March 19, 2008, 2:39 pm

V - Visa

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

V - Visa

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

If priced at $39.5, V's net proceeds (minus underwriter fees) from the ipo will be approximately $17.1 billion. V plans on utilizing ipos proceeds as follows: $3 billion placed in escrow to be used in possible litigation settlements; $10.2 billion to redeem class 'B' and class 'C' shares on ipo; $2.4 billion to redeem shares in 2008 (which will reduce overall share-count for V in '08); and the remaining $1.7 billion for general corporate purposes.

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

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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


$5 per share in cash.

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

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

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

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

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

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

FY '08(ending 9/30/08)

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

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

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

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

A quick comparison with V and MA

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

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

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

Blue chip ipo, strong recommend in range.

January 25, 2008, 10:27 am

RMG - RiskMetrics

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

Disclosure: does have a position in RMG.

RMG - RiskMetrics

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

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

From the prospectus:

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

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

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

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

RMG's risk management products allow customers to:

1) measure their trading, credit and counterparty risk;

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

3) deploy and optimize their use of capital;

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

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

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

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

63% of revenues is US, 37% international.


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

RMG does not plan on paying dividends.

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

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

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

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

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

January 13, 2008, 11:17 am

VRAD - Virtual Radiologic

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

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

VRAD - Virtual Radiologic

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

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

From the prospectus:

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

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

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

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

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

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

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


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

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

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

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

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

A quick look at NHWK and VRAD

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

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

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

December 14, 2007, 6:40 pm

XIN - Xinyuan Real Estate

Analysis on every deal every year at:

XIN - Xinyuan Real Estate

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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


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

XIN does not anticipate paying dividends.

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

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

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

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

XIN has been profitable since at least 2004.

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

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

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

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

November 30, 2007, 6:30 pm

ENSG - Ensign Group

Pre-ipo analysis on 200+ ipos a year before they price at

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

ENSG - Ensign Group

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

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

From the prospectus:

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

November 16, 2007, 11:44 am

OZM - Och-Ziff Capital Management

pre-ipo analysis for 200+ ipos a year at

OZM - Och-Ziff Capital Management

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

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

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

From the prospectus:

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

November 11, 2007, 10:58 am

GRO - Agria Corporation

all ipo pieces completed and available to subscribers before pricing and open.

GRO - Agria Corporation

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

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

From the prospectus:

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

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

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

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


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

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

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

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

GRO has been profitable since 2002.

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

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

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

November 2, 2007, 10:53 am

GXDX - Genoptix

pre-ipo analysis on every deal at

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

GXDX - Genoptix

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

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

From the prospectus:

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

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

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

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

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

The key differences appear to be:

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

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

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

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

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

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


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

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

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

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

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

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

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

2007 - Revenues are on track here for $55-$60 million. Gross margins are increasing quarterly and full year should be 61% for the full year. Operating expense ratio is dropping quarterly as well. Increasing revenues, coupled with increasing gross margins and lowering operating expense ratios is a recipe for fast bottom line growth. Full year operating expense ratio should come in at 34%. Operating margins should be 27%. Untaxed net earnings will be around $1 per share. Plugging in full taxes GXDX should earn $0.65 in 2007.

Pricing range of $14-$16 is much too low here for all the positives. GXDX has plenty of room to continue growing as they're going to make $0.65 in only their third full year of operations and garnering just 3% of the bone marrow cancer testing segment. Strong recommend in range, this is the one to pay up significantly for as well. Fantastic ipo.

October 28, 2007, 9:21 am

PZN - Pzena Investment Management

We're looking at a very busy ipo calendar with 25 on the schedule the first two weeks alone. We're the best spot on the web to get a complete analysis write up on every deal pre-ipo. We've also an active forum focused on entries/exits as ipos trade throughout their first year public. We also provide pre-open indications for all nasdaq ipos, giving subscribers up to the minute open indications the day ipos debut.

PZN - Pzena Investment Management

PZN - Pzena Investment Management plans on offering 7 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs and UBS are lead managing the deal, BofA, Fox-Pitt Kelton, JP Morgan an KBW are co-managing. Post-ipo PZN will have 65 million shares outstanding for a market cap of $1.105 billion on a pricing of $17. IPO proceeds will be used to redeem shares from non-employee insiders. Essentially think of the shares offered in this deal as being offered by insiders as PZN will retain no ipo monies.

