April 22, 2010, 9:44 am

DVOX - Dynavox

DVOX - Dynavox

DVOX - Dynavox plans on offering 9.375 million shares at a range of $15-$17. Assuming over-allotments, the deal size will be 10.8 million shares. Piper Jaffray and Jefferies are leading the deal, William Blair and Wells Fargo are co-managing. Post-ipo DVOX will have 31 million shares outstanding for a market cap of $496 million on a pricing of $16. 1/3 of the proceeds will go to debt repayment, the remainder will go to insiders.

Vestar will own 35% of DVOX post-ipo and will control voting interests via a separate share class.

From the prospectus:

'We develop and market industry-leading software, devices and content to assist people in overcoming their speech, language or learning disabilities. Our proprietary software is the result of decades of research and development and our trademark- and copyright-protected symbol sets are more widely used than any other in our industry.'

DVOX is a leader in two areas for assistive technologies: speech generating technologies and special education software.

DVOX is the largest provider of speech generating technology. Users communicate through synthesized or digitized recorded speech. Users are those who are unable to speak, such as adults with amyotrophic lateral sclerosis, or ALS, often referred to as Lou Gehrig's disease, strokes or traumatic brain injuries and children with cerebral palsy, autism or other disorders. Devices can be controlled/used via touch or even via tongue, head or eye movements. 82% of revenues are derived from DVOX's speech generating products.

Special Education software - 18% of revenues. Used by children with cognitive challenges, such as those caused by autism, Down syndrome or brain injury; physical challenges, such as those caused by cerebral palsy or other neuromuscular disorders; as well as by children with learning disabilities, such as severe dyslexia. DVOX's proprietary symbol sets are the most widely used for creating symbol-based activities and materials in the industry. Funding generally comes from federal sources.

I like this statement in the S-1: 'We believe that our speech generating technologies can transform the lives of those who have significant speech, language, physical or learning challenges by enabling their communication.'

Two most recent products are the EyeMax eye-tracking accessory and the highly portable Xpress speech generating device.

Speech generating products are sold via a direct sales force focused on speech language pathologists. Special education software is sold via internet and direct mail.

Products are sold in the US, Canada and Great Britain.


Speech Generating - 20 million adults and children in the US suffer from conditions that may lead to speech impairment. DVOX believes the annual new market for speech products is $1.8 billion in their geographic market. DVOX does believe this potential end market is currently under penetrated. Growth driver include a growing awareness among speech pathologists and the underserved population. DVOX believes speech generating products are only now achieving mass awareness. A big reason for this are technological advances making the products far more accurate and user friendly.

***I have a feeling that speech generating products are only now beginning to reach 'tipping point' stage. With the aging US population coupled with technological advances in the products themselves, this is a fantastic growth spot over the next 10+ years...and DVOX is far and away the market leader. Assuming the financials look at least okay, this is a very unique, interesting and strong ipo.

Special Education Software - In the US 6 million students are deemed to require special education with a market opportunity of $1 billion+ annually. DVOX believes higher education standards coupled with increased special education funding are the growth drivers for their Special Ed software.

Risks - A large chunk of DVOX's revenues are derived from the public school system as well as Medicaid and Medicare. With budget shortfalls, each of the preceding is finding itself in 'cutback' mode. This could stall growth somewhat, particularly in DVOX's special education segment. I doubt very much that funding cutbacks are going to effect the speech generating segment however as there are few voice communication alternatives out there currently for those without speech.

Competition: From the S-1: 'Within our particular areas of speech generating technology and interactive software for students with special educational needs, we believe we are the largest player and have no dominant competitors.' Rarely do you see in a prospectus a statement this strong when describing the competition.


$30 million in net debt post-ipo. Expect DVOX to pay this down via cash flows going forward. Debt not enough to impede operations.

Fiscal year ends 6/30 annually. FY '10 ends 6/30/10.

Revenues have increased annually for at least five years in a row. DVOX has been profitable since at least FY '05.

Seasonality - Revenues are stronger in the back half of the fiscal year, with the 4th quarter(6/30) being the strongest. In FY '09 33% of revenues were derived in the 4th quarter of the fiscal year.

FY '09(ended 6/30/09) - Revenues of $91 million, a 12% increase over FY '08. Gross margins were strong at 73%. Operating expense ratio of 52%, operating margins of 21%. Solid margins here. Plugging in debt servicing and full taxes, net margins were 11 1/2%. EPS of $0.34.

FY '10 - Strong start to the fiscal year for DVOX through the first 2 quarters of the fiscal year. Keep in mind that DVOX's strongest quarters are to come and DVOX should post a strong number in the 6/30/10 quarter.

***Revenues should grow a strong 37% to $125 million. As I noted above, DVOX's speech generating products appear to be hitting critical mass as revenues in that spot are accelerating strongly here in FY '10.

Gross margins are improving as are operating expense ration, although the latter only slightly. Gross margins should be 75%. Operating expense ratio of 51%, putting operating margins at a quite healty 24%.

Debt servicing should eat up 9% of revenue, well below my 20% threshold. Again, I would expect this debt to be erased altogether sometime in FY '11.

Net after tax/debt margins of 15%. Earnings per share of $0.63. On a pricing of $16, DVOX would trade 25 X's FY '10 earnings.

FY '11 - Really is just a guess here until we see the 6/30 quarter, which will set the tone for FY '11. Let us take a guess though. I do not expect another 30%+ quarter as some of that strength is due to easy recession year comparisons in FY '09. Note though that even in a tough economic climate, DVOX grew FY '09 revenues 11%. I would peg FY '11 growth around 20%, a conservative number. Gross margins have gone about as far as they can I think at 75%. Operating margins should improve slightly as should net margins. On 16 1/2% net margins and 20% revenues growth, DVOX would earn $0.80 per share. On a pricing of $16, DVOX would trade 20 X's FY '11 earnings.

