressive in both Asia and Latin America. While the US economic slowdown in '08 could slow V a bit in the short term, they're positioning themselves for strong worldwide growth into the foreseeable future. A market leading brand fueled by both international growth and the shift in the US to electronic payments, make 25 X's FY '08 earnings here on pricing very attractive. Visa should trade at a bit of a premium to MA in my opinion and in range it is being priced to match MA's valuation. Note too that my FY '08 V estimates are a bit conservative here due to the current cloudy US economic environment.

Blue chip ipo, strong recommend in range.

RiskMetrics ipo'd this morning. following is our full pre-ipo analysis piece. This was available to http://www.tradingipos.com subscribers on January 15th.

Disclosure: Tradingipos.com does have a position in RMG.

2008-01-15
RMG - RiskMetrics

RMG - RiskMetrics Group plans on offering 16.1 million shares(assuming over-allotments) at a range of $17-$19. Insiders are selling 4 million shares in the deal. Credit Suisse, Goldman Sachs and BofA are leading the deal, Citi, Merrill Lynch and Morgan Stanley are co-managing. Post-ipo RMG will have 59.9 million shares outstanding for a market cap of $1.078 billion on a pricing of $18. The bulk of ipo proceeds will go to repay debt.

General Atlantic Partners will own 22% of RMG post-ipo.

From the prospectus:

'We are a leading provider of risk management and corporate governance products and services to participants in the global financial markets. We enable clients to better understand and manage the risks associated with their financial holdings, provide greater transparency to their internal and external constituencies, satisfy regulatory and reporting requirements and make more informed investment decisions.'

RMG operates under two segments, risk management(RickMetrics) and corporate governance(ISS). RMG acquired their corporate governance segment ISS in January 2007 for $542 million in total consideration. RMG has 3,500 clients in 55 countries. Clients include asset managers, hedge funds, pension funds, banks, insurance companies, financial advisers and corporations. Among clients are 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, 41 of the 50 largest hedge funds and each of the 10 largest global investment banks.

RMG is a play on the growth of managed assets globally coupled with the ever increasing complication and intertwining of securities and derivatives.

RiskMetrics - Multi-asset, position-based risk and wealth management products and services. What does that mean? RMG's products help investment managers quantify portfolio risk across a broad range of security products, geographies and markets. Interestingly RMG utilizes transparent processes and algorithms to model risk and portfolio positions. RMG first published their processes in 1994 and continuously updates. Customers subscribe to RMG's applications, interactive analytics and risk reports based on consistently-modeled market data that are integrated with their holdings. RMG's database includes over four million active global securities across 150,000 issuers, spanning 200 countries, 220 exchanges, 11,000 global benchmarks updated daily. RMG believes their dbase covers nearly all equity, fixed income and derivatives in clients portfolios.

RMG's risk management products allow customers to:

1) measure their trading, credit and counterparty risk;

2) monitor and comply with internal or external exposure and risk limits;

3) deploy and optimize their use of capital;

4) communicate risk in a transparent fashion to regulators, investors, clients and creditors;

ISS - RMG's corporate governance segment acquired in January 2007. RMG offers an outsourced proxy research, voting and vote reporting service to assist companies with their proxy voting responsibilities. RMG's web based product offers a full proxy voting solution, from policy creation to comprehensive research, vote recommendations, reliable vote execution, post-vote disclosure and reporting and analytical tools. ISS growth in recent years has been derived from the increase in corporate regulatory oversight. In 2006 ISS provided proxy research and vote recommendations for more than 38,000 shareholder meetings across approximately 100 countries and voted approximately 7.6 million ballots on behalf of clients, representing almost 700 billion shares.

Revenues are derived primarily on an annual subscription basis. through the first nine months of 2007 93% of revenues were derived from annual subscriptions with a strong renewal rate of 91%. The high renewal rate leads to strong recurring revenues annually.

Customers breakdown is as follows: 35% investment managers; 21% alternative investment managers; 15% banking and trading; 6% mutual funds; 6% pension funds; 5% corporate; 5% custodians; 4% insurance and 3% other.

63% of revenues is US, 37% international.

Financials

In addition to the acquisition of ISS, RMG also recently acquired CFRA. To fund these acquisitions RMG took on debt. Post-ipo, RMF will have approximately $314 million in debt on the books.

RMG does not plan on paying dividends.

Revenues from both segments(RiskMetrics/ISS) are roughly equal. The bottom line in 2007 has really been negatively impacted from the ISS acquisition due to increased debt servicing and amortization costs. The acquisition doubled RMG's total revenue stream and in the long run should be beneficial. However as far as GAAP earnings go, the ISS acquisition will really put a damper on the bottom line in 2007 and beyond.

As ISS wasn't acquired until 1/07, we have to combine the two entities for historical revenues. Total revenues were $177 million in 2005, $205 million for 2006 and through the first nine months of 2007 on pace for $235-$240 million.

2007. Revenues are on pace for $235-$240 million, a 15% increase over combined pro-forma 2006 revenues. *Note that the expense numbers that follow take into account the removal of one-time acquisition expenses as well as debt paid of on ipo. Gross margins are a solid 66%. Operating expense ratio should be 38%, putting operating margins at 28%. So far, so good. the issue here is the debt laid on to acquire ISS and the amortization charges. Amortization charges(which do not impact cash flows) should eat up 1/4 of operating margins and debt servicing(which does impact cash flows) should eat up 1/3 of operating margins. Net margins after taxes then should be 7%. Earnings per share should be $0.25-$0.30. On a pricing of $18, RMG would trade 65 X's 2007 earnings. Removing the amortization charges related to the ISS acquisition would mean RMG would net between $0.45-$0.50 per share. In my opinion this second number is more indicative of RMG's cash flows and real earnings.

