Disclosure - We've no position in SYA currently. Piece was available to subscribers of tradingipos.com 1/16/10.


2010-01-16
SYA - Symetra Financial

SYA - Symetra Financial plans on offering 28 million shares at a range of $12-$14. Insiders are selling 9.7 million shares in the deal. BofA Merrill Lynch, JP Morgan, Goldman Sachs and Barclays are leading the deal, UBS, Wells Fargo, Dowling, KBW, Sandler O'Neill and Sterne Agee co-managing. Post-ipo SYA will have 114.1 million shares outstanding for a market cap of $1.483 billion on a pricing of $13.

Ipo proceeds will be used for general corporate purposes, including contributions of capital to insurance business.

Berkshire Hathaway will own 21% of SYA post-ipo.

From the prospectus:

'We are a life insurance company focused on profitable growth in select group health, retirement, life insurance and employee benefits markets. Our operations date back to 1957 and many of our agency and distribution relationships have been in place for decades.'

SYA is coming public right about at book value. Return on equity for the 12 months ending 9/30/09 was 13.9%.

SYA operates through four segments:

Group - Medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 5,000 individuals.

Retirement Services - Fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans.

Income Annuities - single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements.

Individual - Term, universal and variable life insurance as well as bank-owned life insurance, or BOLI.

Annuity and life insurance products are distributed through approximately 16,000 independent agents, 26 key financial institutions and 4,300 independent employee benefits brokers. SYA was a top-five seller of fixed annuities through banks in the first nine months of 2009.

Ratings by the credit agencies are solid across the board.

Market opportunities:

1 - Increasing need for retirement savings and income. 76.8 million baby boomers are approaching retirement age. In addition there 61.6 million Generation X'ers, most of whom will be funding retirement from personal savings/plans.

2 - Continued demand for affordable health insurance. Health insurance premiums in the United States increased 131% from 1999 to 2009. 75 million people in the United States under the age of 65 receive their benefits through self-funded plans, including 47% of workers in smaller firms and 76% of workers in midsize firms. SYA plans to grow their business by offering affordable health plans through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses that self-fund their medical plans.

SYA's asset portfolio has little subprime exposure, less than 1% invested in Alt-A mortgages and no exposure to ARM's.

SYA's strategy is to provide simple to understand products without adding product features that create liability-side balance sheet volatility.

Financials

SYA plans on paying a $0.05 dividend per quarter. On an annualized $0.20, SYA would yield 1.7% on a pricing of $13.

$20 billion in investments, $22 billion in assets.

**Book value of $12.42 on ipo. SYA is going to be priced right around book value which should allow this deal to price/work in range.

As with most financial institutions, 2008 was a disaster for SYA with $158 million in net realized investment losses. SYA did manage a bottom line gain in 2008 however. 2009's numbers appear as if SYA is heading back on track to normalized investment gains/losses with net investment losses of $29 million through 9/30. Historically these are still quite large, compared to 2008 though a vast improvement.

Big risk here is the obvious - Potential for future investment losses. SYA really does not invest much of their asset base in Treasuries, instead preferring corporate securities. These include corporate bonds, equities, preferred shares and private placements. Fully 2/3's of their investments are in corporate securities leaving SYA vulnerable to the broader economy as a whole. That they survived the 2008 meltdown intact is a positive here as it is doubtful a similar situation will arise again in the near term. Real estate risk: SYA does have 20% of their investments in residential mortgage backed securities and 10% in commercial mortgage backed securities. SYA sums it up well in the prospectus: 'If the current economic environment were to deteriorate further, it could lead to increased credit defaults, and additional write-downs of our securities for other-than-temporary impairments.'

2009 saw growth in SYA's fixed deferred annuity products and sales in single premium life insurance products.

In 2009, SYA's Group insurance line had a 92% ratio, anything below 100% indicates profitability.

2009:

Through the first nine months total 2009 revenues appear on track for $1.75 billion. This number does include writedowns and net investment losses. Operating expense ratio of 89%, operating profits 11%. Operating expenses include policyholder benefits/claims, interest credited to accounts, policy amortization, interest expense and general operating expenses. Net income 7 1/4%. Earnings per share of $1.10. On a pricing of $13, SYA would trade 12 X's 2009 earnings.

2010 - Assuming SYA's investment losses subside and performance of investment portfolio returns to normalcy, SYA should be able to add to the bottom line. The wild cards are numerous: 1) The current Federal government health plan overhaul and effect on health insurance plans are still unknown; 2) The performance of corporate bonds in 2010, of which SYA is heavily invested; 3) The performance of residential and commercial real estate, of which SYA has approximately 30% of investments.

A few things to keep in mind here. While the bulk of SYA's investment's are marketable/fixed and do have fair value pricings and/or pricing methods, SYA does have alternative and/or hard to price investments. We are in a position of 'taking SYA's word' for the value and impairments of those investments.

Conclusion - Overall a solid and well rounded insurance and retirement company. Coming book value(assuming SYA's investment marks on on target), SYA was able to generate positive cash flows in a difficult 2008 environment and appears poised to do quite well assuming a 'normalization' of the US economy and financial system. The key here is SYA's investment portfolio, and as long as those investments perform as SVA expects this deal should work short term and longer term. Priced to work in range

This piece was done for subscripers on 12/8. TMH eventually priced below range at $12. Disclosure: I am currently long TMH at an average price of approximately $12.6.

2009-12-08
TMH - Team Health Holdings

TMH - Team Health Holdings plans on offering 20 million shares at a range of $14-$16. BofA Merrill Lynch, Goldman Sachs, Citi and Barclays are leading the deal, five firms co-managing. Insiders(Blackstone) will be selling 9.3 million shares in the deal. Post-ipo TMH will have 61.4 million shares outstanding for a market cap of 921 million on a pricing of $15. Ipo proceeds will be used to repay debt.

Post-ipo Blackstone will own 54% of TMH post-ipo. Yet another private equity related ipo. Blackstone purchased TMH in 2005 in a leveraged buyout. The deal laid substantial debt onto the back of TMH, most of which will still be in place post-ipo. TMH will have $400 million in net debt on the books post-ipo. Note too that not only is Blackstone selling 9.3 million shares in the deal, they are also grabbing $33 million in cash off the balance sheet on ipo.

From the prospectus:

'We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States.'

TMH serves approximately 550 hospital clients and their affiliated clinics in 46 states with a team of approximately 6,100 healthcare professionals, including physicians, physician assistants and nurse practitioners.

Traditionally TMH has focused on staffing hospital emergency rooms and also branched out to include staffing services for hospital medicine (hospitalist), radiology, and pediatrics. Emergency rooms and hospitalist staffing accounted for 79% of 2008 revenues.

**Essentially a combination outsourced emergency room management company coupled with a hospitalist operator akin to recent ipo IPCM.

In 2008 TMH provided services to over 7.6 million emergency room patients. Emergency rooms are a growth business within hospitals, TMH has seen 9% annual revenue growth from their emergency rooms over the past 5 years. TMH focuses on high volume larger hospital emergency rooms which tend to be in larger urban areas.

Most recent 12 month hospital emergency department renewal rate was 98% with a 95% physician retention rate.

TMH's services include:

*recruiting, scheduling and credential coordination for clinical and non-clinical medical professionals. This include providing medical directors;

*coding, billing and collection of fees for services provided by medical professionals;

*administrative support services, such as payroll, professional liability insurance coverage, continuing medical education services and management training;

Sector - Outsourced healthcare staffing is estimated at $50 billion. Emergency departments represent a majority of admissions for key medical services. TMH believes the numbers of emergency room visits is increasing as the overall number of emergency rooms across the US is decreasing. As the baby boomers and older generations above 55 years represent a larger percentage of the population (approximately 23% in 2008 and projected to be approximately 29% in 2020, according to the U.S. Census Bureau), the demand for ED services is likely to increase.

Growth strategy - Other than winning new contracts, TMH expects to grow via acquisitions. TMH estimates that 75% of emergency department outsourcing is done by smaller regional companies leading to many potential acquisitions targets among the regional outsourcing providers.

CMS - For 2009 the CMS total increase for emergency room reimbursement was 4% for services most commonly provided by emergency physicians. Currently it appears emergency room physicians may be seeing a hefty cut in Medicare reimbursement in 2010. The final rule for 2010 includes a 21.2% rate reduction in the Medicare Physician Fee Schedule for 2010. There is a chance Congress will roll this hefty cut back before implementation in 2010. If not, TMH will not be growing revenues in 2010. Note that TMH will pass through much of the cuts to physicians themselves, however a 21% cut in physician reimbursements would mean TMH will feel the effects on the top and bottom line to some degree. **Note that 22% of 2008 revenues were derived from Medicare.

Florida and Tennessee account for approximately 16% and 17% or revenues respectively.

67% of emergency rooms outsource to a national, regional or local emergency physician group. Of these hospitals that outsource, approximately 52% contract with a local provider, approximately 23% contract with a regional provider and approximately 25% contract with a national provider.

Financials

Approximately $397 million in net debt-post ipo. TMH will have $475 million of debt on the books post-ipo and $78 million in cash. Expect TMH to utilize their cash to acquite smaller companies.

12% of revenues are derived from contracts with the military. TMH recently won a renewal on their military contracts for 2010.

Uncollectables run about 8%-9% annually.

Revenue growth has been driven by new business, organic growth in emergency room visits and acquisitions.

2009 - Revenues should be $1.43 billion, a 7.5% increase over 2008. As a 'middle man' operation, margins are not particularly strong. Gross margins should be 23%. Operating expense ratio of 12%, operating margins of 11%. Debt servicing should eat up 18% of operating profits in 2009. Plugging in taxes(38%), net margins should be 5 1/2%. Earnings per share should be $1.25. On a pricing of $15, TMH would trade 12 X's 2009 earnings.

Primary public comparable is Emergency Medical Services(EMS). We'll take a quick look at EMS as well as recent hospitalist ipo IPCM.

2010 - Tricky to forecast as the forecast CMS cuts loom. Odds are Congress will push out those cuts, however they have yet to do so. I will instead take a cue from the analysts estimates on competitor EMS forecasting growth similar to 2009. TMH will most likely make an acquisition or two the first half of 2009 and has shown an ability to win new contracts. Revenue growth the past three years has been 9%, 12% and 7.5%. 7% revenue growth for 2010 appears to be nicely conservative. If the 21% cuts to Medicare physician reimbursement stay, revenue growth would be cut in at east half down to 3% or so. 7% revenue growth would be $1.53 billion. Margins should remain consistent to slightly lower, with debt servicing eating up 17% of operating profits putting net margins in the same 5 1/2% ballpark. Earnings per share would be $1.40. On a pricing of $15, TMH would trade 11 X's 2010 earnings.

EMS - $2.04 billion market cap with $120 million in net debt. Currently trades 17 X's 2010 earnings with an expected 6% revenue growth rate. Net margins slightly lower than TMH due to lower margin emergency transportation segment.

IPCM - $511 million market cap with a small net cash position on books. Currently trades 22 X's 2010 earnings with an expected 20% revenue growth rate. Net margins with slightly better net margins than TMH.

Conclusion - Seems priced to work. Large successful company with strong cash flows operating in a growth segment of the health and medical field. Negatives here the LBO related debt on the books and the looming potential large cuts in Medicare physician reimbursement. However at just 11 X's 2010 earnings, this deal is priced to work mid-term. I usually avoid LBO related ipos, however the debt servicing is below the 20% 'avoid' threshold here and the multiple for a strong operation is cheap. I like this deal.