Conclusion - Market leader in what should be a nice growth area over the next decade. Strong recommend in range here, I like this ipo quite a bit. DVOX looks poised to have a great future, very reasonable market cap in range when we take into account the potential here going forward. This one has the potential and the look of a long term winner

April 12, 2010, 7:05 pm

CELM - Anatomy of a trade

I've not ever done this before. However it seems that most 'ipo experts' out there do nothing but plug themselves even though most do not even trade or own ipos. At tradingipos.com we put our money where our analysis is. Here is a little self-promotion:

We liked CELM on ipo quite a bit, especially with the slashed $4.50 pricing. We owned a large position in the stock, which we sold the last of today at $7.70. We post real-time trades on the forum in our subscribers section, and have been for five years.

We consistently make money at tradingipos and have been fortunate to make a nice living for a decade now exclusively trading these ipos. As important, we help subscribers make money.

Before posting the pre-ipo piece on CELM, here are the timestamps/comments on CELM from the forum on our subscribers section. All, but the last are from me"

Posted: 28 Jan 2010 11:40 am Post subject:

CELM..just looked at prospectus, appears same number of shares outstanding to with new range, so this is a nice reduction in market cap and valuation. at $4.50, it is priced to work.

Posted: 29 Jan 2010 08:01 am Post subject:

celm added 4.64 on open..no stop.


Posted: 03 Mar 2010 08:58 am Post subject:

celm, yep we all here know this is going to run, most likely to at least 7ish...just a matter of time after amcf popped. haven't been this sure of something in a long time


Posted: 09 Mar 2010 07:24 am Post subject:

CELM, yes $8 target. As I have been saying, this thing should hit at least $7 and that is the area I am looking to take some off.


Posted: 16 Mar 2010 07:36 am Post subject:

celm, am already loaded in the name..my avg right around 4.85-4.90.


Posted: 12 Apr 2010 12:57 pm Post subject:

celm, playing out perfectly here although it is setting up for blow-off gap up in morning...I am out here of all 7.7's for final 1/3. nearly 60% gain on that last 1/3


and this post today from a subscriber:

Posted: 12 Apr 2010 07:03 am Post subject: CELM

just wanted to thank you guys for your input on CELM and Bill for your analysis. Even though I sold a bit early last week I still managed to make my year with it by taking oversized positions on the 2 runs from sub $5 to low to mid $6.


Following is the analysis piece I did on CELM for subscribers back in January pre-ipo. These pieces are the basis for my trades...trades/positions I've posted in the subscriber section of tradingipos.com for 5 years now.

Okay, the self-promotion is over...Anyone publishing the CELM analysis piece below, please do so with the above. The piece is now a bit dated as CELM has moved so much and it is now intended as a companion piece to the live trading comments posted above. Thanks.

CELM - China Electric Motor

CELM - China Electric Motor plans on offering 6.7 million shares at a range of $5.50-$6.50. Insiders will be selling 2.5 million shares in the deal. If over-allotments are exercised, the deal size will be 7.5 million shares. Note that in addition to the shares being offered, CELM is giving the underwriters warrants for an additional 425k of stock. Roth and Westpark are leading the deal. Post-ipo, CELM will have 20 million shares outstanding for a market cap of $120 million on a pricing of $6.

Ipo proceeds will be used to increase manufacturing capacity, to purchase more industrial space, to modernize factory equipment and for other general corporate purposes.

To Chau Sum will own 50% of CELM post-ipo. He is not listed as a company officer, however CELM's CFO and Chairman are also involved in To Chau Sum's investment and operation arms. While not operating CELM day to day, he appears to be the 'money guy' behind the creation of CELM and fully in control of management. CELM was once a shell symbol and there are a myriad of transactions with subsidiaries of China Electric, To Chau Sum's investment vehicles and WestPark Capital.

Westpark Capital founder Richard Rappaport will own 6% of CELM post-ipo. Mr. Rappaport also owns a similar % stake in recent ipo ZSTN and has already filed to sell that stake. Expect similar here with an insider secondary coming a few months after ipo.

**Private Placement - CELM did a private placement 10/6/09 at $2.08 per share. The ipo price mid-range is nearly triple this private placement price just 3 1/2 months later.

From the prospectus:

'We engage in the design, production, marketing and sale of micro-motor products. Our products, which are incorporated into consumer electronics, automobiles, power tools, toys and household appliances, are sold under our "Sunna" brand name.'

Micro-motors for consumer products. Produces both AC and DC motors, CELM notes that micro-motors are 'simple to control, easy to operate and are generally very reliable.'

Motors for home appliances account for approximately 65% of revenues, motors for automobiles 22%.

Automobile uses for micro-motors include automated car seats, windows, trunks, door locks, mirrors, sliding doors and roofs.

Home appliance uses include including hairdryers, air conditioners, paper shredders, soy milk makers, juice makers, electric fans, heaters and massagers.

As micro-motors are used in consumer appliances and newer model autos, CELM is a direct play on 1) growing middle class in China; and 2) the continued shift to China for the manufacture of small electronic appliances and micro-motor products. The latter being driven by lower cost manufacturing base in China as well as a growing end market in China and surrounding countries.

Motors sold directly to OEM's and distributors. CELM produces 28 different series of motors with 1,200 different product specs. Majority of CELM's revenues are derived from custom products as only 6.5% of sales are for stock 'off the shelves' motors.

Top seven customers account for over 50% of revenues.


With any technology manufacturer, gross margins indicate where on the 'tech scale' the company sits. The higher the margins, the 'higher tech' the company which generally leads to a higher than average multiple. Conversely lower margins indicate a 'commoditized' type tech sector which generally lead to lower multiples. CELM resides in the lower margin area of the tech ladder. Through the first nine months of 2009, CELM's gross margins were 28%.

Approximately $1 per share net cash post-ipo.

CELM has no real accounts receivables issues. They've had no receivables on the books for over 30 days for the past few years.

2009 - Through the first nine months, total revenues look to be on track for $88 million, a 65% increase over 2008. Gross margins as noted of 28%. Operating expense ratio of 10%, putting operating margins at 18%. As is becoming the norm in China, tax rate is right around 25%, putting net margins at 14%. Earnings per share should be $0.62. On a pricing of $6, CELM would trade 9 1/2 X's 2009 earnings.