CEO Richard S. Pzena will own 40% of PZN post-ipo and will retain full voting control post-ipo due to a separate share class.

From the prospectus:

'Founded in late 1995, Pzena Investment Management, LLC is a premier value-oriented investment management firm with a record of investment excellence and exceptional client service.'

We've seen a few investment management firms ipo this decade(notably Calamos), however I believe this is the first value-oriented firm coming public in a longtime. Most of the management firms that have accessed the public markets via ipo over the years have concentrated more on growth investing.

As of 6/30/07, PZN managed $30.6 billion in assets. Revenues are generated on advisory fees earned on assets under management. For these type firms, the level of profits and growth are directly tied to the size and growth of assets under management. PZN earns about 1/2 of 1% annually on assets under management. The goal of PZN and those of their ilk is to invest those assets in a way that will generate strong annual gains as well as attract new money inflows to their funds.

PZN invests strictly on a value oriented approach, eschewing growth metrics. They've ten distinct value oriented strategies that differ by market cap and geographic focus. As of 6/30/07 PZN managed separate accounts on behalf of over 375 institutions and high net worth individual investors and acted as sub-investment adviser for twelve SEC-registered mutual funds and ten offshore funds. PZN has seen net-inflows annually each of the past five years.

PZN's value investment philosophy can be summed up as follows:

'we seek to make investments in good businesses at low prices...we are focused on generating excess returns over the long term.'

Asset growth has been impressive. On 12/31/03, PZN managed $5.8 billion in assets. They grew to $10.7 in 2004, $16.8 in 2005, $27.3 in 2006 and $30.6 as of 6/30/07. It should be noted that the first half of 2007 saw lowest dollar amount of net inflows since 2004. Net inflows the first half of 2007 were $1.3 billion, well below the first half of 2005 and 2006.

PZN's four main investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have outperformed their benchmarks by 3%-5% since inception. Note that while PZN underperformed during the bull run of the late '90's, they outperformed massively in the difficult markets of 2000-2002. Since 12/31/95, PZN has easily outperformed both the S&P 500 and the Russell 1000 value index.

John Hancock Advisers - Part of PZN's rapid growth the past three years has been due to a strategy of forming strategic relationships with 'sub-advisers', essentially managing the assets of investment funds. PZN has a close relationship with John Hancock Advisers managing mutual funds for Hancock. PZN acts as the investment 'sub-adviser'(read: asset manager) for the John Hancock Classic Value Fund, the John Hancock Classic Value Fund II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund. these four funds combine for approximately 1/3 of all of PZN's assets under management. For In the past 18 months 20%-25% of all PZN revenues have been directly from assets managed for John Hancock.

Note - The third quarter of 2007 was characterized by a period in which value stocks underperformed heavily, as evidenced by the huge losses sustained by quant funds heavily long value and short speculative stocks. The rough quarter for value stocks did not leave PZN unscathed. PZN's assets under management as of 9/30/07 declined $1.7 billion to $28.9 billion. PZN saw net inflows for the quarter of $0.4 billion, meaning markets losses were $2.1 billion for the quarter alone. In other words PZN lost 6.8% across the board on their investments in the third quarter of 2007 alone. Third quarter was a rough quarter for the value approach indeed.

PZN's value strategy - PZN generally invests in companies after they have experienced a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. PZN's approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. Obviously the risk here is that the trouble company is unable to manage a turnaround. PZN's portfolios are concentrated, generally with 30 to 60 holdings of companies underperforming their historical earnings. When PZN enters a troubled company, they usually enter in pretty good size due to the relatively concentrated approach. Top holdings as of 9/30/07 included Citigroup, Allstate, Freddie Mac, Wal-Mart, Alcatel-Lucent and on the international side ING and Mitsubishi.


PZN will have about $50 million in debt(minus cash on hand) on the books post-ipo. Not enough to make much of a difference with $29 billion in assets under management. Should be noted however that the debt was taken on to fund a dividend payout to insiders pre-ipo.

PZN does plan on paying dividends of $0.11 quarterly. At an annualized $0.44, PZN would be yielding 2.6% annually on a pricing of $17.