2008 - Both RMG's segments have a proven track record of 10%-15% organic growth and there is every indication that should continue into 2008. Risk management assessment and corporate governance are two segments that should not be negatively impacted by a slowdown in the financials or the worldwide economy. RMG's subscription fees are not based on assets under management. Assuming a 10%-15% revenues increase in 2008 to $270 million, RMG should be able to put $0.40 on the GAAP bottom line. RMG will continue to carry acquisition amortization expenses through 2008, folding those out would bring $0.60 on the bottom line.

Conclusion - RMG has 'GAAP handicap' due to the acquisition of ISS. The $300 million in debt-post ipo is a very real earnings drag here, however this debt was brought on to double RMG's revenues and bring in a new segment, corporate governance. As mutual and investment funds utilize both RMG's risk management products as well as corporate governance proxy services, the acquisition was a good fit overall for RMG. It does however negatively impact the bottom line. As separate entities, RMG/ISS would earn a combined $0.75-$0.80 in 2007. Together with the added debt/amortization, that number drops to $0.25-$0.30. The bottom line here doesn't really indicate the nice niche and strong underlying business of RMG. Based on the organic strength of each underlying segment and the estimated 2008 cash flows, RMG is a recommend in range. Keep in mind RMG will look expensive on a PE level over the next 2-3 years which in this environment is probably reason enough not to pay up here. However I like both segments here quite a bit and even with the debt on hand post-ipo this is a recommend in range. The two parts here are greater than the sum on ipo....I suspect eventually the 'sum' will catch up.

The 2008 ipo calendar kicks off this week with three new deals. As we've been doing annually, tradingipos.com will have full analysis pieces on every deal available to subscribers pre-ipo again in 2008. Wish everyone a profitable '08.

this week's free blog piece is an interesting medical ipo thst debuted bacin in November, VRAD. As has been the custom, we'll post 10-20 free analysis pieces on this blog post-ipo in 2008, while every analysis piece on every deal is available to subscribers pre-ipo. we also have a number of professional traders posting on our subscriber forum daily as well.

http://www.tradingipos.com



2007-11-08
VRAD - Virtual Radiologic

VRAD - Virtual Radiologic plans on offering 4.6 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs is leading the deal, Merrill Lynch and William Blair co-managing. Post-ipo VRAD will have 16.4 million shares outstanding for a market cap of $279 million on a pricing of $17. Approximately 50% of ipo proceeds will be used to redeem debt, the remainder for general corporate purposes.

President and CEO Sean Casey will own 25% of VRAD post ipo.

From the prospectus:

'We believe we are one of the leading providers of remote diagnostic image interpretation, or teleradiology, services in the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States.'

The leader in this space is 2006 ipo NHWK, Nighthawk.

VRAD provides remote diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Customers include radiology practices, hospitals, clinics and diagnostic imaging centers. The differentiator with VRAD compared to NHWK appears to be that VRAD's radiologists can work remotely from anywhere in the US, while NHWK's US staff is all located at their facility in Idaho.

Digital diagnostic imaging is expected to grow 15% annually over the next three years. 500 million procedures are expected by 2009. Sector is being driven by an aging population, advances in diagnostic imaging technologies and the growing availability of imaging equipment in hospitals and clinics, as well as by more frequent physician referrals for diagnostic imaging. However the projected number of radiologists is expected to grow just 2% annually in the US. The slower pace of radiologist growth coupled with the 24/7 365 demand has pushed hospitals/clinics to outsource some of their radiologist needs.

VRAD has affiliations with 121 radiologists. Reads include computed tomography, or CT scans, magnetic resonance imaging, or MRI, and ultrasound. VRAD is compensated directly by their customers and does not directly depend on third party reimbursement. VRAD has provided services to 457 customers serving 787 medical facilities, which includes 736 hospitals, representing approximately 13% of hospitals in the United States. 98% of contracts up for renewal have been renewed.

Same site sales growth has been strong indication that once VRAD sells in their remote radiology services, the revenue stream per location grows. Same site growth for 2005 was 24%, 2006 was 20% and through first nine months of 2007 17%.

Legal - In 7/07 Merge eMed filed a patent infringement suit against VRAD. The suit claims VRAD infringed on Merge eMed's teleradiology patent. Case is in a very stage currently.

Financials

$2 per share in cash post-ipo, no debt.

Revenues have grown swiftly as VRAD has added new radiologists, sites and grown revenues in existing sites. Revenues in 2005 were $27 million, doubling to $54 million in 2006 and through first nine months of 2007 on pace for $90 million.

Eight straight quarters of sequential revenue growth. VRAD shifted into profitability in 2006.

2007 - Note that due directly to the fast rise in fair value of VRAD, they've booked pretty hefty stock compensation expenses in 2006/2007. VRAD does not have excessive options and this line will fall significantly post-ipo. I've smoothed out stock compensation expense a bit for 2007 numbers as if they were a public company at IPO price for all of 2007. Revenues on track for $90 million, a 67% increase over 2006. The largest expense line is physician cash expenses at 45%. As this is an operation that depends entirely on their physician radiologists, this expense line will always be significant at the 45% level of revenues. Operating margins which have been increasing annually should be 14%. Net margins should be 9%. Earnings per share of approximately $0.50. On a pricing of $17, VRAD would trade 34 X's 2007 earnings.