2010 - CELM's growth in 2009 was a little deceiving as their quarter to quarter revenues were flat through the first 3 quarters of '09 at $19 million, $22 million and $22 million. CELM had a huge revenues jump the first quarter of 2009 and maintained that new level throughout the year. Actually this is similar to their previous two years as it appears their new contracts kick in with the new year. We'll have a much clearer picture of CELM's 2010 revenue story after the first quarter. I would be surprised if CELM is able to grow revenues in 2010 much more than 30%. I am far more comfortable plugging in 25% revenue growth here. The good news is that CELM's gross margins do appear to be improving a bit due to product mix. At a $110 million run rate in 2010, with 30% gross margins CELM should earn $0.90. This may prove to be a bit conservative, but with a micro cap I'd rather err on the conservative side. On a pricing of $6, CELM would trade 6 1/2 X's 2010 earnings.

A quick look here at CELM and HRBN. HRBN produces all sorts of motors, while CELM focuses exclusively on micro-motors. HRBN - $569 million market cap. Currently trading 9 X's 2010 earnings estimates with a projected 90% revenue growth rate. Note that a large chunk of HRBN's 2010 revenue growth is expected to be driven by a significant 2009 acquisition. CELM - $120 million on a pricing of $6. Would be trading 6 X's conservative 2010 estimates with a 25% revenue growth rate. We have a growth and margin comparable here in recent ipo, ZSTN - both ZSTN and CELM are lower margin and similar 2010 growth rates; however, very different tech sector. I do believe CELM is much more viable growth story longer term than ZSTN. CELM has better gross margins than ZSTN, actually much better at a 2009 28% compared to ZSTN's 16%. In addition, CELM appears to be slightly increasing gross margins, while ZSTN's are faltering. Each expected to grow 25% in 2010. ZSTN currently trades 8 1./2 X's 2010 estimates, so simply on that basis it appears there could be appreciation here for CELM in range.

Conclusion - Somewhat commoditized Chinese tech microcap coming at an attractive multiple. CELM has shown strong growth in a difficult 2009. CELM has been operating cash flow positive since 2006 and has improved those cash flows each of the past three years. That is a key here as we have seen numerous China microcap ipos that have been GAAP positive but operating cash flow negative. CELM has not only been operating cash flow positive for 4 years, they've increased those cash flows annually. That is a nice positive in an obscure microcap. The lower gross margins here means we should not get too excited, however in range this deal looks priced to work. Below range it is a no-brainer.

April 7, 2010, 10:47 am

HTHT - China Lodging Group

tradingipos.com piece done for subscribers pre-ipo.

HTHT - China Lodging Group

HTHT - China Lodging Group plans on offering 9 million ADS at a range of $10.25-$12.25. Assuming over-allotments are exercised, the deal size will be 10.35 million shares. Goldman Sachs and Morgan Stanley are leading the deal, Oppenheimer co-managing. Post-ipo HTHT will have 60.25 million ADS equivalent shares outstanding for a market cap of $678 million on a pricing of $11.25. Ipo proceeds will be used to fund expansion.

*** Founder, Executive Chairman of the Board of Directors Qi Ji will own 46% of HTHT post-ipo. Qi Ji also co-founded HMIN and CTRP and served as CEO of each. Qi Ji currently site on the Board of Directors of CTRP. CTRP and HMIN are two of the most successful China ipos of the past decade. In addition CTRP will be purchasing an 8% stake in HTHT on ipo at ipo pricing.

From the prospectus:

'We operate a leading economy hotel chain in China.'

HTHT commenced operations in 2005.

In '08 and '09 HTHT had the highest revenues generated per available room, or RevPAR, and the highest occupancy rate in China.

HTHT operates under the HanTing Express Hotel, HanTing Seasons Hotel and HanTing Hi Inn.

In 2009 approximately 68% of room nights were sold to members of HTHT's HanTing Club loyalty program.

HTHT utilizes a lease and operate model, directly operating the majority of their branded hotels. HTHT does franchise and manage hotels as well. As of 12/3109, HTHT had 173 leased-and-operated hotels and 63 franchised-and-managed hotels. In addition, as of the same date, HTHT had 21 leased-and-operated hotels and 123 franchised-and-managed hotels under development. HTHT currently operates in 39 cities with 28,360 total rooms.

2009 occupancy rate was strong at 94%. Average daily room rate was approximately $25 US with RevPAR at a shade over $23 per day.

Sector - We've seen two ipos this decade in this sector, HMIN and SVN. The lodging industry in China consists of upscale luxury hotels such as four and five star hotels and other accommodations such as one, two and three star hotels and guest houses. The industry grew from approximately 237,800 hotels in 2003 to approximately 315,900 hotels in 2008, and 20.1 million rooms in 2003 to 27.3 million rooms in 2008.

Seasonality - 1'st quarter annually tends to be HTHT's lightest.

HTHT plans to add approximately 90 hotels in 2010, the majority of which will be franchised as opposed to leased and managed. This is key as HTHT's franchised hotels bring in less revenue per hotel than HTHT's leased and managed hotels.


$2.25 in net cash post-ipo.

HTHT moved into operational profitability in 2009.

97% of 2009 revenues were derived from leased and operated hotels.

2009 - $185 in revenues, a 65% increase over 2008. Growth was driven by an increase in hotels and rooms as RevPAR and occupancy remained stable. Gross margins were 21%. Operating margins 6%. HTHT's tax rate is approximately 25%, putting net margins at approximately 4%. Earnings per share were $0.13. On a pricing of $11.25, HTHT would trade 86 X's 2009 earnings.

2010 - HTHT outgrew both SVN/HMIN in 2009 and that should continue in 2010 with the aggressive growth plan. Revenues however will not come close to the 65% increase in 2009 though due to the mix of new hotels leaning towards franchised as well as the flat revenues the back half of 2009. I would plug in 30% revenue growth in 2011, for a total of $240 million. Gross margins should improve to 25%, operating margins 11%. Net margins after tax of 8.25%. Earnings per share of $0.33. On a pricing of $11.25, HTHT would trade 34 X's 2010 earnings.