Note - Blackstone has announced plans to ipo at least eight of their portfolio companies in the near future. As TMH is the first in the pipeline it appears to me Blackstone wants a successful offering and has agreed to set the range at a level that should work short and mid-term.

2009-11-15
SVN - 7 Days Group

SVN - 7 Days Group Holding plans on offering 10 million ADS at a range of $9-$11. If the over-allotment is exercised the total deal size will be 11.6 million ADS. JP Morgan and Citi are leading the deal, Oppenheimer is co-managing. Post-ipo SVN will has an ADS equivalent of 50.6 million shares for a market cap of $506 million on a pricing of $10. Ipo proceeds will be utilized toi repay debt and for general corporate purposes.

　 Founder and Chairman of the Board Boquan He will own 25% of SVN post-ipo.

From the prospectus:

'We are a leading and fast growing national economy hotel chain based in China. We convert and operate limited service economy hotels across major metropolitan areas in China under our award-winning "7 Days Inn" brand.'

Hotels focusing on value-conscious business and leisure travelers.

Third largest economy hotel chain in China with 283 hotels in operation, 48 of which were managed hotels, with 28,266 hotel rooms in 41 cities, and an additional 77 hotels with 7,476 hotel rooms under conversion. Once those hotels are completed, SVN will have a presence in 59 cities. SVN has eight million people registered with their rewards '7 Days Club'. SVN also has the top ranked website for Internet traffic among Chinese economy hotel chains.

As opposed to new construction, growth has been spurred by leasing and converting existing properties into 7 Days Inns. SVN does not own the property of any of their hotels. Growth has been swift: 5 hotels in 2 cities as of the end of 2005, to 24 hotels in 7 cities as of the end of 2006, to 106 hotels in 20 cities as of the end of 2007, to 223 hotels in 33 cities as of the end of 2008 and to 283 hotels in 41 cities as of September 30, 2009.

Leading city locations are Beijing (34 hotels), Guangzhou (31 hotels), Shenzhen (31 hotels), Shanghai(23 hotels), and Wuhan (17 hotels).

Average occupancy rates were 88.1% and 88.4% for the year ended December 31, 2008 and the nine months ended September 30, 2009, respectively. Revenue per available room approximately $20 US.

Sector - China's lodging industry has grown an average of 16% annually the past four years. The economy hotel niche has grown much swifter with 80% annual growth this decade. The top ten economy hotel operators in Chinahad opened 1,736 hotels with 213,789 hotel rooms by the end of 2008. SVN believes there is still plenty of room for growth with 0.3 economy hotel rooms per 1,000 people in China in 2008, as compared to 2.5 economy hotel rooms per 1,000 people in the United States.

Financials

By paying debt off on ipo, SVN will have approximately $0.50 per share in net cash post-ipo.

Tax rate appears as if it will be in the 25% ballpark.

2009 - Numbers are pro forma as if SVN used ipo monies to pay down debt on 12/31/08. This gives us a better idea of how SVN is performing as they will look post-ipo. Revenues should be $170 million, a strong 66% increase over 2008. Growth is being fueled by aggressive growth in number of hotels under operation. Operating margins should be 8%, net margins 6%. Earnings per share should be in the $0.20 ballpark.

SVN is trending strong, improving operating expense ratios quarterly as they grow revenues through new hotels. 2010 is shaping up to be a solid year for SVN.

2010 - Revenues should grow to approximately $235 million, a 38% increase over 2009. Operating margins should improve sharply to 13%. Net margins plugging in a 25% tax rate should be a shade under 10%. Earnings per share should be $0.45. On a pricing of $10, SVN would trade 22 X's 2010 earnings.

Main public comparable here is HMIN. A quick look at each.

HMIN - $1.41 billion market cap. Currently trading 45 X's 2010 estimates with a 20% revenue growth rate.

SVN - $506 million market cap at $10. Would trade 22 X's 2010 earnings with a 38% revenue growth rate.

SVN really helped themselves paying off substantially all debt on ipo. By removing debt servicing we get a much clearer picture of an operating trending very well into ipo. Revenue are growing nicely, SVN is expanding without harming occupancy rates and margins are improving quarterly. SVN looks to be coming public very reasonably valued compared to public rival HMIN, one of the more successful China ipos this decade. Easy recommend in range, SVN should be a good deal and work short and mid-term off of range.

Piece was available to subscribers: 11-01-2009
H - Hyatt Hotels

H - Hyatt Hotels plans on offering 38 million shares at a range of $23-$26. Insiders are selling all shares in the deal. If over-allotments are exercised H will be selling 5.7 million shares and the total deal size will be 43.7 million shares. Goldman Sachs is lead managing the deal, nine firms are co-managing. If the over-allotment is exercised, H will utilize the ipo proceeds for working capital and other general corporate purposes. Post-ipo H will have 173.7 million shares outstanding for a market cap of $4.256 billion on a pricing of $24.5.

Thomas J. Pritzker, H's Executive Chairman, and his family will own 60% of H post ipo. Mr. Pritzker is the selling shareholder in this deal. **Note there will be separate share classes here to ensure the Pritzker family retains controlling voting interest in H even if their interests drop below 50%. Expect to see a secondary here sometime the first year. The Pritzker family has agreed not to sell more than 10 million shares the first year public and will still having voting control even if they own only 15% of outstanding shares. This ipo appears to me to be an exit strategy for the Pritzker family, while still retaining voting control over H. The structure of the voting shares is really unfair for non Pritzker Family shareholders. Expect a number of secondaries here over the next few years as the Pritzker family divests stock while still controlling H.

Goldman Sachs will own 7% of H post-ipo. Goldman invested their stake approximately two years ago, and on paper, have lost half that investment on an ipo pricing of $24.5.

History - Hyatt was founded by Jay Pritzker in 1957 when he purchased the Hyatt House motel adjacent to the Los Angeles International Airport. Over the following decade, Jay Pritzker and his brother Donald Pritzker, working together with other Pritzker family business interests, grew the company into a North American management and hotel ownership company, which became a public company in 1962. In 1968, Hyatt International was formed and subsequently became a separate public company. Hyatt Corporation and Hyatt International Corporation were taken private by the Pritzker family business interests in 1979 and 1982, respectively.

From the prospectus:

'We are a global hospitality company with widely recognized, industry leading brands and a tradition of innovation developed over our more than fifty-year history.'

Hyatt Hotels, pretty self explanatory we do not need a long definition of what H does. H's full service hotels operate under four brand names: Park Hyatt, Grand Hyatt, Hyatt Regency and Hyatt. H recently introduced a 5th brand, Andaz.

Grand Hyatt - Features large-scale, distinctive hotels in major gateway cities and resort destinations. Presence around the world and critical mass in Asia.

Hyatt Regency - Full range of services and facilities tailored to serve the needs of conventions, business travelers and resort vacationers. Properties range in size from 200 to over 2,000 rooms.

Hyatt - Smaller-sized properties located in secondary markets in the United States, ranging from 150 to 350 rooms.

As of 6/30/09 H's worldwide portfolio consisted of 413 Hyatt-branded properties (119,509 rooms and units) in 45 countries, including:

* 158 managed properties (60,934 rooms), all of which H operates under management agreements with third-party property owners;

* 100 franchised properties (15,322 rooms), all of which are owned by third parties that have franchise agreements with H and are operated by third parties;

* 96 owned properties(25,786 rooms) and 6 leased properties (2,851 rooms), all of which H manages;

A little surprised H owns outright only 96 of the 413 Hyatt branded properties. 38% of Hyatt properties are owned by third parties and managed by H.

Properties in which H manages for third party owners: H derives management fee revenues and a percentage of profits, usually under 20%

Franchised: H does not share in profits of these properties, instead collects franchise and royalty fees.

80% of revenues are derived from United States properties. 54 properties received the AAA four diamond lodging award in 2009. H operates in 20 of the 25 most populous urban centers around the globe.

In addition to four full service brands, H also operates Hyatt Summerfield Suites an extended stay brand.

Through first nine months of 2009, daily revenues per available room were $101, with international rooms having $116 per available daily room. **Note that this is a dip of approximately 20% from 2008. Reason for drop has been the worldwide economic slowdown. Should also note that for the quarter ending 9/30/09, both overall revenues per room and international revenues per room increased slightly from 2009 average.

Expansion - For a mature hotel chain, H actually has a solid balance sheet. Post-ipo H will have $1.34 billion in cash with $858 million in debt. Balance sheet wise H has plenty of flexibility to acquire and/or develop new properties. I would expect them to do so going forward. H can use cash, credit line, stock or a combination of all three to go after acquisitions or new property development once public. Expect H to be fairly aggressive in looking to acquire properties going forward, especially as a number of other brands currently have credit issues. H expects to focus expansion efforts on India, China, Russia and Brazil, where there is a large and growing middle class along with a meaningful number of local business travelers.

Cyclical - H has seen revenues decrease sharply each of the past two recessions('01-'02 & '09). H notes that their revenue per available room decreased more sharply during this recent slowdown than in 2001 and 1991.

Debt defaults - H not only manages Hyatt properties owned by third parties, they also have financed a number of third party Hyatt facilities. For example in 2008 H made a $278 million loan to an entity in order to finance its purchase of the Hyatt Regency Waikiki Beach Resort and Spa. As hotels have seen less revenue in 2009 than forecasts, default can be a possibility.

Financials

With $1.34 billion in cash post-ipo and $858 million in debt, H will have slightly less than $3 in net cash per share post-ipo.

H does not plan on paying dividends.

As noted above, H has seen a significant decline in revenues in 2009. Revenue per available room dropped 20%+ in 2009 as compared to 2008. Total revenues decreased 18% for the 6 months ending 6/30/09 compared to the six months ending 6/30/08.

Owned and leased hotels account for 53% of revenues, management/franchises account for 41%.

Occupancy rates for all US properties the first 6 months of 2009 was 64%, for international properties 57%.

**H is coming public in range below book value.

2009 - Revenues should be approximately $3.3 billion, an expected 13% drop from 2008. Operating expense ratio should be 96%, a drop from 2008's 91%. H has attempted to cut costs in 2008, however occupancy rates and room rates declined so significantly it severely impacted operating expense ratio. Operating margins should be 4%. There are a few one-time charges here that need to be folded out so the eps below will differ from GAAP for 2009. Factoring in non-operating charges and income plus taxes, net margins should be 3%. Earnings per share should be approximately $0.60. On a pricing of $24.5, H would trade 41 X's 2009 estimates. Note that in the previous five years, H earned substantially more on the bottom line than '09 estimates. While the P/E ratio looks pricey here, this is a bit of a 'trough valuation' on ipo assuming the bottom line will pick-up once again beginning in 2010. Until we begin to see a pick-up again in operating margins, forecasting 2010 here is quite difficult.

Marriott(MAT) and Starwood(HOT) are H's two closest public comparables. A quick look at all three.

H - $4.26 billion market cap at a pricing of $24.5. Below book value with a little under $3 in net cash per share on hand. Revenues of $3.3 billion trading $41 X's '09 estimates with an expected 13% annual revenue decline.

MAT - $6.9 billion market cap. 2.7 X's book value with $650 million in net debt. Revenues of $5.44 billion trading 15 X's '09's expected estimates with an 8% revenue decrease.

HOT - $5.69 billion market cap. 3 X's book value with $3.7 billion in net debt. $4.7 billion in expected revenues trading 45 X's '09 estimates with a 20% expected decrease in revenues.