2008 - VRAD has shown an ability to grow revenues sequentially, I don't see why that should halt in 2008. If we assume conservative sequential quarterly growth through 2008, I would not be surprised to see VRAD hit $120-$125 million in revenues. This would be a 36% increase over 2007 and might be a tad conservative as VRAD has increased revenues 100% and 67% in '06 and '07 respectively. Still, I'd rather be conservative when forecasting. Operating margins should improve a bit as VRAD gets some economies of scale on SGA if not on physician radiologist cash expenses. At 16% operating margins, VRAD should earn $0.75 - $0.80. On a pricing of $17, VRAD would trade 22 X's 2008 estimates.

A quick look at NHWK and VRAD

NHWK - $664 million market cap. Trading 4.3 X's '07 revenues and 23 X's 2007 earnings with a 67% revenues growth rate in 2007. NHWK currently expecting a 40% growth rate in 2008 and trades 17 X's 2008 earnings.

VRAD - $279 million market cap at $17. Would trade 3 X's '07 revenues and 34 X's '07 earnings with a 67% revenue growth rate in 2007. VRAD conservatively should have a 36% revenue increase in 2008 and would trade 22 X's conservative 2008 estimates.

VRAD should book $125 in 2008 revenues compared to NHWK's $215. Both are solid operations filling an obviously desired/needed niche. I write obviously as the revenue growth for each has been been quick and fast. NHWK ipo'd in 2/06 at a $387 million market cap with an expected $0.50 in earnings and $90 million in revenues, exactly what VRAD will hit in 2007. VRAD is a recommend here. IPO here looks like a 'junior NHWK' except at a $100 million lower market cap in range than NHWK priced 18 months ago. I'd expect VRAD to follow a very similar path as NHWK and grow market cap into the $600 million range two years after ipo. Solid recommend in range.

Analysis on every deal every year at: http://www.tradingipos.com


2007-12-07
XIN - Xinyuan Real Estate

XIN - Xinyuan Real Estate plans on offering 20.1 ADS (assuming overallotments) at a range of $13-$15. Merrill Lynch is leading the deal, JP Morgan and Allen & Company co-managing. Post-ipo, XIN will have 74.5 ADS equivalent shares outstanding for a market cap of $1.043 billion on a pricing of $14. Nearly all ipo proceeds will be used to acquire land use rights for future property development projects.

Chairman and CEO Yong Zhang and Director Yuyan Zang will jointly own a combined 42% stake in XIN post-ipo.

From the prospectus:

'We are a fast-growing residential real estate developer that focuses on Tier II cities in China, which are a selected group of larger, more developed cities with above average GDP and urban population growth rates.'

We've had one successful Chinese real estate ipo in 2007, EJ. Where EJ is a real estate services company, XIN is a real estate developer. Simplified, XIN builds housing developments, EJ markets and sells housing developments.

Unlike many China ipos, XIN has actually been around for awhile commencing operations in 1997. From '97-'05, XIN focused operations in Zhengzhou, the provincial capital of Henan Province. Since they've focused on expanding to other cities. In addition to Zhengzhou, XIN currently has operations in four other 'Tier II' China cities Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, and Suzhou in Jiangsu Province.

Approximately 40% of 2007 revenues have been derived in Zhengzhou.

XIN focuses on large scale residential projects typically multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings. Target buyers of their development come from the growing Chinese middle class. From the prospectus, 'We provide standardized mid-sized units, typically ranging from 50 square meters to 100 square meters in size, at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles.'

Land is generally acquired through public auctions. XIN focuses on unencumbered land auctions which allow them to commence construction quite soon after land acquisition. As of 9/30/07, XIN had seven active residential housing construction projects with a total gross floor area (GFA) of 770,781 square meters. In addition as of 9/30/07, XIN had in the planning stages an additional seven projects with a total GFA of 1,282,498 meters. This total does not include 12/4/07 governmental auction win for a parcel of land located in Kunshan Town of Suzhou City with a site area of 200,000 square meters.

To date XIN has completed 13 projects with a total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, 99.6% of which have been sold. Impressive sell rate, it would appear XIN is able to sell their projects out quite soon after completion.

The draw here is similar to many other Chinese ipos of the past few years targeting the growing middle classes. As XIN states, 'Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for quality housing in many cities across China.'

XIN plans to continue to expand operations to additional 'Tier II' Chinese cities they feel have an underdeveloped residential real estate market for the middle classes.

PRC - Recently the PRC has put in place initiatives to slow the booming Chinese real estate market. While most of these are directed at high end residential real estate, the PRC has also removed middle class residential construction from the 'encouraged' category. The latter will continue to be a 'permitted' type of investment. In addition for residences over 90 square meters total GFA, the down payment must equal 30% of the purchase price. XIN's residences tend to be smaller however, it should be noted that the PRC appears intent on cooling the hot China real estate market at least somewhat. XIN states in the prospectus: 'We believe that these policies have negatively affected our sales to a lesser extent than other property developers that focus on the luxury sector, because our business model focuses on the development of mid-priced housing, which is consistent with these policies'.

Financials

XIN funds a portion of their land purchases through debt. Post-ipo XIN will have approximately $233 million in debt. Compared to US homebuilders, the leverage here is fairly low. Going forward though keep an eye on XIN's debt situation. If their business slows, the debt levels will tend to rise.

XIN does not anticipate paying dividends.

On a pricing of $14, XIN will trade 3 X's book value.

Historically the cost of revenues for XIN has broken down to 1/3 land use rights and 2/3 construction costs.