Quick comparison with SVN and HMIN:

SVN - $320 million market cap. Trading 1 1/2 X's '10 revenues and 33 X's '10 estimates with a 28% revenue growth rate.

HMIN - $1.33 billion market cap. Trading 3 X's '10 revenues and trading 38 X's '10 estimates with a 23% '10 revenue growth rate.

HTHT - $678 million market cap on $11.25. Would trade 2.8 X's '10 revenues and 34 X's '10 earnings with a 30% revenue growth rate in '10.

Conclusion - All three of these(HMIN/HTHT/SVN) are sacrificing shorter term bottom line growth in a race to grow locations and rooms. The problem with this strategy is any appreciation for HTHT over pricing range makes them look awfully pricey when put beside nearly every other China stock across all sectors. That is a perceived valuation issue for this group currently as top line growth should be strong, but bottom line results continue to make the sector look pricey. This deal is a recommend in range for one big reason: HTHT's founder & CEO has also co-founded and was CEO of two very successful Chinese ipos this decade CTRP and HMIN. Factor in that CTRP is purchasing a nice chunk of HTHT on ipo pricing and this is a deal that should work shorter term in range. Mid-term, all depends on what multiple the market wants to give this sector. This is a very competitive group and pricing power(or lack of) will come into play as the economy hotel market becomes better covered and saturated.

Recommend shorter term in range.

March 28, 2010, 8:05 pm

FIBK - First Interstate BancSystem

FIBK - First Interstate BancSystem

FIBK - First Interstate BancSystem plans on offering 8.7 million shares at a range of $14-$16. Assuming over-allotments are exercised the deal size will be 10 million shares. Barclays is leading the deal, Davidson, KBW and Sandler O'Neill co-managing. Post-ipo FIBK will have 41.2 million shares outstanding for a market cap of $618 million on a pricing of $15. Ipo proceeds will be utilized to support growth efforts, pay off remaining long term debt and for general corporate purposes.

FIBK's controlling family, led by Chairman Thomas Scott and Vice Chairman James Scott, will own 33% of FIBK post-ipo.

Dividends - FIBK has regularly issued dividends to shareholders. Over the past year dividends have been $0.11 per quarter. Assuming these levels continue post-ipo, FIBK would be paying holders $0.44 per share annually. Annual yield at $15 would be 2.9%.

From the prospectus:

'We are a financial and bank holding company headquartered in Billings, Montana...We currently operate 72 banking offices in 42 communities located in Montana, Wyoming and western South Dakota.'

As of 12/31/09, FIBK had assets of $7.1 billion, deposits of $5.8 billion, and loans of $4.5 billion.

Company was established by Homer Scott in 1968 with a focus on serving the communities of Wyoming and Montana. Currently FIBK has 72 locations in 42 communities. FIBK is the largest banking presence in over 1/2 of their communities. Overall, FIBK is ranked first in deposits in Montana and second in Wyoming. 50% of deposits are in Montana, 36% in Wyoming and 14% in South Dakota.

Acquisition: In 1/08 FIBK entered South Dakota with the purchase of First Western Bank and their 18 locations.

Strengths - The biggest strength here is that FIBK has not been operating community banks the past few years in Nevada, California or Florida. The three states in which FIBK does operate(Montana, Wyoming and South Dakota), have seen a more stable real estate valuation as well as a relatively stronger economy overall. Unemployment rates as of 12/09: Montana at 6.7%, Wyoming at 7.5% and South Dakota at 4.7%. Each is well below national 10% average. Economy in FIBK's area driven by agriculture and energy.

FIBK has remained profitable and growing through the tough banking cycle of the past few years. 22 consecutive years of profitability.

Community model - Each of FIBK's local bank presidents have discretion and responsibility for loan deposit decisions. Loans and assets are funded directly from local deposits.

Future expansion to be funded via organic growth and potential acquisitions, including FDIC assisted acquisitions.


Bulk of net revenues are derived from the interest rate spread between loan interest earned and deposit interest paid out. FIBK has been able to retain steady spreads of 4-4 1/2% points over the past 4 years.

FIBK has not leveraged their deposits, on 12/31/09 the loan to deposit ratio was 78%. This is well below the historical 85%-90%, a result of tightening loan standards as well as writing off a number of loans in 2008 and 2009. Loan write-offs have been in the 1% of total loan dollars each of the past two years. While historically this is a pretty large bump up for FIBK it is far below many community banks elsewhere in the US.

Operating income decreased in '08 and '09 due to the increase in loan write-offs. 2010 should continue to see a significant loan write-off amount, most likely again in that 1% of loans outstanding ballpark. Why? FIBK's under-performing loans were at 3% of all loans outstanding as of 12/31/09. We can pretty safely assume FIBK will write-off at least 1/3 of those in 2010. This is significant in that it will be difficult for FIBK to increase the bottom line strongly until under-performing loan levels decrease.

65% of loan portfolio is real estate related. Approximately 50% of loan portfolio are commercial loans.

**On a pricing of $15, FIBK would be coming public at 1.3 X's tangible book value.

As FIBK has tightened loan issuance, cash on hand has grown significantly. With a loan book of $4.5 billion, cash on hand sits at $623 million well above FIBK's $163 million under-performing loan levels. Unless those troubled loans increase significantly, it does appear FIBK's cash reserves are strong enough to handle the write-offs and still maintain adequate capital.

2009 - $197 million in net interest income after writing off $45 million in loan losses. Total revenues were $298 million. Operating income was was 27%, net margins 18%. Note that these are a tad skewed as we are using net revenues after written off loans for margins. Earnings per share were $1.31. On a pricing of $15, FIBK would trade 11-12 X's 2009 earnings.

**Note that FIBK's operating income decreased quarterly throughout 2009. Loan write-offs and tightening of loans given out were to blame along with non-interest income. FIBK is going to have a very difficult time even matching 2009's $1.31 eps. Loan write-offs should increase slightly in 2010, while the rest of FIBK's operations should remain relatively stable. I would expect a net here in 2010 in the $1.25 ballpark net of any future acquisitions.