Conclusion - Brand name coming book value with net cash in the bank has to be a recommend in range. A few issues here also though that prevent this from being an enthusiastic recommend. First of all the company structure is awful for new investors as it favors the Pritzker family heavily. The issue here is that the Pritzker family can unload a large percentage of their holdings onto the market over the next few years and still control H as long as they retain a 15% overall interest. Second, again here we are seeing a large ipo coming public without fully discounting the nasty recession and operational slowdown. In essence we still are not seeing 'deals' in the ipo market that reflect the economic reality of the past year. H is being priced/valued as if business will return to normal sometime in 2010. If it doesn't, H is not being priced at a rock bottom valuation. Having written that, I do like their balance sheet is in much better shape than the competition and they are coming public right around book value. Recommend here in range.

2009-10-07
RA - RailAmerica

RA - RailAmerica plans on offering 21 million shares at a range of $16-$18. Majority owner Fortress will be selling 10.5 million shares in the deal. If over-allotments are exercised, the deal size will be 24.15 million shares. JP Morgan, Citi, Deutsche Bank, and Morgan Stanley are leading the deal, Wells Fargo, Dahlman Rose, Lazard, Stifel and Williams Trading co-managing. Post-ipo RA will have 56 million shares outstanding for a market cap of $952 million on a pricing of $17. IPO proceeds will be utilized primarily to repay debt.

Private equity firm Fortress will own 53% of RA post-ipo. Fortress purchased RA in a 2006 leveraged buyout of $1.1 billion. At the time RailAmerica was a publicly traded company. It appears the Fortress led buyout doubled RA's debt levels, par for the course during the LBO heydays of 2003-2007. As a result of that leveraged buyout frenzy we are seeing solid businesses come public loaded with debt. RA is the latest.

Assuming RA utilizes all ipo proceeds to repay debt, there will be approximately $550 million in debt on the books post-ipo. Plugging in debt paid off on ipo, debt servicing the first 6 months of 2009 ate up a whopping 58% of operating profits.

From the prospectus:

　 'We believe that we are the largest owner and operator of short line and regional freight railroads in North America, measured in terms of total track-miles, operating a portfolio of 40 individual railroads with approximately 7,500 miles of track in 27 U.S. states and three Canadian provinces.'

In 2008 RA's railroads transported over one million carloads of freight for approximately 1,800 customers. For the six months ended June 30, 2009, coal, agricultural products and chemicals accounted for 22%, 14% and 10%, respectively, of RA carloads. RA's 40 railroads are located fairly evenly across all regions of the US.

Short-line railroad: railroads that transport freight between a customer’s facility or plant and a connection point with a Class I railroad. Essentially short lines are the connectors from a company to a long haul railroad. In North America there are 550 short line and regional railroads operating approximately 45,800 miles of track. Short line railroads make up just 4% of railroad revenues in the US.

That RA's railroads are often integrated into their customer's facilities meaning leading to a stable and predictable customer base. The only issue is volume. RA has seen a pretty significant dip in usage of their railroads the past year due to the economic slowdown.

Railroads carry more freight tonnage wise than any other mode of transportation in North America. In 2006, railroads carried 43% of total ton-miles (one ton of freight shipped one mile) of freight transported in the U.S.

Freight revenues make up 87% of total revenues with non-freight revenues making up 13%. Non-freight revenues include switching (or managing and positioning railcars within a customer’s facility), storing customers’ excess or idle railcars on inactive portions of our rail lines, third party railcar repair, and car hire and demurrage.

Financials

$550 million in net debt post-ipo, assuming all ipo proceeds are utilized to pay down debt.

In the first six months of 2009 freight revenues decreased 25% from first 6 months of 2008. This was primarily due to a decrease in carloads. Total carloads during the six month period ending June 30, 2009 decreased 25.6% to 414,303 in 2009, from 556,689 in the six months ended June 30, 2008. In contrast non-freight revenues grew 25% the first 6 months of 2009, primarily as a result of storing customers unused freight cars. RA makes a lot more off of freightcars hauling on their tracks than they do storing those unused freightcars so this is not an ideal trend.

Through first 6 months of 2009 fuel costs were 7% of revenues.

Slim margin operation as operational expense ratio was 83% in 2008 and 78% through the first 6 months of 2009. Combination of hefty debt and low margins is never ideal.

Taxes - RA has substantial tax loss carry-forward, $120 million not expiring until 2020-2027. RA also has $95 million in short line tax credits available through the next 20 years. RA's tax rate looks to be approximately 15%-20% for the foreseeable future.

RA does not plan on paying a dividend. This is a bit unusual as this is a classic low growth, predictable cash flow type business. RA however is not planning on returning any cash flows to shareholder, most likely due to the high debt levels. I would expect RA to use any cash flows to pay down debt levels.

2008 - Revenues were $508 million. Operating margins 17%. Debt servicing(adjusted for post-ipo) ate up over 50% of operating profits. Plugging in 15%-20% taxes, net margins were 7 1/2%. Earnings per share were $0.65-$0.70.

2009 - RA has had a difficult past 9 months. This is reflected in the '09 results through 6/30. Lower economic activity means less tonnage passing along rail lines. RA should pick up earnings per share in either 2010 or 2011, so the key here is not the high PE on ipo. The key here unfortunately is debt servicing eating up a very large portion of a fairly slim margins business to begin with. Revenues for the full year should be approximately $440 million, a 13% decrease from 2008. A portion of this decrease is due to lower fuel costs, however as noted above carloads decreased 25% year over ear through 6/30/09. Operating margins should improve to 21%. A portion of this is due to lower pass through of fuel costs, although RA does not management has created efficiencies to combat economic slowdown. After plugging in debt servicing and 20% taxes, net margins should be 9% Earnings per share should be $0.70. On a pricing of $17, RA would trade 24 X's 2009 earnings.

Conclusion - Much like recent ipos EDMC and SEP, RA is a former public company taken private past five years via a leveraged buyout. The newly public RA, much like SEP/EDMC, will simply have too much debt. Operationally 2009 should be as bad a year as RA will have over the next few years. I would expect earnings per share to tick up in both 2010 and 2011. Even so, with debt servicing eating up so much operating profit here, RA looks fully valued to me in range. Skip this deal

As always, piece was available to subscribers well before pricing and open.

VRSK - Verisk Analytics plans on offering 85.25 million shares in a range of $19-$21. Insiders will be selling all of the shares in this deal, VRSK will receive no monies. If over-allotments are exercised, insiders will be offering 12.75 million shares bringing the total deal size to 98 million shares. BofA/Merrill Lynch and Morgan Stanley are leading the deal, JP Morgan, Wells Fargo, William Blair, Fox-Pitt Kelton and KBW co-managing. Post-ipo VRSK will have 180 million shares outstanding for a market cap of $3.6 billion on a pricing of $20.

Travelers Insurance will own 15% of VRSK post-ipo, Berhshire Hathaway 10%. A number of insurance companies own a piece of VRSK stock. In addition VRSK's employee stock ownership plan will own 20% of VRSK post-ipo.

From the prospectus:
　
'We enable risk-bearing businesses to better understand and manage their risks. We provide value to our customers by supplying proprietary data that, combined with our analytic methods, creates embedded decision support solutions.'

VRSK is the largest aggregator and provider of detailed actuarial and underwriting data pertaining to U.S. property and casualty, or P&C, insurance risks. Insurers utilize VRSK to make better risk decisions and to price risk appropriately.

VRSK insurance risk management framework: 1)Prediction of Loss; 2)Selection and Pricing of Risk; 3)Detection and Prevention of Fraud, and 4)Quantification of Loss.

Two segments Risk Assessment and Decision Analytics.

Risk Assessment - The leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Largest P&C insurance database includes over 14 billion records, and, in each of the past three years, VRSK updated the database with over 2 billion validated new records. VRSK uses this data to create industry standard policy language and proprietary risk classifications and to generate prospective loss cost estimates used to price insurance policies. </p>
Decision Analytics - VRSK has a data set that includes over 600 million P&C insurance claims, historic natural catastrophe data covering more than 50 countries, data from more than 13 million applications for mortgage loans and over 312 million U.S. criminal records. Customers utilize this data, along with VRSK's proprietary algorithms, to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. VRSK is at the leading developer of catastrophe and extreme event models.

**Not only are nearly all the major US property & casualty insurers shareholders, VRSK's solutions are actually embedded into their customer's critical decision processes. VRSK is pretty much the only game in town when it comes to risk management for US property and casualty insurance firms. Would be an understatement here to state barriers to entry are high.

VRSK also has a large presence outside of property and casualty:</p>
U.S. customers included all of the top 100 P&C insurance providers, four of the 10 largest Blue Cross Blue Shield plans, four of the six leading mortgage insurers, 14 of the top 20 mortgage lenders, and the 10 largest global reinsurers. Over the past three years, VRSK has retained 98% of all customers.

97% of top 100 customers had been customers for each of the past five years. VRSK's revenue growth from these top 100 customers has averaged 12% annually the past five years.

72% of revenues are derived from annual subscriptions or long-term agreements, which are typically pre-paid. 60% of revenues are from the US P&C insurance industry.

Acquisitions - VRSK has made 9 acquisitions over the past three years, all in their Decisions Analytics segment. the acquired companies provide fraud identification and detection, loss prediction and selection solutions to the healthcare market. **VRSK's fraud identification and detection business is their fastest growing niche.

**Large, very successful insurance risk management operation embedded in the US P&C insurance sector with large proprietary databases, datasets and algorithms. Really the issue here is not whether VRSK is investable, it is 100% a matter of valuation on ipo. We'll take a look at this below.

Financials

Debt - There is a bit of net debt here post-ipo, $689 million. It appears much of the debt has been taken on as a result of the 9 acquisitions over the previous three years.

VRSK has steadily grown annually over the past five year. This has been a result of organic growth coupled with acquisitions. Revenues have grown quarterly for at least 8 Q's in a row.

Gross margins and operating expense ratios have remained steady the past 4 years. Result is VRSK is filtering revenue growth to the bottom line at roughly the same dollar for dollar amount over the years.

2008 - Revenues were $893 million. Gross margins were 57%. Operating expense ratio 22%. Operating margins a strong 35%, indicative of an automated/embedded type operation. Debt-servicing ate up 10% of operating profits. Plugging in taxes, net margins were 19%. Earnings per share were $0.92.

2009 - through first 1/2 of year, revenues appear on track for $1.04 billion, a strong 16% increase over 2008. Gross margins look to be 56%-57%, operating expense ratio 21%. Operating margins should once again be in the 35% ballpark. Debt servicing should eat up close to 9% of operating profits. After tax net margins should be 19.5%. Earnings per share should be approximately $1.10. On a pricing of $20, VRSK would trade 18 X's 2009 revenues.

Conclusion - Blue chip ipo coming at a very attractive valuation. Years of revenue growth, strong operating margins and extremely high barriers to entry. This is a large 98 million share deal(assuming over-allotments) with all shares coming from insiders. Because of this, VRSK may trade a bit heavy early on any opening pop. Anywhere near $19-$21 range however and this is a keeper. Strong recommend here in range for mid-term.

Note: piece was available to subscribers 9/17. Tradingipos.com is currently long VITC at an avg price of $11.40

VITC - Vitacost.com plans on offering 11 million shares at a range of $11-$13. Insiders will be selling 6.6 million shares in the offering. If the over-allotments are exercised the deal size will be 12.6 million shares offered with insiders selling 7.6 million shares. Jefferies and Oppenheimer are leading the deal with Needham and Roth Capital co-managing. Post-ipo VITC will have 28.1 million shares outstanding for a market cap of $337 million on a pricing of $12. Approximately 50% of ipo proceeds will be used for capital expenditures, the remainder for debt repayment and general corporate purposes.