2006 - PZN had total revenues of $115 million. Again revenues are generated from advisory fees based on assets under management. Unlike the hedge fund/private equity ipos we've seen in 2007, PZN does not generate revenues based on a percentage of portfolio gains quarterly of annually. Compensation and benefits expenses were a fairly low 30%. This is well below investment banking/private equity/M&A ipos of the past few years, all with compensation expense & benefit ratios in the 50%-60% ballpark. General and administrative expenses are minimal here, just 7% of revenues. Operating margins were 62%. Plugging in full taxes, net margins were 40%. Earnings per share were $0.71. On a pricing of $17, PZN would trade 24 x's 2006 earnings.

2007 - As PZN derives revenues from total assets under management and not gains on those assets, the bad third quarter won't kill their year. That is, assuming the 3rd quarter of 2007 was an anomaly and not the beginning of a trend. PZN actually had a very solid third quarter operationally as assets under management for the quarter, while they slipped, were still near all time highs for PZN. Through 3 quarters, revenues for 2007 are on pace to be $148 million, a 29% increase over 2006. With the ipo, the compensation expense and benefits ratio will actually decrease as a chunk this expense line will be shifted to equity compensation and ipo shares. Expect this expense line to dip to 23% or so, which will boost operating margins. 2007 operating margins should increase to 70%, with 43% net margins. Earnings per share should be in the $1.00 ballpark. On a pricing of $17, PZN would trade 17 X's 2007 earnings.

Looking across the publicly traded asset managers, nearly all trade 20-25 2007 earnings, indicating a bit of a discount here with the PZN pricing range. I suspect this in part to the rough third quarter for PZN's investments. If you look at PZN's track record over the past twelve years, the odds appear in favor of the third quarter of 2007 being an anomaly and not the beginning of a trend. As long as that is the case, PZN is an easy recommend in range. One thing you do not want to see here however, is another quarter of a drop in assets under management. I applaud PZN for having the fortitude to come public in a quarter in which their investments got knocked around pretty good. If PZN is able to return to their historic levels of gains on assets under management, the pricing range here offers good value mid-term plus

October 18, 2007, 6:29 am

CML - Compellent Technologies

as always all ipo pieces on every ipo available to subscribers pre-ipo at

CML - Compellent Technologies

CML - Compellent Technologies plans on offering 6.9 million shares at a range of $10-$12. Morgan Stanley is leading the deal, Needham, Piper Jaffray, RBC and Weisel co-managing. Post-ipo, CML will have 30.5 million shares outstanding for a market cap of $336 million on a pricing of $11. IPO proceeds will be used for working capital (to fund losses) and general corporate purposes.

El Dorado and Crescendo Ventures will each own 17% of CML post-ipo. El Dorado and Crescendo each made a mint back in the 1990's, being very early stage tech centric venture funds. It has been quite awhile since one of their companies has gone public I believe.

From the prospectus:

'We are a leading provider of enterprise-class network storage solutions that are highly scalable, feature rich and designed to be easy to use and cost effective.'

Storage Area Network (SAN) operation; CML has sold their SAN's to 600 enterprises worldwide. They call their SAN, 'Storage Center.' CML describes their Storage Center product as follows:

'Provides storage virtualization and speeds both common and complex storage tasks by reducing the time and effort required for many complex functions into a few simple point-and-click steps.'

Performance: CML is still losing money on the bottom line. Two things however make this an interesting little tech ipo: Recent swift revenue growth and industry acknowledgment of CML's high quality storage solutions. Rarely in the prospectus do you see a company make the sort of claim CML makes. To quote, 'We believe that Storage Center is the most comprehensive enterprise-class network storage solution available today, providing increased functionality and lower total cost of ownership when compared to traditional storage systems.'

Awards: In 2006, InfoWorld selected CML's Storage Center as "Best SAN" and Computer Reseller News selected CML as a top Storage Standout. Gartner, a third-party industry analyst, recently reported Compellent to be the fastest growing disk storage company in the world in 2006.