GBCI is probably the closest public comparable. FIBK and GBCI both with a shade over 3% in under-performing loans and each right around 1.3-1.4 X's book value. GBCI is posting much stronger interest spreads at 4.8% to FIBK's 4%. Reason is simple: GBCI is leveraging their deposits to the tune of 2 1/2 times deposits(2.5) while FIBK does not with loans at 77%(0.77) of deposits. FIBK would seem to be the more conservative of the two.

Conclusion - Solid community bank coming pretty fully valued for 2010. FIBK appears in no danger of running into liquidity and/or operational troubles. However, outside of acquisitions, growth is going to be difficult to come by over the next year due to increases in doubtful loans and the needed cash horde to sustain any write-off increases. If cash is sitting on the balance sheet, it impacts the interest rate spreads in which FIBK puts money on the bottom line, Indeed spreads in 2009 shrank to just over 4%, from the historical norm of 4.5%(since 2005). Reason is 100% combination of loan write-offs and the large amount of cash on hand. Neutral in range here, would become very interested if pricing occurs closer to tangible book value. Solid conservatively run community bank operating in a region driven by agriculture and energy.

March 16, 2010, 7:00 am

FNGN - Financial Engines

FNGN - Financial Engines

FNGN - Financial Engines plans to offer 10.6 million shares at a range of $9-$11. Insiders will be selling 4.7 million shares in the deal. Assuming over-allotments are exercised, the deal size will be 12.2 million shares with insider sales remaining the same at 4.7 million shares. Goldman Sachs and UBS are leading the deal, Cowen and Piper Jaffray are co-managing. Post-ipo FNGN will have 41.1 million shares outstanding for a market cap of $410 million on a pricing of $10. Ipo proceeds will be used for general corporate purposes.

Note that FNGN does have a significant amount of option shares that will be exercised over the next few years. Currently FNGN has 11.6 million shares in the form of granted options at an exercise price of $6.07 average.

Foundation Capital will own 14% of FNGN post-ipo, Enterprise Associates 11% and Oak Hill Capital 7%. None of these three entities are selling any shares on ipo.

From the prospectus:

'We are a leading provider of independent, technology-enabled portfolio management services, investment advice and retirement help to participants in employer-sponsored defined contribution retirement plans, such as 401(k) plans.'

Investment advice for the 'common man' focusing on assisting those in retirement plans, notably workplace 401k plans. FNGN focuses on the mass market 401k and other retirement plans via automated web based technology platforms. One can imagine the labor expenses if the approach were actually a 1-to-1, face-to-face or voice-to-voice investment advice business plan focusing on the millions of employees with 401k's and/or other similar retirement plans. FNGN's solution is web based auto-generated advice. Who developed this auto-generated advice?

Financial Engines’ web-based advice is generated using portfolio-analysis programs designed by its co-founder, Nobel laureate William F. Sharpe. FNGN's automated analysis offers specific advice including whether to buy or sell certain funds available under the 401k plan while evaluating investments on factors including asset mix, fund expense, manager performance, risk and tax efficiency.

Approximately half of users have less than $20,000 of retirement assets. This is mass retirement investment advice running counter to most advisor outfits which offer specific fee based advice to higher net worth clients. For FNGN this means one thing: Volume, Volume and...Volume. FNGN needs many 401k accounts to significantly grow their assets under management and in turn grow fees. Growth here is driven by selling in their services to large companies with many employees under the 401k umbrella.

FNGN's three services:

Professional Management - Managed account service designed for plan participants who want affordable, personalized and professional portfolio management services, investment advice and retirement help from an independent investment advisor without the conflicts of interest that can arise when an advisor offers proprietary products. This is FNGN's growth area. When a company's 401k plan offers FNGN's services, plan participants can elect to remove themselves from the decision making/allocation process and have FNGN make those decisions for them. It is portfolio management for the 'little guy' essentially. FNGN currently has 391,000 managed accounts totaling $25.7 billion in assets. **Professional management accounted for 62% of 2009 revenues.

Online Advice - Internet-based service that offers personalized advice to plan participants who wish to take a more active role in personally managing their retirement portfolios.

Retirement Evaluation - Highlights specific risks in a plan participant’s retirement account and assess the likelihood of achieving the plan participant’s retirement income goals.

Customers include 116 of the Fortune 500 and 8 of the Fortune 20. FNGN currently has 354 plan sponsors utilizing all three services above totaling 3.9 million participants and $269 billion in assets under management. **9.5% of these assets are under FNGN's direct professional management.

Since 2004, Financial Engines has retained 97% of its contracted 401(k) sponsors each year.

**This is an easily scalable business here. FNGN has built their proprietary web platforms and can easily scale them to however many plan participants they add. This point may be the strongest pull to this deal. FNGN has already spent significant capital building their platform and are well ahead of competitors in their core business. Fidelity is really the only pension plan selling FNGN's services that also competes with them in a fashion. Other direct competitors include Morningstar (MORN) GuidedChoice and ProManage. Note that investment management for MORN accounts for only 20% or so of their revenues.

Revenues are primarily derived from management fees based on the value of assets managed (assets under management) for plan participants. In addition FNGN derives revenues from recurring subscription platform fees for access to FNGN''s services. A strength here is that revenues are recurring and are also based on 401k's which themselves tend to have recurring regular contributions.

Sales into sponsors are made either directly or through one of eight retirement plan providers. These are ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T. Rowe Price and Vanguard. JPMorgan, Vanguard and ING directly accounted for approximately 18%, 10% and 8% of 2009 revenues.

FNGN's selling point - US companies have shifted from a defined pension plan system to a defined contribution (401k/IRA) retirement system. The result is that most baby boomers and generation X'ers are not remotely close to a retirement nest egg and will be seeking ways to maximize retirement plan assets going forward. FNGN offers independent and unconflicted advice, as FNGN is not recommending buying and/or selling anything they also manage.

Proprietary technology - It appears FNGN's technology platforms incorporate a version of 'Modern Portfolio Theory' used by many large pensions and institutions. They consist of the following:

Optimization Engine - Makes personalized investment recommendations, chosen from the investment options available within each plan. In addition FNGN recommends a level of savings to reach retirement goals.