Founder and former CEO Wayne Gorsek will own 17% of VITC post-ipo. Mr. Gorsek is selling approximately 40% of his stake in the company on ipo. Note that the SEC found Mr. Gorsek liable for security fraud in 2003 in connection with the promotion of penny stocks. For VITC to be listed on the Nasdaq, Mr. Gorsek had to give up his role of CEO and Chairman of the Board. Mr. Gorsek is still a paid consultant for VITC. </p>
From the prospectus:

'We are a leading online retailer and direct marketer, based on annual sales volume, of health and wellness products, including dietary supplements such as vitamins, minerals, herbs or other botanicals, amino acids and metabolites (which we refer to as "vitamins and dietary supplements", as well as cosmetics, organic body and personal care products, sports nutrition and health foods.'

Online discount vitamin and health & wellness product retailer. </p>
Founded in 1994 as a catalog third-party retailer of vitamins. In 1999 VITC launched website Vitacost.com and since has done bulk of sales via that site.

VITC offers 23,000 SKUs from over 1,000 third-party brands, such as New Chapter, Atkins, Nature’s Way, Twinlab, Burt’s Bees and Kashi. In addition VITC has their own brands Nutraceutical Sciences Institute (NSI), Cosmeceutical Sciences Institute (CSI), Best of All, Smart Basics and Walker Diet. VITC completed construction of manufacturing facility in North Carolina and now manufactures most of their own labeled products.

VITC claims prices on their website are 30%-60% lower than manufacturers suggested retail prices. While technically this may be true, a quick run through their website would seem to indicate third party products are roughly in-line with the big box stores. In this day and age it is hard to undercut the large grocery chains, Target and Wal-Mart. What VITC does offer is a large selection in one online spot with click to buy ordering as well as their own label brands.

As of 6/30/09, VITC has approximately 957,000 active customers, an increase of 37% year over year. VITC defines 'active customer' as a customer who has made a purchase from VITC in the prior 12 month period. On average, active customers make purchases 2-3 times a year with average ticket between $72-$77. Approximately 50% of visitors to Vitacost.com arrive via non-paid sources. average conversion rate per visitor to site in 2008 was 15%, which seems to me to be rather solid.

VITC's margins are far stronger on sales of their own label products. Sales of VITC labels had gross margins in '08 of 53% on while gross margins were just 24% on sales of third-party products.

Sector - Even as the US economy slowed, online sales continued to grow as more and more people become comfortable with ordering/purchasing online. US online retail sales were $141 billion in 2008 and expected to grow 11% in 2009. Also US sales overall of dietary supplements are expected to grow 5% year over year through 2013. Sales of dietary supplements through the Internet grew 24.8% in 2007 and are expected to grow double digits over the next few years.

86% of orders placed online via VITC's website. 98% of revenues are generated from US customers.

Customer acquisition costs are $10.16. In 2008, 74% of orders were from repeat customers.

VITC has the capability to ship 20,000 orders per day. 93% of orders are shipped same day.

Competition is fierce. Retailers include GNC, Vitamin World, Vitamin Shoppe,Walgreen’s, CVS, RiteAid, Wal-Mart, Target and supermarket chains. Online competitors include Amazon.com and Drugstore.com.

Financials

$1 per share in cash (minus debt) post ipo.

Revenue growth has been very strong. VITC even notes in the prospectus: 'To date, we have not been adversely effected by the current recession and resulting downturn in consumer confidence and discretionary spending.' Quarterly revenues have shown a sequential increase for at least eight quarters in a row.

VITC's own label products accounted for 33% of product sales through the first six months of 2009.

VITC has been operationally profitable since 2006. In 2009 however VITC has been able to increase the bottom line significantly due to growing customer base and very solid operating expense management. In a very competitive landscape, VITC has done an excellent job increasing revenues and profits.

2008 - Revenues were $143.6 million. Gross margins were 26.5%. Operating expense ratio was 25%. Operating margins were 1 1/2%. Net margins(after tax and debt interest) were 1/2 of 1%. EPS was $0.02.

2009 - VITC has had a fantastic first half of 2009 as they've increased revenues and margins sharply. Full year revenues should be $196 million, a 36% increase over 2009. VITC should achieve this growth while keeping sales/marketing expenses flat compared to 2008. For an online retailer this is impressive organic growth. Normally when you see sharp growth from an online retailer, it also comes with sharp increase in sales and marketing expenses notably internet advertising. That isn't the case here at all as it appears returning customers are creating a nice economy of scale here. VITC seems to be providing a quality service based on the numbers here. Gross margins should be 32%. Operating expense ratio should be 19%, putting operating margins at 13%. Net margins should be 8%. Earnings per share should be $0.56. On a pricing of $12, VITC would trade 21 X's 2009 earnings.

conclusion - The trends look strong for VITC. Nothing proprietary here but VITC is doing a very nice job of increasing customer base while holding down expenses. The result is a nice move into profitability in 2009, which should lead to increased EPS for '10. Customer base here has grown from 270,000 at the end of 2005 to approximately 957,000 as of June 30, 2009. This growth has come without ramping operating expenses. Solid vitamin/supplement manufacturer and online retailer definite recommend in range.

2009-06-15
MDSO - Medidata Solutions

MDSO - Medidata Solutions plans on offering 6.3 million shares at a range of $11-$13. All of the shares are being sold by MDSO. If the over-allotments is exercised however, insiders will be selling 945,000 shares. Citi and Credit Suisse are leading the deal, Jefferies and Needham co-managing. Post-ipo MDSO will have 22.4 million shares outstanding for a market cap of $269 million on a pricing of $12. IPO proceeds will be used to repay outstanding debt and for general corporate purposes.

Insight Venture Partners will own 21% of MDSO post-ipo. Insight also owned a significant chunk of recent ipo SolarWinds.

From the prospectus:

　 'We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our customers include pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations, or CROs, and other organizations engaged in clinical trials to bring innovative medical products to market and explore new indications for existing medical products.'

On demand software platform for clinical trial data management. MDSO's software platform is designed to migrate clinical study data into one comprehensive online electronic point.

Customer base includes 22 of the top 25 global pharmaceutical companies. Since 2007, largest customers have been Johnson & Johnson, AstraZeneca, Amgen, Astellas Pharma and Takeda Pharmaceutical.

Medidata Rave is MDSO's principal revenue driving platform. MDSO derives the bulk of their revenues via multi-study arrangements from customers for a defined number of studies. The Rave platform integrates electronic data capture with a clinical data management system in a single solution that replaces traditional paper-based methods of capturing and managing clinical data. Designed for clinical trials of all sizes and phases, including those involving substantial numbers of clinical sites and patients worldwide.

Sector - Traditionally paper based manual entries into computerized form has been the primary data collection techniques in clinical trials. MDSO believes that while electronic data capture has become widely accepted, currently the majority of clinical trials still employ a form of paper based manual entry techniques. MDSO estimates that the total potential market for clinical trial electronic data capture is $1.4 billion annually worldwide.

The clinical trial space showed explosive growth from 2000-2007. Pharmaceuticals, biotechs and life science companies easily obtained the funding necessary to conduct clinical trials during this period. Access to public market funding was open, private equity firms and venture capital funds flowed and debt financing was easy to secure. Easy funding and the aging of Europe and North America led to unprecedented clinical trial testing for prospective new drugs. That came to a stop in 2008. One look at the charts and continued estimate cuts in the contract service organizations involved in clinical trials(CVD/PPDI/KNDL etc...) shows a trail of tears over the past year. Some of the stocks in the sector gave back nearly all of a 7+ year huge bull run. It has not been an easy sector backdrop for a company such as MDSO the past year or so. We shall see below how MDSO weathered this worldwide clinical trial slowdown.

MDSO solution - MDSO lists all the advantages of their software platform. We could delve into that for a few paragraphs I suppose. However essentially MDSO can be summed up as this: Real-time data from clinical trials from inception thru stages I, II, III and IV all on a single scalable electronic platform. A key feature is the ability to show real-time date for a clinical trial comprised of many different locations throughout the globe. Also MDSO's platform can be used in multiple languages simultaneously.

Hosting - MDSO hosts all client/customer data in one dedicated facility. MDSO is another example of the growing 'on demand' software and e-platform segment of the software business. This time with a data center twist. Client information is accessible online without the need to install extensive software at various sites worldwide.

Top 5 customers accounted for 46% of revenues in 2008. AstraZeneca accounted for 11% of '08 revenues and Johnson & Johnson 10%. For the first three months of '09, Takeda Pharmaceutical accounted for approximately 12% of revenues. Approximately 30% of revenues the past 13 quarters were from international clients.

Legal - Recently MDSO settled a patent infringement lawsuit claim for $2.2 million. The infringement suit was not directed toward MDSO, however it was directed to a company whose technology MDSO incorporated into their platform.

Accounting - pre-ipo, MDSO discovered their revenue recognition practices were not in line with approved accounting policies. This caused the restatement of 2006-2008 earnings statements. While this is fairly common with pre-ipo companies with small accounting staff, MDSO appears to have had more issues than is the norm.

Competitors include BioClinica, etrials Worldwide, eResearch, ClinPhone, Datatrak, Omnicom, Oracle Clinical and Phase Forward.

Financials

$2.50 per share in net cash post-ipo. Note that financials below assume debt on the books will be paid off on ipo, removing all debt expenses. With $2.50 in net cash post-ipo, MDSO will begin to have net interest revenues going forward instead of interest expenses.

In 3/08, MDSO acquired FastTrack a provider of clinical trial planning solutions. Purchase price was $18.1 million. The acquisition included substantial goodwill and intangible assets, the effect being added amortization and depreciation non-cash flow charges to MDSO's earnings statement the past four quarters. In addition to the GAAP charges going forward related to this purchase, MDSO also invested heavily in their data center capacity in 2006-2007. As MDSO will have $2.50 in net cash on the balance sheet post-ipo, these depreciation/amortization charges are not really pertinent to cash flows as there will be no debt drag from the investments. This is one of the rare cases in which I feel folding out this expense line gives a better idea as to the state of the operation.

Customer base has grown from 33 at 1/1/06 to 153 at 3/31/09. Customer retention rate was 87% in 2008. **MDSO did not lose any customer in the first three months of 2009.

MDSO recognizes their backlog as 'expected to be realized in current year' backlog. Backlog as of 1/1/09 was $116.7 million. As of 3/31/09, expected to be realized in '09 backlog was $91.6 million.

Impressive revenue growth since the first quarter of 2008. Revenues in the 12/07 quarter were $17,609 In the five quarters since beginning in 3/08 and ending in 3/09 revenues have been $20,979; $25,753; $27,810; $31,182; $33,602. This quarterly revenue growth performance is very impressive considering the dreary global economic climate over this period. At a sub $300 million market cap on ipo, a company laying on 10%+ quarter to quarter revenue growth is almost an automatic recommend. Factor in the very difficult clinical trial environment due to funding issues over the past year, and MDSO's rapid revenue growth is even more impressive. The issue here is not the growth, it is the bottom line.

Revenue growth is directly tied to substantial customer gains in 2008 and first quarter of 2009. MDSO either has a superior platform or they are significantly undercutting the competition in price.

The 12/08 quarter was MDSO's first profitable quarter on GAAP operational earnings. Again, MDSO's actual cash flows will be a bit stronger each quarter than GAAP earnings due to the amortization and depreciation charges from the FastTrack purchase. While MDSO booked a substantial GAAP loss in 2008, total cash flows were slightly positive.