Unlike many Chinese ipos we've seen, XIN is heavily taxed all along their various phases from land acquisitions through construction to sales. XIN annually pays a Corporate Income Tax, a Land Appreciation Tax, a Deferred Tax expense and an Uncertainty Tax expense. Reads a bit like a cable bill. Note that the 'Uncertainty Tax' expense is an accounting maneuver to attempt to better capture deferred taxes owed.

Revenues have grown briskly. Revenues in 2005 were $62 million, in 2006 $142 million and through 9 months on pace in 2007 for $310 million. XIN had a monster 9/30/07 quarter.

XIN has been profitable since at least 2004.

*Note* - Due to the nature of the business quarterly results have historically been quite choppy. This will definitely continue in the future making projections here quite difficult.

2007 - XIN is on pace for $310 million in revenues, a 118% increase over 2006. XIN has $120 million in revenues alone in the 9/30/07 quarter. Note that XIN completed construction on two major projects in the 9/07 quarter. I've factored in a sequential slowdown in Q4 and they still look to double 2006 revenues. Gross margins should be 31%, operating margins 25%. Plugging in debt servicing and taxes, net margins should be 15%. Earnings per share should be $0.65. On a pricing of $14, XIN would trade a fully (and heavily for a China IPO) 22 X's 2007 earnings.

2008 - Due to the choppiness factor, forecasting 2008 is somewhat challenging. However XIN has a significant amount of active construction projects of which they'll be deriving 2008 revenues. They've also substantial land already purchased and planned for construction. Assuming China's real estate market and economy continue to grow nicely, XIN is poised for a strong 2008. I would anticipate XIN's 2008 will more resemble the 9/30/07 quarter of $120 million in revenues than the 3/31/07 quarter of $23 million in revenues. Note that XIN's gross margins have not been nearly as strong in their newer geographic areas so I would not look for a gross margin increase in 2008. I would not be surprised to see XIN book $450 million in 2008 revenues. Note that this is conservative as it breaks down to $110-$115 million in quarterly revenues, below their $120 million in the 9/30/07 quarter. While XIN does pre sell a large percentage of their properties, they are not anticipating completion on any projects until the second half of 2008. Assuming $450 million in revenues, XIN could earn in the $1 per share ballpark. *Note* - this is nothing more than an educated guess because 1) XIN had an 'outside the box' strong quarter just prior to ipo and 2) they operate in a segment that is traditionally quite choppy quarter to quarter.

Conclusion - XIN is trending strongly right into their ipo. They booked a fantastic quarter just prior to this offering fueled by the completion of two major residential projects. China residential real estate has not seen the difficulties of the US real estate market, so it is entirely reasonable to expect XIN to have a solid 2008. Home construction is notoriously cyclical in the western world, there is definite reason to assume it will be at some point in China also. On ipo though, XIN is not all that leveraged and the balance sheet looks quite lean for the sector. XIN is one of the stronger ipos from China in 2007. Recommend in range and a bit above, good looking China real estate ipo.

Pre-ipo analysis on 200+ ipos a year before they price at http://www.tradingipos.com

disclosure: tradingipos.com does have a position in ENSG at an average price of 15 3/4's.


2007-11-04
ENSG - Ensign Group

ENSG - Ensign Group plans on offering 4 million shares at a range of $18-$20. DA Davidson and Stifel are co-lead managing the deal. Post-ipo ENSG will have 20.5 million shares outstanding for a market cap of $390 million on a pricing of $19. Ipo proceeds will be used to acquire additional facilities, to upgrade existing facilities, pay down debt and for working capital and other general corporate purposes.

CEO and President Christopher R. Christensen will own 20% of ENSG post-ipo.

From the prospectus:

'We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho.'

ENSG owns or leases 61 facilities. All are skilled nursing facilities while four also are assisted living facilities. ENSG owns 23 facilities and leases 38 others. They've options to purchase on 16 of those 38. Current bed count is 7,400. ENSG has aggressively grown via acquisitions adding 15 new facilities since 1/1/06. 31 of 61 facilities are in California, 13 in Arizona and 10 in Texas. Total occupancy rates for 2007 has been 78%.

Sector - The senior living and long-term care industries consist of three primary living arrangement alternatives, independent living facilities, assisted living facilities and skilled nursing facilities. ENSG operates primarily skilled nursing facilities, those that require the most resident care. Skilled nursing facilities provide both short-term, post-acute rehabilitative care for patients and long-term custodial care for residents who require skilled nursing and therapy care on an inpatient basis. ENSG estimates the skilled nursing facility market in the US is a $100 billion segment annually. ENSG believes the skilled nursing facility segment stands to grow going forward due to increasing life expectancies and the aging population.

Medicare is a federal health age based program, Medicaid is a federal health needs based program. ENSG relies extensively on Medicaid/Medicare reimbursements.

Approximately 44% of all revenues are derived from Medicaid, 33% from Medicare. Simplified Medicare will generally cover skilled nursing facility stays up to 100 days annually. After day 100, patients’ payment is received from either the patient, private health insurance or Medicaid. With 44% of all revenues derived from Medicaid, it is fairly safe to state a large portion of ENSG's residents are shifted from Medicare to Medicaid at some point for the bulk of their annual stay. The Center for Medicare & Medicaid Services (CMS) sets the Medicare rates. Skilled nursing centers have fared relatively favorably with the CMS this decade, however payments rates have been frozen for FY '08 due to budgetary attempts to cut overall Medicare/Medicaid costs. Medicaid is a bit different animal. Medicaid funding across the board has seen freezes and/or decreases due to federal and state budget issues. Medicaid is primarily funded by the Federal government, but disbursed by the states. Keep in mind that ENSG will annually be at the whim of federal Medicare rates set for skilled nursing centers and Medicaid disbursement rates set by the states. With runaway health care costs, trends for annual increases in Medicare/Medicaid reimbursement rates are not favorable going forward.