Simulation Engine - Model the risk and return characteristics of more than 30,000 securities taking into account factors such as asset class exposures, expenses, turnover, manager performance, active management risk, stock specific risk and the security’s tax-efficiency.

Advice Engine - Appears to exist to minimize the risk of holding too much exposure in company stock as opposed to spreading the risk to other assets. Think Enron or Lehman employees here whom held most of their retirement in their company stock and watched it all disappear.

**Okay we have a proprietary technology platform already built and easily scalable to huge numbers of users if needed. We've a recurring revenue model which also is based on contributions that tend to be recurring themselves. FNGN has 8 large pension plans selling in their services which include simply web-based advice all the way to active technology/automated driven 401k portfolio management. This is one heck of a business model here, about as good as it gets. In 2008, the stock and bond markets (outside of US Treasuries that is) took a beating as we are all well aware. Many mutual funds saw assets under management decline by massive amounts. With their strong business model and the fact they do not manage funds themselves, FNGN's assets under management declined by only 4% in 2008. That is very significant in a year in which asset managers across the spectrum took a sound beating.

We should also note that FNGN is the sole provider of services offered in each of the 354 plan sponsors which offer the full suite of FNGN's services. There is no competition once FNGN sells into a sponsor.

Risks here are fairly obvious. If one of the retirement plans stops offering FNGN's services (notably JP Morgan, Vanguard or ING), growth would be stymied going forward. Also if a large company drops FNGN from their plans, revenues would take a hit. This recently happened with competitor Morningstar.


Approximately $1 1/2 per share in net cash post-ipo.

**Assets under professional active management grew 65% in 2009 after dipping just 4% in 2008. These directly managed assets accounted for 62% of 2009 revenues. All of FNGN's growth is coming from this segment.

As of 12/31/09, assets under FNGN's active management were:

Cash 5%

Bonds 25%

Domestic Equity 50%

International Equity 20%

2009 - Revenues were $85 million, a 20% increase over 2008. Operating expense ratio was 92%, operating margins 8%. While at first glance this looks very thin, FNGN is moving swiftly into solid operating profits. In 2009, while revenues grew by 20%, operating expenses grew just 5.5%. Most of that growth in expenses was stock compensation related due to the implied rise in FNGN's share value. Fold that out post-ipo and operating expenses are flat here. Again this is the power of FNGN's business model and technology platform. FNGN has extensive loss carry-forwards as 2009 was their first year of operating profits. Post-ipo the tax rate for 2010 appears as if it will be in the 25% ballpark, so that what we will plug in for 2009. Net margins for '09 were 5.7%, eps $0.12.

2010 - FNGN had a sharp rise in assets under management the fourth quarter of 2009. This should translate into solid growth for 2010 as the bulk of revenues are derived as a percentage of assets under management. Total revenues should be in the $115-$120 million ballpark, a 43% increase over 2009. The stronger growth is due to the easy first half of 2009 comparables. Operating expense ratio should dip from 90% to 80%. Again FNGN is growing revenues far quicker than expenses creating a strong economy of scale here. Plugging in 25% tax rate, net margins should be 10%. Earnings per share should be $0.40-$0.45. On a pricing of $10, FNGN would trade 23 X's 2010 estimates.

MORN is FNGN's closest public comparable. Keep in mind that MORN derives 20% of annual revenues from investment management, FNGN 60%.

MORN - $2.4 billion market cap projecting 11% revenue growth in 2010 currently trading 22 X's '10 estimates. $7 per share in cash on hand.

FNGN - $410 million market cap on a $10 pricing. 43% revenue growth in 2010 trading 23 X's 2010 estimates. $1 1/2 per share in cash on hand.

Conclusion - Fantastic business plan and solid execution past two years. If FNGN continues on current pace, the bottom line will continue to expand quickly. Strong recommend in range.

February 17, 2010, 8:18 am

CHC - China Hydroelectric

CHC - China Hydroelectric

CHC/CHCW - China Hydroelectric plans on offering 3.125 million units at a range of $15-$17. Each unit will consist of one ADS and one warrant.

The warrants will be exercisable upon ipo settlement at a price of $15. The ADS and warrants will trade separately post-ipo with the warrants under the ticker CHC and the warrants under the ticker CHCW. The warrants are exercisable for a period of up to four years post-ipo. They have value only if CHC is trading above $15 as that is the exercise price of all warrants.

Broadband Capital is leading the deal, i-Bankers, Morgan Joseph and Pail co-managing. Note that Broadband Capital also was the lead underwriter for the(thus far) very successful 2009 LIWA ipo.

Post-ipo, assuming all warrants will eventually be exercised, CHC will have 52.1 million ADS equivalent shares outstanding for a market cap of $834 million on a pricing of $16.

Ipo proceeds will be utilized for hydroelectric company acquisitions.

Vicis Capital Management will own 30% of CHC post-ipo, CPI Ballpark Investments 21%.

From the prospectus:

'We are a fast-growing consolidator, operator and developer of hydropower plants in China, led by an international management team. We were formed in July 2006 to acquire existing small hydroelectric assets in China and aim to become the PRC’s largest independent small hydroelectric power producer.'

CHC was formed in 2006 and since2007 has purchased 11 small hydropower plants located in four Chinese provinces. Installed capacity currently is 376.6 MW. CHC generates revenues by selling electricity generated by hydropower capacity to local power grids.

Sector - Hydropower is largest source or renewable energy in China. Electricity generated from hydropower in China has grown at annual rate of 12% over the past decade.

Growth plan is to continue to acquire small hydropower plants. CHC has recently acquired two plants, one of which has yet to begin construction.