MDSO has significant tax loss carryforwards and should pay minimal taxes in 2009-2011.

Approximately 70% of revenues is high margin application services revenues, 30% low margin professional services revenues. Think of the higher margins side as the software revenues and the lower margin side as the data service revenues.

2008 - Revenues were $105.7 million, a 68% increase over 2007. While MDSO did make an acquisition in 2008, nearly all the growth was organic and a result of increased customer base. Gross margins were 52%, an increase from 2007's 27%. Gross margins would be low for the software segment, except MDSO is not really a software operation. They are a combination on-demand software, data center, and electronic platform company. Operating expenses were staggering at 67% of revenues, an increase from 2007's 63%. If depreciation and amortization are removed, operating expense ratio was 59%. Folding out debt expense(as there will be no net debt post-ipo), MDSO's loss in 2007 was approximately $0.70 per share. This includes all depreciation, amortization and stock compensation expenses. As noted above, MDSO was slightly cash flow positive in 2009 overall, so this loss is a shade misleading. **To get a clearer picture here, one should fold out the depreciation and amortization expenses. Doing so, puts the net loss at $0.25 per share.

2009 - MDSO gives a very good '09 blueprint thanks to their 'expected to realize in '09' backlog count. Using that and first quarter results, total revenues for 2009 should be in the $140 - $150 million ballpark. This would be a strong 38% increase over 2008. MDSO continues to improve gross margins in their lower margin 'professional services' side as they add customers. Gross margins should increase to 64% for 2009, an increase from '08's 52%. As revenues have increased strongly, operating costs have remained flat the past four quarters. This is a nice positive as MDSO has been running 'hot' on GSA expenses the past few years as they've invested in growing their business. Total operating expense margin(including depreciation & amortization) should be 56%, a nice decrease from '08's 67%. Operating margins should be in the 8% ballpark. Due to the loss carryforwards noted above, MDSO's tax rate will be approximately 10%. Net margins should be 7% with earnings per share of $0.45. On a pricing of $12, MDSO would trade 27 X's 2009 earnings.

As noted previously, this to me is a case in which folding out depreciation and amortization charges give us a better idea of overall cash flows. Folding out those charges(but keeping in stock compensation), earnings per share would be $0.88. If we normalized taxes (instead of the 10% rate), earnings per share folding out these charges would be $0.64. To me this number gives us a better picture of MDSO's 2009 operations.

MDSO is sort of a stealth ipo. Growth has been phenomenal over the past year amidst a sharp overall slowdown in the worldwide clinical trials segment. The GAAP earnings though look horrific for 2007 and 2008. However, MDSO is trending strongly in revenues, gross margins, operating margins and net margins each and every quarter and is quickly approaching a spot in which net earnings should look far better than the past. Factor in their actual cash flows are disguised a bit due to non-cash flow charges and this one has strong sleeper potential.

Biggest negative here is that the sector has not been strong and on the surface, first glance MDSO looks unimpressive.

Quick glance at MDSO's closest public comparable PFWD. PFWD is not a true pureplay comparable as their clinical trial offerings are just a segment of the overall business. Also ERES has a segment that competes with MDSO, however ERES has seen their business falter significantly overall the past few quarters unlike PFWD/MDSO.

PFWD - $675 million market cap. $3.5 per share in cash. PFWD currently trades 30 X's 2009 earnings estimates with an expected revenue growth rate of 24%.

Conclusion - I like this ipo. MDSO is trending very strongly on all metrics the past 6 quarters in a difficult environment for the clinical trials sector. If trends continue (and the sector just normalizes) MDSO will have a banner 2010. As always, this is a young company that spends heavily on operating expenses each quarter so any hiccup will be greatly magnified. However cash flows here are increasing impressively each quarter, and at a sub $300 million market cap, this is an easy recommend in range. Stealth ipo, looks unimpressive first glance but is trending very nicely into ipo.

As has been the case for 4+ years now, we've a detailed analysis report on every deal before pricing/open at http://www.tradingipos.com

2009-06-16
DGW - Duoyuan Global Water

DGW - Duoyuan Global Water plans on offering 5 million ADS at a range of $13-$15. The offering will be 5.75 million ADS if the over-allotment is exercised. Piper Jaffray is leading the deal, Oppenhemier and Janney Montgomery co-managing. Post-ipo, DGW will have 21.3 million ADS equivalent shares outstanding for a market cap of $298.2 million on a pricing of $14. IPO proceeds will be used to build and upgrade manufacturing facilities and production lines as well as R&D. 　

Director, Chairman and CEO Wenhua Guo will own 58% of DGW post-ipo.

From the prospectus:

'We are a leading China-based domestic water treatment equipment supplier. Our product offerings focus on addressing the key steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis.'

Water treatment products in China. Customers include wastewater treatment plants, water works facilities, manufacturing plants, commercial businesses, residential communities and individual customers.

DGW offers 80 products in three categories. 35 of these products were introduced in 2008.

Circulating Water Treatment Equipment - Electronic water conditioners, fully automatic filters, circulating water central processors, cyclone filters and water softeners, used in the process of treating water and removing buildup in circulating water systems. DGW derived 41% of their 2008 revenues from this segment.

Water Purification Equipment - Products for residential and commercial end-users utilizing ultraviolet, ozone, membrane-based and electrodeionization, or EDI, technologies. 21% of 2008 revenues were derived from this segment.

Wastewater Treatment Equipment - Products to treat municipal sewage and industrial and agricultural wastewater. DGW derived 38% of their 2008 revenues from this segment.

As with most companies in China selling a product, DGW utilizes distributors and not a direct sales staff. DGW's distribution network consists of over 80 distributors in 28 Chinese provinces.

Sector - As China becomes more industrial and urban, clean non-polluted water has become a precious commodity. China's government has promoted and investing in water treatment projects turning the sector into a growth industry in the country. The demand for water treatment products in China is estimated to increase nearly 15.5% annually through 2012. Growth drivers are rapid population growth, industrialization and urbanization, and more recently, the economic stimulus plan being implemented by the Chinese government.

Seasonality - DGW derives lower revenues in the winter months due to slowdown in construction as well as Chinese New Year. The 3rd quarter of the year tends to be the strongest, with the first quarter the weakest.

Financials

$4 per share in cash post-ipo. Note that DGW plans on spending a significant chunk of this cash on capacity expansion, including building new manufacturing facilities and production lines. In addition DGW plans on spending $10 million on a new R&D facility.

DGW has been profitable since at least 2005.

Taxes - DGW will be taxed at a 25% rate beginning 2009.

Gross margins were 45% in 2008 a strong improvement over 2007's 37%. The increase was due to the sharp drop in commodity prices the back half of 2008. DGW expects favorable pricing on their commodity purchases in 2009 due to long term supply agreements. Expect 2009 gross margins to remain in the 45% ballpark.

2008 - Revenues grew 40% in '08 to $86.8 million. As noted above, gross margins were 45%. Operating expense ratio was 15%, putting operating margins at 30%. Plugging in the 25% post-ipo tax rate, net margins were 22.5%. Earnings per share were $0.91. On a pricing of $14, DGW would trade 15 X's 2008 earnings.

2009:

First quarter is DGW's slowest annually. However DGW grew revenues by approximately 38% year over year in the 3/09 quarter keeping pace with 2008 growth rates.With continued strong gross margins due to supply agreements in place through '09, DGW is off to a solid start for 2009. DGW has also done a nice job keeping expenses in line the past two years, allowing for economies of scale. They appear to be selling more with roughly the same expense outlays.

Revenues for 2009 should be in the $110 million range, a 26% increase over 2008. I was conservative here in estimating as DGW had a huge 3rd quarter of 2008 that may be difficult to duplicate. If the third quarter inproves year over year on the '08 Q, the $110 million estimates will be a little low.

Gross margins should be 45%. Operating expense ratio should dip to 13%, putting operating margins at 32%. Plugging in a 25% tax rate, net margins should improve to 24%. Earnings per share should be $1.25. On a pricing of $14, DGW would trade 11 X's 2009 earnings. Note too that these are 25% taxed earnings and not the usual China ipo low to no taxed earnings per share.

Conclusion - Nothing real proprietary here it appears, although DGW does devote substantial resources to R&D to stay current with worldwide water treatment technologies. I have seen this compared to ERII, but not quite. ERII is a water tech company that is involved in large water projects worldwide. DGW is a pureplay on Chinese population, infrastructure and urbanization growth which brings about a greater demand for clean water. Growth here has been very strong and the multiple does not look extreme at all. Good growth, low multiple, wind at back due to China internals, plus factor in the huge recent China stimulus package. DGW should not be a high multiple stock due to it 'nuts and bolts' type business. However the multiple here with the strong growth makes for an easy recommend in range. good growth and low multiple = strong recommend in range.

2009-05-04
DGI - DigitalGlobe

DGI - DigitalGlobe plans on offering 17 million shares(assuming over-allotments are exercised) at a range of $16-$18. **Note that insiders are selling 13.33 million shares in this deal, DGI will be selling only 3.6 million shares in this 17 million share deal. Morgan Stanley and JP Morgan are leading the deal, Citi, Merrill Lynch and Jefferies co-managing. Post-ipo DGI will have 47 million shares outstanding for a market cap of $799 million on a pricing of $17. IPO proceeds will be utilized for general corporate purposes.

Morgan Stanley, the lead underwriter in this deal, will own 30% of DGI post-ipo.

**DGI will have $200 million in net debt post-ipo. Actual debt will be $341 million, while cash on hand post-ipo will equal $140 million assuming over-allotments exercised. DGI would be a much stronger company post-ipo were insiders not making up the bulk of this deal. DGI participates in a hefty capital expenditure sector, launching and operating satellites. I would much prefer to see a debt free DGI post-ipo than one with debt on the books. Had insiders waited until the lock-up to begin selling, it would have allowed DGI to offer the bulk of shares in this deal and pay off some of the debt on the books. That is not the case however.

From the prospectus:

'We are a leading global provider of commercial high resolution earth imagery products and services. Our products and services support a wide variety of uses, such as defense and intelligence initiatives, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management.'

High resolution satellite operator helping companies and governments map the physical world.

DGI currently operates two high resolution imagery satellites which produce DGI's earth imagery content which allows customers to map, monitor, analyze and navigate the physical world. DGI's imagery is currently used in location based applications including Google Maps and Microsoft Virtual Earth, and mobile devices from vendors such as Garmin and Nokia. DGI's satellites take both black and white, and multi-spectral imagery, which shows visible color and non-visible light, such as infrared. One million square kilometers of imagery is added/updated daily to DGI's image library. The image library currently houses more than 660 million square kilometers of high resolution earth imagery, an area greater than four times the earth’s land mass. **DGI believes their image library is the largest, most up-to-date and comprehensive archive of high resolution earth imagery commercially available.

**DGI will be launching their third satellite, WorldView-2, in October '09. The WorldView-2 will nearly double DGI's collection capabilities to nearly two million square kilometers per day. In addition it will enable intra-day revisits to a specific geographic area, including collecting up-to-date imagery in those areas of greatest interest to customers. The WorldView-2 will be the only commercial earth imagery satellite with 8-band multi-spectral capability, which has a more robust color palette and enables enhanced analysis of non-visible characteristics of the earth’s surface and underwater. It reads as if the WorldView-2 launch is designed to expand their governmental defense and intelligence based business.

Sector - Estimates peg the 'earth imagery' sector at $1.9 billion in 2007 with expectations of $3.2 billion in annual revenues by 2012. DGI would appear to have approximately a 10%-15% total market share in this segment. Growth drivers include: 1)increase in government reliance on unclassified earth imaging; 2) Growth of imagery usage to monitor economic development; 3) Consumer application growth including internet and GPS.