Financials

*ENSG will have approximately $1 per share in cash (minus debt) post-ipo. This is a good sign. Usually roll-up type operations such as nursing facilities come public pretty significantly leveraged. ENSG's solid balance sheet on ipo will allow them to aggressively grow over the next 2-3 years. Expect ENSG to grow revenues much faster than the industry growth rate the next 1-2 years due to acquisitions. When looking at this type of ipo, balance sheet health is as important (if not more) than any other factor. Nursing facilities are both a slim margin and consolidating sector. A solid balance sheet post-ipo allows a company such as ENSG to not only flow more operating margin to the bottom line, but grow top/bottom line strongly first few years public. I like the balance sheet here post-ipo quite a bit.

ENSG does plan on paying a dividend. Based on the past 12 months, it appears the dividend will be approximately $0.04 quarterly. At $0.16 annually, ENSG would yield 0.8% annually on a $19 pricing.

3 X's book value on a pricing of $19.

Growth going forward will be driven by acquisitions as the current Medicaid/Medicare reimbursement environment is not favorable for significant rate increases. ENSG's operating margins are not going to increase in this reimbursement environment, in fact they've dipped slightly in 2007. This is an industry wide trend, not specific to ENSG. This environment makes it even more important for a strong balance sheet and lack of debt.

Revenues in 2005 were $301 million, 2006 $359 million and through the first three quarters of 2007 on pace for $409 million.

ENSG has had a net profit annually since at least 2002.

2007 - Revenues on pace for $409 million, a 14% increase over 2006. Gross margins 19%. Operating margins of approximately 8 1/2%. Net margins 5%. Earnings per share should be in the $0.90 - $0.95 range. On a pricing of $19, ENSG would trade 21 X's 2007 earnings.

2008 - I fully expect ENSG to utilize their solid balance sheet to acquire revenue growth. Based on third quarter revenues, a full year operating current facilities should increase revenues by 10%. I think acquisitions could add another 5%, for a 15% top-line revenue growth. Gross margins will remain 19%, operating margins may increase slightly filtering down to a small net margin increase. With this sector it is extremely difficult to grow margins so you're just never going to see operating margins expand too much here no matter the revenue growth. With a 15% top-line growth rate, ENSG should earn $1.20 per share. On a pricing of $19, ENSG would trade 16 X's 2008 earnings.

Recent IPO SKH operates in the same sector as ENSG. The big difference between the two is SKH is heavily leveraged while ENSG post-ipo will have more cash on hand than debt.

SKH - $588 million market cap, operates approximately 80 skilled nursing facilities. Currently trading less than 1 X's 2008 revenues and 17 X's 2008 earnings. SKH has approximately 450 million in net debt on the books, much of it high interest debt. SKH has net margins of 3 1/2%.

ENSG - $390 million market cap on a $19 pricing. SKH operates 61 skilled nursing facilities. At $19 would trade less than 1 X's 2008 revenues and 16 X's 2008 earnings. ENSG has $1 per share net CASH on hand post ipo. ENSG has 5% net margins.

Conclusion - ENSG operates in a highly regulated sector experiencing rate freezes or lowered increases going forward. These factors make it nearly impossible for an operation such as ENSG to expand their margins. Top and bottom line growth therefore will come from acquisitions. With this type of business and in this sector you really want to look at operations that have low debt levels which will allow them A) filter more of their slim operating margins to the bottom line and B) allow them plenty of room to grow through acquisitions. I like the balance sheet here and I like the valuation at 16 X's 2008 revenues. Due to the constraints on the sector mentioned above, you don't want to pay too hefty an initial multiple here, but ENSG looks good to me in range. I would especially be interested here on a low pricing/open. Recommend.

pre-ipo analysis for 200+ ipos a year at http://www.tradingipos.com


2007-11-07
OZM - Och-Ziff Capital Management

OZM - Och-Ziff Capital Management plans on offering 41.4 million shares at a range of $30-$33. In addition OZM is also making a private offering to Dubai International Capital(DIC). the private offering will constitute an overall 9.9% stake in OZM and the price will be the equivalent of the underwriters discount pricing of OZM's public offering. Based on all ownership stakes post ipo, DIC will purchase approximately 38.2 million shares at a price of $1.50 below ipo price. Goldman Sachs and Lehman are leading the deal, thirteen other firms co-managing. Post-ipo, OZM will have a total of 390.4 shares outstanding for a market cap of $12.4 billion on a pricing of $31.50. All ipo proceeds from both offerings will go to insiders. The insiders will reinvest those proceeds(in their own name) back into Och-Ziff funds.

Daniel Och will own 49% of OZM post ipo. Mr. Och will retain voting control via a separate share class.

