February 25, 2011, 10:16 am

MEDH - MedQust

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

MEDH - MedQuist

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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


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

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

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

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

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

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

February 11, 2011, 8:39 am

KMI - Kinder Morgan

KMI - Kinder Morgan

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

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

From the prospectus:

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

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

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

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

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

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

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

In the US, KMP is:

* the largest independent transporter of petroleum products;

* the second largest transporter of natural gas;

*the largest provider of contracted natural gas treating services;

*the largest transporter of CO2;

*the second largest crude oil producer in Texas;

*the largest independent liquids terminal operator;

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

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

KMI's interests in KMP:

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

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

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

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


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

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

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

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

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

February 8, 2011, 7:49 am

IFT - Imperial Holdings

IFT - Imperial Holdings

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

Management and directors will own the non-floated shares.

IFT will not pay a dividend.

From the prospectus:

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

IFT finances life insurance premiums and also purchases structured settlements.

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

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

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

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

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

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

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

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

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


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

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

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

February 2, 2011, 11:32 am

EPOC - Epocrates

EPOC - Epocrates

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

Competitors include WBMD and UpToDate inc...


$3 per share in cash post-ipo.

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

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

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

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

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

4th quarter is historically the strongest.

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

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

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

January 28, 2011, 2:48 pm

VELT - Velti

VELT - Velti

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

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

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

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

From the prospectus:

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

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

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

Ads can be placed in 30+ countries.

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

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

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

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

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

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

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


$1 per share in net cash post-ipo.

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

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

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

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

January 25, 2011, 5:05 pm

DMD - Demand Media

DMD - Demand Media

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

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

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

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

From the prospectus:

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

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

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

The two segments:

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

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

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

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

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

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

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

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


About $1 per share in cash post-ipo.

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

23% of 2010 revenues derived from eHow.com.

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

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

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

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

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

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

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

December 15, 2010, 7:45 am

FLT - FLeetCor

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

FLT - FleetCor Technologies

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

December 9, 2010, 4:32 pm

BONA - Bona Film Group

BONA - Bona Film Group

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

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

From the prospectus:

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

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

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

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

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

BONA also runs a talent agency.

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

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

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

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


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

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

BONA has been GAAP operationally profitable since at least 2007.

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

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

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

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

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

December 9, 2010, 8:31 am

DANG - E-Commerce China Dangdang

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

DANG - E-Commerce China Dangdang

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

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

From the prospectus:

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

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

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

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

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

78% of revenues generated from repeat customers.

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

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

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

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


$2.25 per ADS net cash post-ipo.

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

84% of 2010 revenues from book sales.

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

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

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

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

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

November 22, 2010, 3:36 pm

IPHI - Inphi

IPHI - Inphi

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

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

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

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

From the prospectus:

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

IPHI's semiconductors address bandwidth bottlenecks in networks.

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

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

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

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

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

Products can operate up to 100 gigahertz.

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

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

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

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

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


$3 per share in cash post-ipo.

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

2009 was IPHI's first year of operational profitability.

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

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

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

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

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

November 8, 2010, 8:55 am

PRMW - Primo Water

PRMW - Primo Water

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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


$11 million in net debt post-ipo.

PRMW has never had an annual operational or net gain.

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

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

October 28, 2010, 3:46 pm

BOX - Seacube

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

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

Quick look at BOX and the two direct competitors trading:

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

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

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

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

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

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

BOX - SeaCube Container Leasing

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

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


$700 million in net debt post-ipo.

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

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

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

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

Quick look at two larger competitors TAL and TGH:

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

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

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

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

October 21, 2010, 7:46 am

VRA - Vera Bradley


VRA - Vera Bradley

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

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

From the prospectus:

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

28 year old VRA primarily sells women's handbags.

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

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

Handbags can be viewed here:


Indirect and direct sales channels.

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

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

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

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

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

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


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

Fiscal year ends 1/31 annually.

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

VRA has been profitable since at least 2005.

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

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

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

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

October 19, 2010, 6:54 am

SHP - ShangPharma

SHP - ShangPharma

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

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

From the prospectus:

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

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

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

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

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

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

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

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


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

SHP has been operationally profitable since at least 2006.

15% tax rate.

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

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

Comparison between SHP and WX.

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

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

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

September 30, 2010, 7:02 am

RNO - Rhino Resource Partners

RNO - Rhino Resource Partners

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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


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

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

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

Distribution coverage from cash flows projected at 107%.

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

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

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

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

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

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

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

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

September 25, 2010, 2:10 pm

COR - CoreSite Realty Corp

COR - Coresite Realty Corp

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

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

From the prospectus:

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

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

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

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

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

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

75% renewal rate in 2009.

68% of data center space location in California.

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


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

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

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

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

August 20, 2010, 12:12 pm

GMAN - Gordmans Stores

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

GMAN - Gordmans Stores

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

Footwear is sold under a licensing agreement with DSW.

All store locations are leased.


$1 per share in net cash post-ipo.

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

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

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

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

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

Solid retailer coming public attractively priced.

August 9, 2010, 7:06 pm

NXPI - NXPI Semiconductors

NXPI - NXPI Semiconductors

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

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

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

From the prospectus:

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

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

58% of revenues from Asia-Pacific region.

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

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

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

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


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

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

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

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

August 1, 2010, 5:16 pm

CHKM - Chesapeake Midstream Partners

CHKM - Chesapeake Midstream Partners

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

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

From the prospectus:

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

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

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

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

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

CHKM relies on CHK for virtually all revenues.

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

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

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


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

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

Historically $350-$400 million in annual revenues.

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

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

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

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

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

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

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

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

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

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

July 18, 2010, 12:20 pm

RLD - RealD

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

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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


$1 per share net cash post-ipo.

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

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

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

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

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

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

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

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

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

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

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

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

June 29, 2010, 11:28 am

TSLA - Tesla Motors

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

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

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

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

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

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

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

From the prospectus:

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

Two things of note:

TSLA focuses exclusively on electric automobiles and electric powertrains.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

June 21, 2010, 1:07 pm

ONE - Higher One Holdings

ONE - Higher One Holdings

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

June 15, 2010, 12:20 pm

CBOE - CBOE Holdings

CBOE - CBOE Holdings

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

From the prospectus:

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

May 11, 2010, 4:56 pm

NKA - Niska Gas Storage Partners

NKA priced this evening at $20 1/2.

NKA - Niska Gas Storage Partners

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

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

From the prospectus:

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

April 24, 2010, 10:55 am

4/19 Week in Review

IPO Week in Review.

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

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

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

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

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

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

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

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

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

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

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

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

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