Barriers to entry are significant. DGI estimates launching a high resolution imagery satellite is a four year endeavor. Factor in the prohibitive cost of launching and maintaining the satellites, the licenses needed, and the inability to quickly replicate DGI's historical image library and you have a pretty significant entry barrier for new competitors. DGI does have one publicly trading pure-play competitor in GeoEye(GEOY). In the financials section, we will compare the two.

DGI's largest customer is the US government in the form of the National Geospatial-Intelligence Agency, or NGA. NGA accounted for 58% of 2007 revenues and 74% of 2008 revenues. 17% of revenues were derived internationally. Approximately 80% of 2008 revenues were derived from government defense and intelligence agencies, 20% from commercial clients. The bulk of DGI's government revenues comes from tasking orders. These would be up to date data directly from the satellites, often following specific directions from the agencies. Only 12% of government revenues are derived from use of DGI's image library. By contrast approximately 80% of DGI's commercial revenues are derived from their image library.

Capital expenditures - As one would surmise, this is a hefty capital expenditure sector. In the past three years, DGI has had capital expenditures of: $83 million in 2006; $238 million in 2007; $142 million in 2008.

Risks - Two large ones here:

1) The loss of government revenues. As most of the competition in the high res imagery satellite sector is non-US based, there is only one company that poses a serious threat to DGI's government related revenues stream. That one company is GeoEye, who recently commissioned a multi-spectral satellite into operations. GEOY's new multi-spectral satellite is anticipated to derive more US government business than their predecessor satellites. **Note** - It appears the US government remains intent on utilizing both GEOY and DGI's imagery. In fact in a recent long term plan from the Obama administration the government will increase its use of imagery from each of the two companies. Currently it appears to this analyst as if there is plenty of revenues from the NGA for both DGI and GEOY. In fact it seems the NGA prefers using two satellite imagery providers and not relying on one company. Of note, the US government has made a mess of their own plans to launch satellites, which has opened the door for strong revenues growth for both GEOY and DGI. There are long-range plans for the US government owned imagery satellites, however nothing is imminent at this time. That alone makes DGI/GEOY interesting public companies.

2) Failure of a timely launch for the WorldView-2 satellite. As DGI will be a public company when the launch is scheduled, any delay or launch mishap would harm the stock price. Should be noted that GEOY's recent satellite launch was delayed a number of times. DGI's first satellite is due to be decommissioned in 2010. Their second satellite(WorldView-I in operation since 11/07) is expected to remain operational until 2018.

Financials

A significant amount of debt on the books at $341 million. Post-ipo, DGI will also have a substantial amount of cash on hand, approximately $140-$150 million. Much of this cash will be utilized the remainder of 2009 on the launch of their new satellite Worldview-2. Most likely come early 2010, DGI will have $300+ million in net debt, compared to $200 million net debt post-ipo.

***Even with the substantial net debt on hand, DGI will only book $3-$5 million in net debt expense in 2009. Most of the current interest expenses will be capitalized under the construction of the new WorldView-2 satellite and will be expensed over the expected life of the satellite under depreciation & amortization. Once the satellite is launched and commissioned and final expenses are in however, future annual interest expenses will revert to that line item. Expect the interest expense line item to grow substantially by 2011.

Revenues have grown swiftly, kicking into another gear after the late 2007 launch of WorldView-1. Revenues in 2006 were $107 million, in 2007 $152 million and in 2008 $275 million. The swift 2008 growth was nearly all spurred by the US defense and intelligence agencies as commercial revenues only grew by 10% on the year. The launch of WorldView-2 in late 2009 should kick start 2010 revenues similarly. The issue with DGI however is 2009.

DGI became operationally profitable in 2006.

2008 - Revenues were $275 million, a whopping 81% increase from 2007. The reason as noted was the commissioning of the WorldView-2 satellite which brought with it a large increase in US government contractual revenues. Gross margins were 90%. The high gross margins are due to capital expenditures going on the depreciation & amortization line to be expensed down over the life of the satellites. Operational expense ratio was 56%, split evenly between depreciation & amortization and GSA expenses. Operating margins were a strong 35%. Factoring in normalized taxes and interest expense, net margins were 21%. **Note that DGI's taxes were at a higher rate in 2008 than they will be as a public company. It appears this was due in part to DGI taking a large tax credit in 2007. In 2008, DGI was actually a bit more GAAP profitable than the numbers appear. Earnings per share were $1.22 in 2008. On a pricing of $17, DGI would trade 14 X's 2008 earnings.

A couple of comments. First of all, DGI is able to legally hide a chunk of their interest expense annually by capitalizing it into the costs of their satellite launches. Unless the company plans another launch sometime in the 2011-2013 window, beginning in 2011 DGI will get hit with an increase in interest expense on their debt. In fact since much of their interest the past two years has been folded into their satellite costs, come 2011 they will be expensing actual debt servicing as well as the depreciating expense on 2007-2010 debt servicing. This is something that should serve to put a bit of a drag on those strong margins come 2011.

Also as DGI actually spent a far greater amount in 2007-2008 in actual capital expenditures than the depreciation & amortization expense lines, the GAAP earnings numbers look much better than actual cash flows. DGI is GAAP profitable, but due to these two accounting rules, DGI's margins look far stronger than the actual cash flows. This is a hefty capital expenditure business and launching two satellites in two years will have cost DGI over $600 million in actual monies. By spreading out the expenses over the expected life of the satellites, come 2011 DGI will actually have stronger cash flows than their GAAP numbers. Currently however, in their launch phase, the GAAP numbers are better than cash flows.

2009 - 2009 is going to be a small step back for DGI. The economic slowdown has slowed their non-contractual government business. Operating expenses however will grow briskly as DGI prepares for the launch and commissioning of their WorldView-2 satellite. While the first quarter 2009 numbers were not yet ready, DGI expects 1) a sequential decrease in quarterly revenues for the March '09 quarter; 2) A year over year decrease for the March '09 quarter; 3) lower profits for the March '09 quarter. In addition DGI is forecasting no revenue growth in 2009, but forecasting increased operating expenses. Yes, the reason is understandable. 2009 for DGI will be the 'in-between' year not benefiting from the commissioning of a new satellite as 2008 was and 2010 will be. I suspect however that the coming lackluster results for DGI in 2009 may be a surprise to some shareholders expecting continued growth. They just will not be seeing it this year. The good news is, the valuation in range factors this in as DGI is not overly pricey at all in range. A quick forecast for 2009:

Revenues should be stagnant again in the $275 million range. Gross margins should again be strong. DGI will see an increase in GSA and depreciation & amortization knocking operating margins to approximately 31%. Factoring in net interest expense and taxes, net margins should be 18 1/2%. Earnings per share for 2009 should be in the $1.05-$1.10 range. On a pricing of $17, DGI would trade 16 x's 2009 earnings.

A quick look at DGI and competitor GEOY.

GEOY: $492 million market cap with $250 million in debt. In 2009 GEOY expects revenues of $262 million and earnings per share of $0.78. GEOY currently trades at 34 X's 2009 earnings. GEOY recently launched/commissioned a new satellite and expects 2010 to be the year that revenues from said satellite begin to spur EPS growth.

DGI: $799 million market cap with $340 million in debt. DGI should have revenues of approximately $275 million in 2009 and earnings per share of $1.05-$1.10. On a pricing of $17, DGI would trade 16 X's 2009 earnings.

While DGI looks a bit hefty in comparison to GEOY on a price to revenue basis, DGI does sport better overall margins. Part of this may be explained by the difference in accounting as GEOY has opted for more a straight line 'expense as you go' approach while DGI has opted to capitalize and depreciate their direct satellite costs over the expected lifespan of that satellite. Both GEOY and DGI should post strong 2010 eps growth and an argument could be made each should trade at a similar market cap and not the disparity we should see if DGI prices in $16-$18 range.

Conclusion - 2009 should be a rather flat year of performance as the company prepares to launch and commission their new state of the art imagery satellite. Investors expecting continued swift growth in 2009 may be disappointed as DGI will go from 80% revenue growth in 2008 to stagnant revenue growth in 2009. The question here is whether or not that is built into the valuation in range. I believe it is, however be prepared for a potential cool reception to DGI's first few earnings reports in 2009 as they should lag 2008's earnings power. DGI is going to have a difficult 2009, however once the WorldView-2 is commissioned, the revenue and earnings picture in 2010 should resemble 2008's impressive year.

Yes debt is a drag here and I would far prefer DGI pay off debt on ipo than insiders cashing out. That is a significant negative here. The flat 2009 is another negative. However, for the potential payoff in 2010 and beyond, the valuation in range here does not appear out of line. This is an interesting ipo and a recommend in range. Note however, this is not an ipo to pay up for as there very well may be a negative reaction at some point this year to DGI's lackluster 2009 operational performance.

Even with the negatives noted, a unique ipo with hefty barriers to entry and a solid future trading 16 X's current year earnings is a definite recommend in range....shareholders though should definitely expect a choppy ride over the next year.

2009-04-06
RST - Rosetta Stone

RST - Rosetta Stone plans on offering 7.25 million shares (assuming overallotments exercised) at a range of $15-$17. Insiders will be selling 4.125 million shares in the deal. Morgan Stanley and William Blair are leading the deal; Jefferies, Robert Baird, and Piper Jaffray co-managing. Post-ipo RST will have 20.3 million shares outstanding for a market cap of $325 million on a pricing of $16. The bulk of ipo proceeds will be used for general corporate purposes.

ABS Capital will own 25% post-ipo..ABS Capital is also the majority shareholder of 2007 ipo APEI.

From the prospectus:

'We are a leading provider of technology-based language learning solutions. We develop, market and sell language learning solutions consisting of software, online services and audio practice tools primarily under our Rosetta Stone brand.'

RST's language learning approach does not utilize the traditional second language approach of translation or grammar explanation. Instead RST utilizes audio & video to replicate the natural language learning ability that children use to learn their native language. RST calls their proprietary language learning approach 'Dynamic Inversion'. RST currently offers their self-study language learning programs in 31 languages.

Language Learning - Children learn their native language without using rote memorization or adult analytical abilities for grammatical understanding. They learn at their own pace through their immersion in the language spoken around them and using trial and error. They do not rely on translation. Traditionally the majority of second language learning programs in/out of the classroom have focused instead on translation, grammar and rote memorization. The majority of alternative second language courses have focused on in-country immersion and private study, both expensive alternatives to the traditional memorization approach. RST's solution brings the immersion approach to ones computer.

Rosetta Stone solution - As noted above, RST aims to replicate the process in which children learn their native language. The student learns at their own pace. The RST content library consists of more than 25,000 individual photographic images and more than 400,000 recorded sound files. Each language has 1-3 proficiency levels which can be purchased individually or bundled. Individual proficiency's (such as Spanish I) retail for approximately $250 while the complete language bundle (Spanish I, Spanish II, & Spanish III) retails for approximately $550. Each proficiency level offers approximately 40 hours of instruction. In addition RST offers an online peer-to-peer practice environment called SharedTalk, at www.sharedtalk.com, where registered language learners meet for language exchange to practice their foreign language skills. During 2008, RST had more than 100,000 active SharedTalk users.

Effectiveness - According to a self-commissioned study, after 55 hours of Spanish study using Rosetta Stone, the learning was sufficient to fulfill the requirements for one semester of university study.