**With a roll-up growth strategy, ideally you want to see a clean balance sheet on ipo. Unfortunately that is not the case here. Post-ipo, CHC will have net debt of $194 million. Through the first nine months of 2009 debt servicing ate up 74% of operating profits. There is sort of a double whammy in effect here. CHC has done private stock placements to raise cash. They've also given equity considerations(in preferred shares) in a few of their acquisitions. This has led to a high share count on ipo leading to a sizable $800+ million market cap on a $16 pricing. However they've still run up sizable debt in their acquisitions. So sizable, that at least for the present, the debt load is eating into nearly all operating profits. This is not what you want to see in a roll-up strategy, not at all. Going forward CHC will continue acquiring and will need to do so by adding more debt to the bottom line as the cash flows are simply not there due to the current debt load. I do realize that revenues from recently acquired plants will grow year over year as CHC operates them for a full fiscal year. The point is not that CHC will not increase revenues or grow, it is that they are in a precarious balance sheet situation for a company implementing a roll-up acquisition strategy.

This is a very interesting niche with substantial potential. However this particular company is coming public with one hand already tied behind it's back. I would expect substantial share dilution here going forward simply due to the fact CHC still needs to raise a lot of money post-ipo.

Accounts receivables - Nearly 50% of CHC's revenue growth the first nine months of 2009 is sitting in the 'accounts receivables' line. Put another way, 30% of 2009's revenues have yet to be actually collected. Some of this very well may be a timing issue, however something to keep in mind and follow over the next few quarters. Along these lines, CHC GAAP wise shows a nice operating profit through the first nine months of 2009, however actually cash flows are negative.

**CHC ipo looks to be the 'wrong' deal in the 'right' sector. Hydropower in China is a growth business as the PRC looks to expand clean/renewable energy projects. Unfortunately, CHC's balance sheet gives me pause here as I have reservations about their ability to execute their growth plans over the coming years. This is a high risk deal that has a better than average possibility of 'blowing up' sometime in the future. Best case scenario here is ipo investors get massively diluted over the coming years as CHC does multiple equity offerings to fulfill roll-up growth strategy and clean the balance sheet.

2009 - Through the first nine months, full year revenues appeared on track for $42 million. Gross margins should be 63%, operating margins 43%. Plugging in debt servicing and taxes, net margins should be 9%. Earnings per share of $0.07.

Conclusion - The low EPS here does not bother me, the growth plan coupled with the balance sheet and debt servicing costs do. I am interested in this sector, however with this particular deal I am not interested in range

February 17, 2010, 8:16 am

AMCF - solid little China microcap

AMCF - Andatee China Marine Fuel Services

AMCF - Andatee China Marine Fuel Services plans on offering 2.5 million shares at a range of $6-$8. With over-allotments the deal size will be 2.875 million shares. Rodman & Renshaw is leading the deal Newbridge co-managing. Rodman & Renshaw recently brought ZSTN public. Post-ipo AMCF will have 8.875 million shares outstanding for a market cap of $62.1 million on a pricing of $7. Ipo proceeds will be used for capital improvement, sales and marketing, research and development, funding possible future acquisitions as well as for general working capital purposes. Chairman, President and CEO An Fengbin will own 60% of AMCF post-ipo.

From the prospectus:

'We are engaged in the production, storage, distribution and wholesale purchases and sales of blended marine fuel oil for cargo and fishing vessels with operations mainly in Liaoning, Shandong and Zhejiang Provinces in the PRC.'

Chinese marine fuel stations. Facilities include storage tanks, vessels berths, marine fuel pumps, blending facilities and tankers. Note that AMCF refines their own fuel blends as well as sells them. AMCF's blend is a close substitute for diesel. Primary raw materials for AMCF's blended fuels are oil refinery by-products.

Marine oil for fishing boats account for 70%-80% of revenues, with marine oil for cargo vessels accounting for the other 20%-30%.

AMCF generally is able to pass-through oil price fluctuations to end customers. Total revenues will be impacted by the fluctuations in the price of oil, however margins should remain relatively consistent assuming AMCF remains successful passing through those fluctuations.

AMCF's primary business lies in the historical fishing towns of northern China, Dandong, Shidao and Shipu. AMCF has a 25% market share in the Bohai Bay.

As is customary in Chinese business, most of AMCF's revenues are derived from distributors who then sell to the end customers. Approximately 15%-30% of AMCF's revenues are derived from direct sales to retail customers, the rest is derived via sales to distributors. AMCF's margins are higher on direct sales, lower on sales to distributors.

Sector - Fragmented market in servicing fuel needs of small and medium size vessels. Characterized by intense price competition and uneven product/service quality. AMCF's own research has concluded that vessel operators are willing to pay a premium to berth with a service provider with consistently high fuel quality. AMCF believes they charge a premium for their consistent services.

Providing fuel has always been a low margin business and fuel to fishing/cargo vessels in China is no different. Gross margins through the first nine months of '09 were 12%.

Seasonality - The Chinese government prohibits fishing vessels from fishing from 6/15-9/15 annually, the breeding season for many fish. AMCF annually sees a 15% or so drop in revenues during this three month period. Due to this, 3rd quarter annually is the the weakest.

Growth - AMCF expects to grow primarily via acquisitions. As this sector is highly fragmented, expect AMCF to acquire a number of smaller competitors over the next few years. AMCF is setting aside 35% of ipo monies for future acquisitions. Notably AMCF plans to explore future growth in Southern China, an area they've just recently entered in 12/08.


AMCF will have approximately $1 per share in net cash on hand post-ipo. This number takes into account the $10 million short term debt AMCF has on the books post-ipo.

VAT - AMCF's fuel sales are subject to a value-added tax(VAT) of 17% across the board. AMCF's reported revenues are net after this VAT.

AMCF has no accounts receivables issues. They generally get paid upon purchase and delivery of fuel.

2010 fuel volumes increased an impressive 64% driven by acquisitions into southern China and expansion in their core market, Bohai Bay. Fuel volume is the metric to keep an eye on here more so than revenues. Revenues for AMCF will fluctuate with the price of oil, however margins on volume should stay rather consistent due to pricing pass throughs. A jump in volumes will lead to more net earnings, more so than a jump in revenues from just a rise in the price of oil.

AMCF is committed to investing in growth via acquisitions. As such, expect much of AMCF's operating cash flows to be used to invest in and expand the business.