In addition to insiders(OZM principals) receiving all ipo proceeds(approximately $2.2 billion), they also declared a special distribution of $750 million payable to them. This payment was made by laying debt onto the back of the soon to be public OZM. Boy I'm so weary of these 'business as usual' shenanigans. Apparently it is not enough to be wealthy beyond wildest dreams, one also needs to pile debt onto the company just prior to coming public to pay yourselves even more money. At some point the market needs to say 'enough' to these greed grabs. Mr. Och will have an equity stake in the public OZM of approximately $6 billion, not counting the approximately $1 billion in cash he'll receive from this offering. Was the extra $750 million(of which Mr. Och stands to receive $350 million) really needed too???? I'm not touching this ipo simply for this reason. I'm tired of these shenanigans with these things. If they're this greedy pre-ipo how well will they treat their silent partners, those buying their public shares? Also Mr. Och will receive deferred income distributions totaling ans additional $1 billion during a three-year period beginning in 2008.

From the prospectus:

'We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $30.1 billion of assets under management for over 700 fund investors as of September 30, 2007.'

OZM has been in operations 13 years. OZM is a hedge fund and operation focusing on "Risk-adjusted returns". Risk adjusted returns are based on the income generated from primary investment positions while also being hedged to limit risks from market changes, interest rate fluctuations, currency movements, geopolitical events and other risks. OZM goes out of their way to state they look for long term value and to mitigate risk.

OZM derives revenues from management fees and incentive income. Management fees are based on total assets under management and average 1.50% - 2.50% of assets. Incentive income is realized and unrealized gains generated by the funds that managed by OZM. Incentive income is typically equal to 20% of the net realized and unrealized profits earned. Pretty standard hedge fund revenue structure. OZM's partners(managing directors) receive nearly all their income payments from participation in the profits of our entire business.

Assets under management have grown impressively. OAM had $11.4 billion under management end of 2004, $15.6 end of 2005, $22.6 end of 2006 and $30.1 billion on 9/30/07.

OZM's flagship global multi-strategy fund is the OZ Master Fund. **Note** - The OZ Master Fund has lagged the S&P 500 in each of the following periods: one year performance 3% behind S&P 500; three year performance 0.6% lower than S&P 500; five year performance 1.6% behind the S&P 500. The OZ Master fund has averaged a 13.9% return over the past five years compared to a 15.5% average annual return for the S&P 500. An S&P 500 ETF held the past five years would have returned more than the OZ Master Fund which takes a % of assets as well as a % of gains annually as revenue.

The OZ Master fund holds approximately 63% of OZM's assets under management.

OZM had a losing quarter overall in their funds for the quarter of 9/30/07. This was the first quarter for OZM to not experience appreciation of assets since spring of 2003.

Financials

$750 million in debt-post ipo. As noted ipo all this debt was taken on to pay insiders a 'special dividend.'

OZM intends to pay quarterly dividends. They state, 'Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of Och-Ziff Operating Group annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the operation and growth.' As OZM does not factor in incentive income until the year end, assuming OZM's funds are net positive annually the fourth quarter distribution stands to be larger than the other three quarters.

Note - OZM is heavily invested in their own funds. This greatly increases OZM's profit when their funds appreciate as they've done annually the past five. However this also means losses can hit even harder. OZM derives approximately 2/3's of their operating revenues annually from incentive fees. These incentive fees are based on a percentage of annual gains in OZM's funds. OZM's gains from investing in their own funds has the past 7 quarters equaled 1/2 their operating profit. If OZM had a flat year overall in their funds for 2006 for example, they would have had nearly $1 billion less in inventive fees and funds gains putting them deeply in the red for the year. You do not want to be in OZM if they ever have a bad year. Not only will there be no distributions, the losses per share will be pretty staggering. **Essentially the public OZM is making a significant bet that OZM's funds can continue to perform well year in and year out. Also OZM's managing directors also appear to have much of their net worth tied up into OZM equity and investments in OZM funds. Everyone involved here is making a big bet OZM continues to perform. Keep in mind, if OZM has a flat year in their funds, dividends and earnings will disappear pretty quickly.

As with Fortress and Blackstone, OZM's financials are intricate and difficult to grasp.

2006 - Total revenues were $972 million. 2/3's of this revenue came from incentive fees, 1/3 from management fees. Compensation and benefits were 50% of revenues. Gains from investments in their own funds added $242 million to the bottom line. Pre-tax, OZM earnings $1.50 per share. If we plugged in taxes, earnings would be approximately $1 per share.

2007 - As OZM does not factor in incentive fee revenues until after the fourth quarter closes, net here is negative through nine months. Note that this is a change from the first nine months of 2006 directly due to a pretty significant bump up in compensations expenses. If we're to factor in incentive fees for the full year 2007, I would imagine revenues will be closer to $1.2 billion. Earnings per share should be in the ballpark of 2006, again due to a sharp increase in compensation expenses. OZM looks as if they'll earn again in the $1-$1.50 ballpark. Note that these numbers are highly fluid and much depends on the amount in incentive fees, OZM books on the close of 12/31/07.

Due to all the accounting changes as well as equity distributions and compensation and benefits, OZM's pre-ipo financials are dense and tricky. going forward keep in mind OZM is heavily leveraged in their own funds in the form of actual investments in their funds and the heavy reliance on incentive fees. As long as OZM's funds post solid annual gains, OZM will put on a solid bottom line. If OZM's funds have a hiccup in a given year, OZM can easily slip into the red on the bottom line.