Sector - RST generates 95% of revenues in the US. The US language learning industry generated $5 billion in revenues in 2007, of which $2 billion was for self-study. Assuming these numbers are correct, RST has approximately a 10% share of the self-study revenues in the US and is the far and away leader in their niche.

Customers:

Consumer sales accounted for approximately 80% of 2008 revenues. Direct-to-consumer channel sales accounted for 58% of consumer sales. These are sales made via RST's website or or call centers. RST's 145 retail kiosks (located in airports and malls) accounted for 22% of consumer revenues and sales to retailers accounted for 21% of consumer revenues. The bulk of retailer sales were to Apple, Barnes & Noble, and Borders.

Institutional sales accounted for 20% of 2008 revenues. Primary/secondary schools represented 44% on institutional sales, government & armed forces 19%, homes schools 20% and businesses 10% and non-profits 5%.

60% of RST customers earn more than $75,000 annually with 44% earnings more than $100,000. In a self-commissioned study, 92% of respondents expressed satisfaction with RST products and 76% have recommended Rosetta Stone to others.

Growth potential - RST feels their growth prospects going forward lie in the international markets. In 2008, just 5% of RST's revenues were derived outside the US.

Risk - 80% of RST's revenues are derived from US consumers. The big risk here would be a recession negatively impacting consumer discretionary spending coupled with a slowdown in international travel. We've certainly seen the first with consumer discretionary spending falling off a cliff in mid-September 2008. As RST is the first consumer discretionary ipo in quite awhile, this is a definite concern. Lets look at RST's 4th quarter of 2008 and see if revenues were impacted. In the 4th quarter of 2008, RST booked their best quarter in operating history in terms of revenues while maintaining gross margins and dropping sales and marketing expense in terms of percentage of revenues(a positive). Now seasonality plays a factor here as the 4th quarter annually has been RST's strongest due to holiday spending. RST however booked very solid revenue growth in the 4th quarter of 2008, much as they did a year prior in the 4th quarter of 2007. Quarter to quarter revenue growth in the 4th quarter of 2008 was a strong 11%, compared to 4th quarter of 2007 quarter to quarter revenue growth of 24%. Factoring in a near doubling of the revenue base in 2008 coupled with the difficult consumer spending environment in late 2008, the 4th quarter of 2008 for RST looks strong to me.

Returns - RST offers a 6 months 'no questions asked' money back guarantee on their products. In 2008 approximately 6% of all revenues were returned.

Competition - Berlitz International, Simon & Schuster, Inc. (Pimsleur), Random House,(Living Language), Disney Publishing Worldwide and McGraw-Hill Education. There is no pure public comparable to RST.

Risk – As mentioned, 80% of customer base in 2008 were individuals. As a result RST revenues could be affected by any trend changes in discretionary consumer spending and retail shopping patterns. Slowdown in international travel too carries a risk due to sales from airport kiosks forming almost a fifth of consumer driven revenues.

Financials

$2.67 in cash per share post-ipo, no debt.

Growth has been very strong in the past two years. As is often the case with software related ipos, gross margins are also impressive. Revenue growth was 50% in 2007 and actually increased in 2008 by 52% more. Rarely do you see a company deriving significant revenues ($209 million in 200 and accelerating revenue growth year to year. That RST did so in a tough consumer 2008 environment is very impressive. The revenue growth here the past two years with back to back 50%+ growth is easily reason enough to recommend this ipo.

Seasonality - RST's best quarter tends to be the 4th quarter annually as they derive holiday related revenues.

RST's first profitable year was 2007.

2008 - Revenues were $209.3 million, a 52% increase over 2008. Gross margins were fat at 86%. As one would expect, sales and marketing expenses make up the bulk of RST's operating expenses. While in 2008 sales & marketing expense ratio was 45%, it did mark a decrease from 2007's 48% and 2006's 50%. Good sign, all things being equal you want to see sales and marketing expenses growing slower than actual revenues, allowing a company to filter more of those revenues to the bottom line. Operating expense ratio is also decreasing annually, exactly what one wants to see. Fast growing revenues and declining operating expense ratios are the ingredients of a top notch ipo. Operating expense ratio in 2008 was 72%, compared to 79% in 2007 and 80% in 2006. This number is still quite high in 2008, however the trends are improving and if RST can continue at this pace over the next 2-3 years, they will become a very profitable operation.

2008 operating margins were 14%. Plugging in anticipated post-ipo tax rate of 37%, net margins were 9%. Earnings per share were $0.91. On a pricing of $16, RST would trade at 17-18 X's trailing earnings with a 50% trailing revenue growth.

2009 - I just do not feel comfortable forecasting another 50%+ jump in annual revenue for 2009. Having written that, RST is poised to have a very strong 2009. In what was a difficult environment in 2008 with consumer discretionary spending falling precipitously overall, RST shined. Looking at quarter to quarter revenue growth at the end of 2008 and factoring in seasonality with a much slow first half of the year for RST historically....I would project very conservatively that RST can grow revenues 20% in 2009 to approximately $250 million. Gross margins should remain strong and I would project operating expense ratios to continue to decline, increasing operating and net margins. On a $250 million run rate, with 86% gross margins, 16% operating margins and 10% net margins, RST would earn $1.23 in 2009. On a pricing of $16, RST would trade 13 X's 2009 earnings.

Conclusion

How has RST thus far managed to sidestep a massive consumer spending slowdown? 22% of RST buyers responded in a survey they did so based on the personal recommendation of another. That is pretty powerful word of mouth marketing when annual revenue tops $200 million. Digging into this ipo, the one constant appears to be customer satisfaction driving growth. You really could not ask for much more with a consumer based ipo. RST looks poised to grow strongly in 2009 and is trending well in every facet of their business. If RST is able to build on their United States success globally over the next few years, this could be a huge long term winner coming public at just a $325 million market cap (based on a $16 pricing).

RST is a unique, and difficult to value sector leader with fast growing revenues, strong gross margins and improving operating expense ratios. All this equals a top-notch ipo. If RST can continue current trends for even another 2-3 quarters, the range of $15-$17 here is far too low. This is a strong recommend in range and one to pay up for if need be. The CEO describes his company as a 'disruptive value proposition' in language learning. I agree

2009-03-26
CYOU - Changyou.com

CYOU - Changyou.com plans on offering 7.5 million ADS at a range of $14-$16. Note that 1/2 the ADS in this offering will be sold by parent company Sohu.com (SOHU). Credit Suisse and Merrill Lynch are leading the deal, Citi and Susquehanna Financial are co-managing. Post-ipo CYOU will have 51.25 million ADS equivalent shares outstanding for a market cap of $769 million on a pricing of $15. Ipo proceeds will be utilized for general corporate purposes.

SOHU will own 71% of CYOU post-ipo. CYOU's CEO Tao Wang will own 15% of CYOU post-ipo. Note that post-ipo CYOU will be paying SOHU a one-time dividend of $96 million.

SOHU - A Chinese internet portal operating since 1998. Sohu has a current market cap of $1.56 billion and currently has over 250 million registered accounts.

From the prospectus:

"We are a leading online game developer and operator in China as measured by the popularity of our game Tian Long Ba Bu, or TLBB. TLBB, which was launched in May 2007, was ranked by International Data Corporation, or IDC, for 2007 as the third most popular online game overall in China and the second most popular online game in China among locally-developed online games."

On-line multi-player role playing game company, this CYOU ipo is similar in that fashion to this decade’s ipos of SNDA/NCTY/PWRD/GA. Below we'll do a comparison of those four with CYOU.

Tian Long Ba Bu(TLBB) was developed and launched in house at CYOU, then a part of SOHU. In addition to TLBB, CYOO also has licensed and operated Blade Online (BO). For the three months ending 12/31/08, TLBB had 1.8 million active paying accounts and BO had 159,000 active paying accounts.

Tian Long Ba Bu - 2.5D martial arts game was launched in May of 2007. Multi-player means literally over a million players/characters can inhabit the game playing universe at the same time. In 3/09, peak concurrent users exceeded 800,000. CYOU has also licensed this game to third party operators who run the game in Taiwan, Hong Kong, Vietnam, Malaysia and Singapore. Game players may play for free, however they must purchase pre-paid game cards to buy virtual items such as gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks. As is customary in China, pre-paid game cards are sold through regional third party distributors who then distribute to Internet cafes and various websites, newsstands, software stores, book stores and retail stores.

Pipeline - CYOU has three games in various stages of development: Duke of Mount Deer, or DMD, Immortal Faith, or IF, and the Legend of the Ancient World, or LAW. Duke of Mount Deer is another martial arts game and is being developed in-house. The other two will be licensed properties. Rollout of DMD will be 4th quarter of 2009 with the other two coming in 2009 and 2010 respectively. It would appear CYOU is banking on Duke of Mount Deer to be their next hit and hoping that this release will pick up the slack from the eventual player slowdown in TLBB.

Market segment - China's online game players numbered an estimated 40 million in 2007 with revenues of $1.4 billion. Online game revenues are expected to continue to grow to $3.4 billion in 2012 at a compound annual growth rate, or CAGR, of 19.9%.

Growth - 94% of CYOU's revenues in 2008 were from the game Tian Long Ba Bu(TLBB). Launched less than two years ago, TLBB has been a huge success generating over $180 million in revenues in 2008 alone. This ipo is based completely on the success of this one game. While TLBB has generated massive revenues and profitability, online video games tend to have a distinct lifespan and popularity curve. TLBB's popularity seems to have peaked in late 2008, so future growth is going to depend on CYOU's pipeline of coming games. TLBB in the 12/08 quarter had 1,822 paying accounts which was down slightly from the 9/08 quarter. Quarterly revenue growth from TLBB has gone from stratospheric to somewhat flat. Beginning with the 12/07 quarter, following is the quarter to quarter revenue growth of TLBB: 12/07 +102%; 3/08 +76%; 6/08 +13%; 9/08 +11%; 12/08 +6%. Looking at the slowing growth from TLBB, we can clearly see that CYOU will have difficulty growing going forward without their 4th quarter 2009 launch of Duke of Mount Deer becoming a big hit. In fact I would expect TLBB to book negative revenue growth quarter to quarter by the end of 2009 just as their next in-house game is launched.

Risk - the obvious risk here is a significant market cap on ipo of $769 million (assuming a $15 pricing) is based on one on-line game. Looking at the above slowing quarter to quarter growth trends of this one game and the risk here is that unless CYOU's next in-house game (due to hit in late 2009) is a big hit, revenues and earnings power will decline significantly as TLBB sees its popularity wane. This is a significant risk, especially as their new in-house game has yet to have a track record. For me, this large a market cap based on one game carries enough risk that I can only be, at best, neutral on this deal in range as the popularity of TLBB is already baked into the market cap in range.

Financials

After paying SOHU a $96 million dividend, CYOU will have slightly under $2 per share in cash post-ipo with no debt.

Revenue growth has been swift since the release of the Tian Long Ba Bu game. Revenues in 2006 were $8.5 million, in 2007 $42 million and in 2008 $201.8 million.

2008 - Revenues were $201.8 million, a massive increase over 2007. Tian Long Ba Bu accounted for 94% of those revenues. Gross margins were an impressive 93%. Operating expense ratio was 36%. Operating profits were 57%. In 2008 Tian Long Ba Bu was a money making machine. Normalizing CYOU's tax rate as it will appear post-ipo, net margins were 50%. Earnings per share were $1.97. On a pricing of $15, CYOU would trade 7-8 X's trailing earnings.