CML does not sell through a direct sales force, instead relying 100% on channel partners. CML also employs something they call a 'virtual manufacturing strategy' in which their hardware component suppliers ship directly to customers, merging in transit with CML's storage solutions. This helps CML cut down on inventory as supplier components are pretty much drop shipped to CML's customers at the same time as CML's storage products. CML believes relying on channel partners as well as 'virtual manufacturing' lowers their operating cost structure.

Sector - Data storage as been a growing need this entire decade as enterprises are creating vast amounts of data in need of storing. Traditional storage solutions were not developed for the continued need for updated storage. These storage systems were designed to take storage snapshots, storing all data at regular intervals. This has led to massive stored data duplication.

CML's solution: Similar to 'node storage' CML's solution is based on module 'Dynamic Block' storage architecture. A block is the lowest level of data granularity within any storage system. Dynamic Block Architecture allows CML to record and track specific information about each block of data and provides intelligence on how that block is being used. With the use of modules, CML's customers can easily add storage capacity as they go. CML's block system also allows for automatic movement of blocks of data between tiers of high cost, high performance storage and tiers of lower cost inactive storage. CML believes up to 80% of stored data falls into the 'inactive' area, allowing CML's customers to save money in storing this inactive data in a low cost way.

Virtualization: Dynamic Block Architecture enables end users to create a shared storage pool. Storage Center distributes workloads across the entire pool, automatically improving utilization of storage resources for all applications. CML believes their Storage Center product meshes well with the growing adoption of server virtualization. CML and VMware have a technology partnership. From CML's website: 'Compellent's innovative storage virtualization technology integrates with VMware to create an efficient virtualized data center. Using Compellent and VMware in unison enables customers to improve utilization and lower overall costs with flexible server.'

CML currently has eight pending patent applications in the United States, two patent applications filed pursuant to the Patent Cooperation Treaty and four pending foreign patent applications. The bulk of the pending patents relate to their Dynamic Block Architecture.

Historically CML has focused on small and medium sized business. One of their growth goals going forward is to expand their business into larger enterprises. One reason that CML has focused on smaller operations is that the SAN space is dominated by large, well established tech companies. CML's direct competition includes Dell, EMC, Hewlett-Packard, Hitachi, IBM and Network Appliance.

CML has also focused primarily on the US market. 89% of revenues through the first 6 months of 2007 were from enterprises based in the US.


$2 per share in cash, no debt.

CML began shipping product in February 2004. Since revenues have grown briskly. In 2004, CML booked a shade under $4 million in revenues, $10 million in 2005 and $23.3 million in 2006. Through the first 6 months of 2007, CML appears on pace to book $48-$50 million in full year revenues a 100%+ increase over 2006. Hefty losses have come with the swift revenue growth. CML lost $0.43 in 2006.

2007 - Revenues are on pace to hit $48-$50 million in 2007, a strong 110% improvement over 2006. Gross margins are in the 45%-50% range. CML is such a young company it is not at all surprising that operating expenses here have been hefty in relation to revenues. Operating expense ratio in 2005 was 133%, 76% in 2006 and 68% through the first 6 months of 2007. The good news is that operating expenses are moving in the right direction, growing at a slower pace than revenues. They're still quite robust however, meaning CML is not closing in on break-even just yet. It should be noted that in the 6/07 quarter, CML did have by far both their strongest revenue quarter in operating history and lowest operating expense ratio. Assuming each trend continues the back half of the year, I'd expect CML to hit 62% operating expense ratio for the full year 2007. Losses for 2007 on $49-$50 million in revenues should be approximately $0.20 - $0.25.

2008 - With a company this young growing revenues this swiftly, we'll need to see the last two quarters of 2007 before predicting 2007. Assuming strong growth continues, CML should be shifting towards operational break-even sometime the back half of 2008.

Positives here are pretty clear: Swift 'hockey stick' type revenue growth from recent start up stage, industry awards, and a technology partnership with hyperbolic tech growth company VMware. Really that is enough to recommend CML in range. There are numerous risks here going forward that need to be mentioned. CML is coming public a bit too prematurely in their revenue and profit curve. This greatly heightens the risks going forward. As CML relies on one product (Storage Center) for the bulk of their revenues, any end market hiccup in quarterly demand/revenues would lead to a rather significant drop in share price. This is a very difficult and competitive sector filled with large players more than willing to cut margins to increase their market share and drive smaller companies such as CML out of the game. One need only to look at recent storage ipo ISLN for an example of what can go wrong with these type of young fast growing ipos; it is the pace of that growth stalls. In addition CML has never booked a quarterly profit and losses should continue annually for full year 2008. All this means one does not pay up heavily for this ipo. However, with an initial market cap in range of $350m or so, CML is worth the risk here. Personally I'd be far more comfortable if CML had one more year of revenue growth while shifting closer to break-even before accessing the public markets.