Conclusion - complex dense financial statements in a deal in which insiders are making out extraordinarily well. What strikes me is that in the one, three and five year periods, OZM's flagship fund has underperformed the S&P 500. Why? Well because OZM takes not just 2% of assets under management for fees, but they also grab 20% of the profits annually. Why pay someone this much when your return is lagging the S&P 500? OZM has done well growing assets under management in the hedge fund boom this decade. At $12 billion+ market cap though, there are enough question marks and negative to keep me away in range.

all ipo pieces completed and available to subscribers before pricing and open. http://www.tradingipos.com



2007-10-29
GRO - Agria Corporation

GRO - Agria Corporation plans to offer 19.7 ADS(assuming over-allotments) at a range of $14.50-$16.50. Insiders will be selling 5.5 million ADS in the ipo. Credit Suisse is lead managing the deal, HSBC, Piper Jaffray and CIBC are co-managing. Post-ipo GFO will have 65.5 million ADS equivalent shares outstanding for a market cap of $1.02 billion on a $15.50 pricing. IPO proceeds will be used to fund capital expenditures, for R&D and for general corporate purposes.

An entity co-controlled by Chairman of the Board and CEO Guanglin Lai and Director Zhaohua Qian will own 60% of GRO post-ipo.

From the prospectus:

'We are a fast-growing China-based agri-solutions provider engaged in research and development, production and sale of upstream agricultural products.'

Yes yet another China ipo. GRO sells corn seeds, sheep breeding products, and seedling products. corn seeds account for 48% of revenues, sheep breeding products 40% and seedling products 12%. Gross margins for each segments are: corn seeds 41%, sheep breeding products 73% and seedling products 79%.

GRO has access to 27,000 acres of farmland in seven provinces of China, of which approximately 23,000 acres are used for production of corn seeds, approximately 3,700 acres are used for sheep farming and breeding activities and the remainder are used for seedling production and research and development activities. Note that GRO does not own their own farmland, as apparently they are legally prohibited to own farmland. Instead they rely for the most part on contractual agreements with village collectives. GRO owns 17,000 sheep and sells frozen sheep semen, sheep embryos and breeder sheep. Through the first six months of 2007 GRO sold approximately 14,400 tonnes of corn seeds, 10.6 million straws of frozen sheep semen, 4,980 sheep embryos, 1,760 breeder sheep, 14,400 Primalights III hybrid sheep and a total of 11.6 million seedlings. Seedling products predominantly include blackberry, raspberry, date and pine bark seedlings.

Sector - China's agricultural sector is growing, note however the growth has lagged China GDP growth in recent years. The agricultural sector accounts for 10% of China's GDP and has grown 8% average annually the past five years. China is the world's second largest corn producer accounting for 19% of worldwide-corn production. China has the largest sheep flock in the world at an estimated 171 million sheep.

Financials

$2 per share in cash post-ipo, no debt.

3 X's book value on a pricing of $15.50.

While corn seed still accounts for 45%-50% of revenues, corn seed revenues have been stagnant for 2 1/2 years now. Revenue growth has been driven by sheep breeding revenues and seedling products.

Annual revenues have been: 2004 - $20 million; 2005 - $50 million; 2006 - $60 million; 2007 - on pace for $65 million.

GRO has been profitable since 2002.

Note that revenues are seasonal with the June and December quarters annually being the strongest. As GRO sells barely any corn feed in the September quarter, that Q is by far the weakest. Expect a seasonally weak report when GRO releases their 9/30/07 quarterly earnings report.

2007 - Revenues appear on pace for $65 million, a 5%-10% increase over 2006. Gross margins should be 57%. GRO has very little operational expense as they contract with village collectives for most of the work, which is factored into gross margins. Actually looking at the strong gross margins here for GRO, I'd think these village collectives might want to consider adjusting their contracts! Operating expense ratio is just 6%. Operating margins should be 51%. Tax rate thus far has been 0%. However it appears going forward GRO's tax rate on earnings will be in the 10% range, so we'll plug that percentage into 2007 earnings. 46% net margins, earnings per share of $0.45-$0.50. On a pricing of $15.50 GRO would trade 33 X's 2007 earnings.

Conclusion - $1+ billion market cap for a farmings operation that will book $65 million in 2007 revenues, just 10% higher than 2006? The net margins here are strong, but just 10% top line growth and nearly 14 X's revenues for an agricultural operation that has village collectives producing corn seed, sheep and seedlings for them seems awfully excessive. China ipos have been pretty hot in 2007 and we've seen a number of good ones. GRO looks fine as a company, the valuation here seems way off however. Most of the high multiple, highly successful China appears have been sector leaders benefiting directly from the urbanization and growing affluence of the middle class in China. While one could make a tangential case that GRO benefits from the growing China individuals affluence, it is still not a direct link. This is a pass for me, as I've no interest in paying for a $1+ billion cap agricultural operation with $65 million in revenues. In range, this seems like a very lofty price to pay for an operation responsible for producing corn seed, various sheep breeding products and seedlings. Pass in range for me.

pre-ipo analysis on every deal at http://www.tradingipos.com

disclosure: tradingipos.com does have a position in GXDX at anaverage of 24 1/4.

2007-10-27
GXDX - Genoptix

GXDX - Genoptix plans on offering 5 million shares at a range of $14 - $16. Insiders will be selling 700k shares in the deal. Lehman is leading the deal, BofA and Cowen co-managing. Post-ipo GXDX will have 15.6 million shares outstanding for a market cap of $234 million on a pricing of $15. IPO proceeds will be used to 1) increase personnel, (2) establish a second laboratory facility and expand backup systems, (3) repay all outstanding indebtedness and (4) pursue new collaborations or acquisitions.

Enterprise Partners will own 20% of GXDX post-ipo.

From the prospectus:

'We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists, or hem/oncs. Our highly trained group of hematopathologists, or hempaths, utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patients condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.'