2009 - As noted above, quarter to quarter growth will slow dramatically from 2007 and 2008. CYOU's money making game TLBB appears as if it has peaked in popularity, or at least should see much more constrained revenue growth. As CYOU's next in-house developed game will not hit until late 2009, CYOU's revenues should be rather stagnant on a quarter to quarter basis throughout 2009. Projected revenues for 2009 should be in the $230 million ballpark, an increase of 15% over 2008. Much of this growth will be due to favorable comparables in the 3/09 quarter compared to 3/08 period. Gross margins look to continue to be 90%+. Operating expense ratios should be slightly higher as CYOU ramps up product development and sales/marketing efforts to promote new games. Lets plug in a 37% operating expense ratio. Operating margins should be 55%. It appears that for 2009-2011, CYOU will have an approximate tax rate of 12.5%. Net margins then should be approximately 42.5%. Earnings per share should be approximately $2 per share. On a pricing of $15, CYOU would trade 7 1/2 X's 2009 earnings.

Lets take a glance at CYOU's public competitors.

SNDA - $2.6 billion market cap. Currently trading 13 X's '09 estimates with an anticipated revenue growth of 25%.

NCTY - $370 million market cap. Currently trading 9 X's '09 estimates with an anticipated revenue growth of 9%.

PWRD - $789 million market cap. Currently trading 7 X's '09 estimates with an anticipated revenue growth of 22%.

GA - $1.6 billion market cap. Currently trading 12 X's '09 estimates with an anticipated revenue growth of 5%

Stacking CYOU up with these four, it does appear to be priced within the valuations of the above. A positive for CYOU is that they do have an extremely popular game. The downside is that nearly all revenues are derived from this one game and, at this point, we do not know whether CYOU will be successful in diversifying their game base and revenue stream.

Conclusion

On a trailing basis the CYOU ipo looks dirt cheap. The problem however is the ipo and market cap are based on the huge success of their game TLBB. It appears to me that TLBB has, at the very least, come close to peaking by late 2008. With their next in house game not launching until late 2009, I would project CYOU to see pretty flat revenues for '09 actually. Looking forward this is a pretty hefty market cap for reliance on one single game which saw its best year in 2008 and should decline somewhat in popularity going forward. The valuation is not out of line however and if CYOU's next in house game is another big it, there is potential for share price appreciation. Problem however is currently we have no idea how CYOU's future games will be received. We do know that the current success of TLBB is most definitely in the market cap on ipo. Neutral here in range. Swift growth in '08 and reasonable PE ratio is appealing, the lack of revenue diversification however is a pretty big sticking point for me.

disclosure - at date of posting for non-subscribers(11/26) tradingipos.com does have a position in LOPE from an average price of $10.60.


2008-11-15
LOPE - Grand Canyon Education

LOPE - Grand Canyon Education plans on offering 10.5 million shares at a range of $14-$16. Credit Suisse and Merrill Lynch are leading the deal, BMO, William Blair and Piper Jaffray are co-managing. Post-ipo LOPE will have 43.1 million shares outstanding for a market cap of $646 million on a pricing of $15. The bulk of ipo proceeds will go towards paying a special distribution to corporate directors and pre-ipo shareholders. Very little of the ipo proceeds will find their way to LOPE's balance sheet post-ipo.

Endeavour Capital Fund will own 22% of LOPE post-ipo. Four venture capital firms combined will own approximately 50% of LOPE post-ipo.

From the prospectus:

'We are a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, business, and healthcare. In addition to our online programs, we offer ground programs at our traditional campus in Phoenix, Arizona and onsite at the facilities of employers.'

Online university focusing on post-graduate degrees education, business, and healthcare for working professionals. LOPE has increased enrollment from 3,000 students at the end of 2003 to approximately 22,000 students on 9/30/08. 62% of students enrolled were seeking masters degrees with 92% of students 25 or older.

LOPE began as a campus based college approximately 60 years ago. In February of 2004, investors turned LOPE into a for-profit university and focused on growing the online program. Currently 87% of enrolled students were in the on-line program with just 13% traditional on-campus students.

Tuition - Tuition for a full program would equate to approximately $15,000 for an online master’s program (non-MBA), approximately $47,000 for a full four-year online bachelor’s program, and approximately $62,000 for a full four-year bachelor’s program taken on campus. The eMBA program tuition is $44,000. LOPE raised tuition an average of 5% for the 2008/2009 academic year.

Sector - Approximately 18 million people are enrolled in postsecondary institutions generating approximately $385 billion in revenues. In the past decade online post-secondary education has been a nicely growing area as many working adults prefer the flexible schedules of an online accredited degree granting institution.

Approximately 70% of LOPE's revenues are derived from tuition financed under federal student financial aid programs. These programs include a myriad of federally funded and/or backed grants and loans.

Recession/Credit issues - We've two competing drivers here. During previous economic slowdowns we've seen post-secondary enrollments from adults (25+) rise as people go back to school to retrain and/or work towards a degree to compete in a slowing competitive economy. This current slowdown however is coupled with a freeze in available credit, including private student loans. 40% of full-time postsecondary students receive student loans. With LOPE's eMBA program costing $44,000, student loans are an important component in LOPE's revenues. While a portion of the student loan market is backed by low-interest government backed loans, as tuition costs have risen the private loan market has been an increasingly relied on method of paying for post-secondary education. In 2007, private student loans accounted for over 5% of LOPE's revenue. Also as credit conditions have tightened, fewer banks are participating in the Federal student loan program itself, making obtaining even these loans potentially more difficult. We've two competing trends here - 1) economic slowdown is generally good for postsecondary education with 2) tight credit making student loans more difficult to obtain. While the education group tends to be a nice counter cyclical play, the current credit issues mitigate somewhat the usual counter-economy trend.

Investigation - The Department of Education has issued subpoenas (8/0 to LOPE in an apparent investigation into whether LOPE improperly compensated enrollment counselors/managers in violation of Federal regulations. Investigation is still in infancy stage. LOPE is also facing a lawsuit by a former employer relating to incentive based compensation to enrollment counselors/managers.

Competitors - As more brick and mortar universities offer online programs, LOPE's competition includes thousands of on-line programs across the United States. There are however a few publicly traded on-line for-profit universities. These include CPLA, APOL, CECO, COCO, DV and ESI. Recent successful ipos LRN and APEI are also on-line education related, although neither is a direct comparable to LOPE. Below we look at how LOPE stacks up financially with those in this group.

Financials

$1 in cash, no appreciable debt.

Revenues have grown strongly while margins remain slim and net profits constrained. LOPE has been very aggressive in student recruiting the past two years and it has been reflected in overall enrollment and revenues. LOPE quadrupled enrollment counselor staff over the past two years.

Revenues in 2005 were $52 million, in 2006 $72 million, in 2007 $99 million and through 3 quarters on pace for $154 million in 2008.

Selling expenses have grown as a percentage of revenue, each of the past 3 years. This can indicate competition for new students has consistently grown as annually LOPE is paying more as a percentage of revenue to recruit a student, this even with the annual tuition increases. Even so, LOPE's revenue increase is impressive and a direct reflection of their success in expanding degree programs and recruiting students to fill these newer programs.

LOPE has been profitable since 2006.

Seasonality - LOPE's strongest quarters are the 3rd and 4th quarter annually. The 3rd quarter markets the beginning of their campus semester while online programs generally begin their academic year in both the 3rd and 4th quarter. 4th quarter annually has had the strongest revenues and margins.

2008 - Note that LOPE will be taking a nearly $9 million charge in the 4th quarter due to ipo related compensation charges. I have folded this out of projections as well as other post-ipo non-recurring charges and dividends. Revenues should be in the $154 million ballpark assuming LOPE has a strong 4th quarter as anticipated. Operational costs are high as instructional costs eat up approximately 32% of revenues and selling (student recruitment) eats up approximately 40% of revenues. Total operating expenses account for 89% of revenues, leaving operating margins for 2008 at a slim 11%. This is actually an improvement over 2007's 8%-9% as LOPE has kept their other non-selling costs in check. Factoring in short term debt/interest income as well as taxes, net margins should be in the 6% ballpark. Earnings per share for 2008 should be in the $0.20-$0.25 range. On a pricing of $15, LOPE would trade 66 X's 2008 earnings.

2009 - LOPE will increase revenues 55% in 2008. The big question here is this: Can LOPE continue their massive 2008 revenues growth? I suspect LOPE will not be able to approach 2008 revenue gains as this period coincided with regulatory approval that allowed LOPE to increase enrollments. Lets assume a more muted growth in the 25% range, which may be conservative. However two things should constrain rapid 2009 revenue growth- 1) the slowing economy should constrain tuition increases in 2009 from 2008's record 5% increase; 2) the ongoing credit issues may mute enrollment growth for the foreseeable future. A 25% revenue increase in 2009, would still put LOPE above the sector average. LOPE will never have strong operating margins due to operating expenses. They should be able to increase net margins slightly around the edges however. If we assume a $190-$200 million revenues run rate with slight margin expansion, LOPE should earn approximately $0.35 in 2009. This is a ballpark number and I would not be surprised be a number 10 cents to either side. The problem here is the very high sales expense that is preventing strong bottom line growth. That isn't going to change, so LOPE will most likely filter down revenue growth on a 1:1 level going forward, don't expect an economy of scale here on revenue growth. On a pricing of $15, LOPE would trade 42 X's 2009 earnings.

The online education sector has been a safe port in the 2008 market storm. comparable companies are performing relatively well with DV upon the year, APOL flat, CPLA down 23%, LRN down 10%, APEI flat, and COCO flat. Only CECO has underperformed the overall market. Even with the potential credit issues hampering growth, this sector has indeed been a counter-cyclical play in 2008 with online education stocks outperforming the market as a whole. **Just as important, forward earnings estimates for this group have remained stable throughout 2008, one of the few groups to do so.

Comparisons:

LOPE - $646 million market cap on a $15 pricing. Growing revenues a very strong 55% in 2008 and coming public 66 X's 2008 earnings.

CPLA - $842 million market cap. Growing revenues 22% in 2008 and trading at 31 X's 2008 earnings.

APOL (which includes the largest US online university, University of Phoenix) - $10.8 billion market cap with 16% revenues growth in 2008 and trading 19 X's 2008 earnings.

APEI (not directly comparable due to focus on military veterans) - $690 million market cap with 53% revenues growth in 2008 and trading 48 X's 2008 earnings.

Conclusion - LOPE is a good candidate to break the ipo drought. Post-secondary education has traditionally been counter-cyclical, enjoying enrollment growth during difficult economic times. We certainly have difficult economic times. Looking at stock performance in 2008 for the on-line education group, they've most certainly heavily outperformed the market as a whole. In addition LOPE's revenue growth is impressive and, while growth should slow going forward, LOPE looks to outgrow the sector as a whole in 2009. Caution here for the following however: 1) IPOs in 2009 have performed abysmally and in this climate you do not want to pay up for anything; 2) Margins are slim here. They are on par with CPLA, but behind the rest of the group. With strong growth and lower margins, it appears LOPE is 'buying' some of their revenue growth. 3) PE ratio for this current climate appears high. With the revenue growth, a high pe is not a major concern. What is a concern is the market not willing to pay high multiples currently.

Slight recommend here in range. I like the sector here and I like LOPE's growth and prospects. There is enough for caution here and the lower LOPE prices, the more I am interested. Ideally I would like to see a pricing below range or at the low end of the pricing range. Two online education ipos in the past year have each not only held pricing, but are up nearly 100% (APEI) and 15% (LRN). In this ipo market, that is unusual and makes LOPE a good candidate to break the ipo drought and also hold a reasonable pricing.

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.