2009 - Based on first nine months, revenues should be $118 million. Again the key metric here is that AMCF increased fuel volumes strongly in 2009, 64%. Gross margins 12%. As noted above this is a rather low margin business. With the volume increases, AMCF was able to improve gross margins significantly in 2009. Operating expense ratio of 4%, operating margins 8%. Taxes are in the 25% ballpark. Plugging in taxes, short term debt and non-controlling interests, net margins should be 5 1/2%. Earnings per share of $0.73. On a pricing of $7, AMCF would trade 9 1/2 X's 2009 earnings.

2010 - With the ipo, AMCF has cash on hand to continue growing business via small acquisitions. I would fully expect fuel volumes to increase nicely in 2010, even in a sluggish cargo ship environment. Keep in mind the bulk of revenues here are derived from fueling fishing vessels. As I tend to do, I want to be conservative here when plugging in volume growth. As AMCF's large recent acquisitions occurred in 12'08, I would not expect another 64% fuel volume increase in 2010. However I would expect at least a 25% increase directly due to expansion/acquisitions. The overall revenue number will depend on the price of oil/fuel, but a 25% volume increase along with small margin increases would put 2010 eps in the range of $1 per share.

Conclusion - 2009 was not an ideal year for fueling ships anywhere in the world. The economic slowdown impacted marine vessels worldwide, including the cargo industry in China. AMCF also notes that the fishing industry in China was also negatively impacted by the worldwide economic slowdown, although that sector is less economically sensitive than cargo. Still, AMCF was able to expand their business, open operations in the south of China and impressively grow volumes and expand the bottom line. This is another solid looking China microcap ipo that looks good in range. Coming 7 X's 2010 estimates(on a pricing of $7) with a good balance sheet, this one should work in range.

copyright © 2005 tradingipos.com All rights reserved.

January 24, 2010, 11:49 am

SYA - Symetra Financial

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

SYA - Symetra Financial

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

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

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

From the prospectus:

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

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

SYA operates through four segments:

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

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

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

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

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

Ratings by the credit agencies are solid across the board.

Market opportunities:

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

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

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

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


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

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

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

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

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

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

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


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

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

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

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

December 26, 2009, 11:21 am

TMH - Team Health Holdings

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

TMH - Team Health Holdings

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

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

From the prospectus:

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

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

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

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

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

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

TMH's services include:

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

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

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

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

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

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

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

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


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

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

Uncollectables run about 8%-9% annually.

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

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

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

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

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

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

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

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

December 2, 2009, 10:23 am

SVN - 7 Days Group

SVN - 7 Days Group

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

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

From the prospectus:

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

Hotels focusing on value-conscious business and leisure travelers.

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

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

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

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

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


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

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

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

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

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

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

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

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

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

November 12, 2009, 5:26 pm

H - Hyatt Hotels

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

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

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

H does not plan on paying dividends.

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

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

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

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

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

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

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

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

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

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

October 26, 2009, 2:13 pm

RA - RailAmerica

RA - RailAmerica

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

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

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

From the prospectus:

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

October 16, 2009, 6:55 am

VRSK - Verisk Analytics

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

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

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

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

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

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

Two segments Risk Assessment and Decision Analytics.

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

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

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

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

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

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

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


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

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

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

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

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

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

September 24, 2009, 9:42 am

VITC - Vitacost.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

July 20, 2009, 7:25 am

MDSO - Medidata Solutions

MDSO - Medidata Solutions

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

June 29, 2009, 10:38 am

DGW - Duoyuan Global Water

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

DGW - Duoyuan Global Water

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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


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

DGW has been profitable since at least 2005.

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

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

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


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

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

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

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

May 19, 2009, 5:54 am

DGI - DigitalGlobe

DGI - DigitalGlobe

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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

Risks - Two large ones here:

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

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


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

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

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

DGI became operationally profitable in 2006.

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

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

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

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

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

A quick look at DGI and competitor GEOY.

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

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

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

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

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

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

April 16, 2009, 2:33 pm

RST - Rosetta Stone

RST - Rosetta Stone

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

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

From the prospectus:

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

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

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

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

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

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


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

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

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

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

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

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

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

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


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

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

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

RST's first profitable year was 2007.

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

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

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


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

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

April 2, 2009, 7:36 am

CYOU - Changyou.com

CYOU - Changyou.com

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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


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

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

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

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

Lets take a glance at CYOU's public competitors.

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

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

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

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

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


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

November 26, 2008, 3:03 pm

LOPE - Grand Canyon Education

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

LOPE - Grand Canyon Education

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

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

From the prospectus:

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

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

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

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

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

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

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

Investigation - The Department of Education has issued subpoenas (8/08) to LOPE in an apparent investigation into whether LOPE improperly compensated enrollment counselors/managers in violation of Federal regulations. Investigation is still in infancy stage. LOPE is also facing a lawsuit by a former employer relating to incentive based compensation to enrollment counselors/managers.

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


$1 in cash, no appreciable debt.

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

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

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

LOPE has been profitable since 2006.

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

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

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

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


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

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

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

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

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

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

July 28, 2008, 3:58 pm

ERII - Energy Recovery Devices

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

ERII - Energy Recovery Devices

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

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

From the prospectus:

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

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

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

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

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


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

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

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

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

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

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

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

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


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

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

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


$1.20 per share in cash post-ipo.

ERII does not plan on paying a dividend.

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

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

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

ERII has been profitable annually since 2005.

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

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

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

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

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

June 28, 2008, 12:33 pm

FSC - Fifth Street Capital

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

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


FSC - Fifth Street Capital

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

May 13, 2008, 11:05 am

Colfax - CFX

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

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

three year anniversary and still going stong.

CFX - Colfax

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

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

From the prospectus:

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

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

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

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

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

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

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

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

A quick look at CFX end markets:

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

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

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

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

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

CFX sees growth coming from the following core markets:

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

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

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

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

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

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

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


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

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

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

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

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

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

April 29, 2008, 7:29 am

AWK - American Water Works

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


AWK - American Water Works

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

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

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

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

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

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

April 16, 2008, 7:47 am

four on the schedule

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

subscribe for three day free trial here:


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

Page :  1 2 3 4