Cancer laboratory diagnostic operation focusing on malignancies of blood and bone marrow. There are approximately 800,000 patients in the United States living with malignancies or pre-malignant diseases of the blood and bone marrow, with more than 140,000 new cases being diagnosed each year. 60% of GXDX diagnostic cases are bone marrow, 40% blood-based.

In order for hematologists and oncologists to make the correct diagnosis, develop therapies and monitor therapy effectiveness, they require highly specialized diagnostic services. That is where GXDX comes in. 2007 Medicare reimbursement rates average $3,000 for typical bone marrow diagnostic cases and range from $100-$3000 for blood based cases. GXDX estimates there are 350,000 bone marrow procedures performed in the US annually and each one requires at least one bone marrow diagnostic test. GXDX believes the bone marrow diagnostic test market is approximately a $1 billion market in the US; 350,000 procedures with at least one diagnostic battery done on each averaged $3,000 a pop. In addition to the bone marrow diagnostic tests, GXDX believes there are 200,000 blood-based diagnostic tests for liquid and solid tumors performed annually in the United States.

Traditionally these tests have been performed by hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories. GXDX believes historically none of these testing entities effectively served the needs of community based hematologists and oncologists. GXDX states their diagnostic testing services as follows:

'We believe our differentiated services offer the technical expertise of an esoteric testing laboratory, the customer intimacy of a hospital pathologist and the state-of-the-art technology of an academic laboratory, while maintaining a specialized service focus that is not typically available from national reference laboratories that cover a broad range of medical specialties.'

The key differences appear to be:

1) Personalized and comprehensive approach - GXDX assigns a single hempath to guide the diagnostic process for each patient file. This hempath is the person that is responsible for guiding the sample through all diagnostic services and for communication with the hem/oncs. Hematologists and oncologists speak directly to the hempath if and when needed and desired. This appears to be a key differentiator with GXDX and the testing labs that have traditionally provided bone marrow cancer and blood cancer testing.

2) More than just test results - GXDX hempaths provide hem/oncs with a clear, concise and actionable diagnosis rather than just providing individual test results. GXDX is sort of a full service diagnostic shop, not just a testing company.

GXDX two service offerings are COMPASS and CHART. With the COMPASS service offering, the hem/onc authorizes the hempath at GXDX to determine the appropriate diagnostic tests to be performed, and the hempath then integrates patient history and all previous and current test results into a comprehensive diagnostic report. As part of their CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. Approximately 50% of test requisitions in 2007 have been for both the COMPASS and CHART services.

Cartesian Medical Group - GXDX contracts with Cartesian Medical Group to provide all hempaths and an internal medicine specialist. All GXDX hempath physicians are employees of Cartesian, contracted to work for GXDX in GXDX labs. There are approximately 1,500 hempaths licensed in the US with just 75 newly receiving board certification annually.

GXDX estimates their current bone marrow testing market share is 3%.

54% of revenues come from private insurance, including managed care organizations and other healthcare insurance providers, 43% from Medicare and Medicaid and 3% from other sources.

Financials

$5 per share in cash post-ipo, no debt. Note that GXDX will be using $2-$3 per share in cash of ipo monies to construct a second lab testing facility and to hire personnel.

Often these small medical ipos come public way too early in their revenue profit curves. The reason is simple: They need the ipo cash to fund growth attempts. I like here that GXDX did not come public before generating significant revenues and turning a nice operating profit. Personally I'd like to see much more of this as it really gives us far more information to make a good buying decision. I am thrilled that GXDX did not attempt to come public in 2005 when revenues were still in development stage and there was doubt as to whether GXDX would be successful in grabbing bone marrow cancer and blood cancer diagnostic services from the traditional sources. Here in the fall of 2007, we can clearly see GXDX has been wildly successful, very quickly grabbing market share in this niche.

Revenue growth has been nothing short of phenomenal. Start-up stage in 2004 (GXDX did not begin offering their services until 3rd quarter of 2004), revenues in 2005 were $5 million, in 2006 $24 million and on pace in 2007 for $55-$60 million. 10+ straight quarter of sequential revenue growth. *At just a $234 million market cap this revenue growth rate in a very specialized niche is reason enough to recommend this ipo very strongly.*

It gets better too. GXDX moved into operational profitability in the first quarter of 2007 and in the 6/30/07 quarter booked operating margins of 28%. For a company attempting to grab a foothold in a highly specialized niche, you nearly always see them spending massively on sales & marketing to grow revenues as fast as GXDX. Hasn't been the case here, there appears to be extremely strong organic demand for GXDX services. Sales and marketing expenses were just 20% of revenues in the 3/07 quarter and dipped to only 17% of revenues in the 6/30/07 quarter. In hard dollars, GXDX doubled revenues in the 6/07 quarter when compared to the 12/06 quarter yet spent just the same each quarter on sales and marketing expenses. This is perfect in what you want to see with small fast growing ipos.

The three paragraphs above are reasons to get very excited about this GXDX ipo as you rarely see all these highly positive combinations in one ipo, let alone an ipo that was in start up stage just 3-4 years prior. This is just outstanding stuff here, this GXDX ipo in range is a 'goose bump' ipo.

Provisions for doubtful accounts has run around 4% in 2007.

GXDX has sufficient tax loss carryovers to cover the bulk of 2007's earnings. We'll take a look at earnings untaxed and also plugging in normalized taxes as GXDX should begin normal tax rates by mid 2008.

2007 - Revenues are on track here for $55-$60 million. Gross margins are increasing quarterly and full year should be 61% for the full year. Operating expense ra