Recommend in range due to swift growth from recent start-up stage, industry awards/recognition and the technology partnership with VMware.

October 5, 2007, 6:27 pm

DUF - Duff & Phelps

disclosure - as of date of blog post(10/05/07), does have a position in DUF.

going on 2 1/2 years now, as always all ipo analysis pieces are available to subscribers pre-ipo.

DUF - Duff & Phelps

DUF - Duff & Phelps plans on offering 9.5 million shares (assuming over-allotments) at a range of $16.50-$18.50. Goldman Sachs and UBS are lead managing the deal. Lehman, William Blair, KBW, and fox-Pitt Kelton will be co-managing. Post-ipo DUF will have 33.8 million shares outstanding for a market cap of $592 million on a $17.50 pricing. Approximately 20% of the ipo proceeds will be used to repay debt, the remainder will go to insiders.

Vestar Capital will own 20% of DUF post-ipo, Lovell Minnick 16%. Both are private equity entities that came on board DUF to help fund the 2005 purchase of Corporate Value Consulting from Standard & Poors. In addition on 9/1/07, Shinsei Bank (Japanese) purchased a 10% post-ipo stake in DUF at $16.07 per share.

From the prospectus:

'We are a leading provider of independent financial advisory and investment banking services. Our mission is to help our clients protect, maximize and recover value. The foundation of our services is our ability to provide independent advice on issues involving highly technical and complex assessments of value.'

DUF's valuation advisory services are focused on four core areas: 1)financial and tax valuation; 2)mergers & acquisitions; 3)restructuring; and 4) litigation & dispute.

We've seen a number of financial advisory and/or investment banks come public the past few years. DUF is a bit of a different animal than the rest as they focus on the unique niche of valuation advisory services specializing in complex financial, accounting, tax, regulatory and legal issues.

DUF breaks down their business into Financial Advisory and Investment Banking segments. Financial Advisory segment provides valuation advisory, corporate finance consulting, specialty tax and dispute and legal management consulting services. Investment Banking Segment provides M&A advisory services, transaction opinions and restructuring advisory services.

This is a good spot to make an important point. With the slowdown in M&A activities over the past two months, this might not be an ideal time for a financial operation with an Investment Banking M&A component to come public. DUF however derives 75%-80% of annual revenues from their Financial Advisory segment (valuation advice) and 20%-25% from their Investment Banking segment. It should be noted that a chunk of those Financial Advisory segment revenues have come from valuation advisory services for newly acquired/merged operations. DUF believes the past 18 months that 45%-50% of their overall revenues were in some aspect related to M&A. This alone should be enough to proceed with a bit of caution on this DUF ipo.

DUF does not fall neatly into either of the financial advisory/IB ipos of the past two years in that they do not rely primarily on either direct M&A advisory services nor capital raising (IPO/secondary) activities.

DUF (with 21 offices, 6 being international) had approximately 400 clients in 2006. 36% of the S&P were a client sometime over the past 18 months and during that period 60%+ of revenues were derived from repeat customers. DUF is the industry's leading independent practice providing purchase price allocation services. Additionally, DUF is the number two independent provider of fairness opinions and a top ten global provider of restructuring services based on number of assignments.

Growth Drivers:

Sarbanes Oxley - In 2002 the Sarbanes-Oxley Act, among other things, has conflict of interest restraints preventing accounting firms from providing other non-audit advice. The Enron scandal was the primary driver behind this aspect of Sarbanes-Oxley. This has led to an increase in demand for independent non-audit accounting related services. DUF believes that Sarbanes-Oxley gives them a competitive advantage over the auditing focused accounting firms in securing valuation advisory clients as DUF has no audit related segment and thus no potential conflicts of interest that would run up against the constraints of Sarbanes-Oxley.

Fair Value Accounting - DUF believes they benefit from the shift towards Fair Value Accounting (FVA). FVA seeks to measure the current market value of a company's assets and liabilities as an alternative to the traditional historical cost method of accounting. Simplified for our purposes, FVA is an accounting snapshot of a company as it looks on current assessment of value, not historical. As DUF specializes in valuation, this shift to FVA standards and away from historical accounting standards plays into their favor.

Global M&A boom - This is the big question mark with this ipo. While DUF's direct M&A advisory arm is small when compared to their Financial Advisory segment, a huge chunk of their organic growth the past few years has been from giving financial advisory valuation services to newly acquired and merged companies. As M&A activity, particularly levered buyout M&A activity has slowed significantly the past few months, it remains to be seen what sort of impact this slowdown will have on DUF's advisory services. I would think the third quarter of 2007 will see a rather significant slowdown in DUF's direct and indirect M&A related revenues. Whether M&A activity resumes strength over the next twelve months will go a long way in determining the success of this DUF ipo.

Restructuring - On the flip side, if the economy slows DUF hopes that their restructuring and financial distress advisory services will grow in demand. I do like that DUF is playing both sides of the fence here with merger financial valuation advisory services as well as bankruptcy valuation services. On some level, valuation experts will be in demand no matter the economic climate.

Note - In the prospectus DUF stresses quite a bit on their non M&A related strengths. They do have that, however the transaction boom the past few years has been very good to DUF. It stands to reason that if the number of transactions in the global marketplace slow from 2006 and first half 2007 levels, DUF's revenue stream would be impacted on some level.


DUF will have approximately $1 per share in cash and debt each on the books post-ipo.

Compensation expense ratio - DUF is a people expertise operation, quite similar in this fashion to investment banking/M&A ipos such as EVR/GHL/TWPG etc...As such, compensation expenses are by far the highest expense line item. DUF's historical compensation expenses are a bit more difficult to decipher than most as they've made a few acquisitions over the past few years, most significantly being the private equity backed Corporate Value Consulting acquisition in 2005. These acquisitions have led to significantly deferred equity compensation expenses which have shown up in 2006 and 2007 (and will again for the final time in 2008). Folding out these acquisition related awards, DUF's compensation expense ratio is in line with other 'people expertise' operations at 50%.

*Note* - DUF does not fold out these acquisition related expenses in the prospectus, so the numbers below will look different than those in the prospectus. I feel the numbers below are more representative of the overall operation in 2006 and first half of 2007.

Much of DUF's revenue growth has been fueled by their own acquisitions and related M&A advisory services.

2006 - Revenues were $278 million. Compensation expense ratio was 50%. Operating margins were 11%, net margins 6%. Earnings per share were $0.50.

2007 - without seeing the impact of 3rd quarter M&A slowdown on results, I'm not going to try and forecast the full year here. This is one of those ipos that is coming right in the middle of a whole lot of confusion in their core growth driver niche and frankly I don't know how significant the M&A slowdown in the third quarter of 2007 will be on DUF. Instead let us take a look at the first half of 2007 and go from there. Revenues for the first half of 2007 were a very strong $171 million. DUF at the halfway point was on pace to blow away 2006 revenue numbers. Compensation expense ratio was 52%. Operating margins were 14%, net margins 8%. Earnings per share for the first half of 2007 were $0.42.

One would have to surmise that DUF's third quarter of 2007 will be stagnant at best, most likely a bit weaker than the first half of 2007. If we are a bit conservative on the back half of 2007, DUF earnings per share range should be $0.70 - $0.75 for the full year. On a pricing of $18.50, DUF would be trading 25 X's 2007 earnings. Again keep in mind due to the acquisition related deferred compensation expenses, GAAP earnings will be much smaller than this number. This number however is a truer indication of their current business.

Conclusion - This is a tough one. DUF had a very solid first half of 2007 fueled by prior acquisitions and a strong M&A environment. DUF is a niche leader in valuation advisory, a nice growing segment whose growth is not entirely fueled by M&A. I really would like to see DUF's third quarter earnings report. I think the abrupt global M&A slowdown in July had to have impacted DUF in some fashion. I like expertise related niche leaders however I would be very careful adding DUF on an aggressive open pending the third quarter earnings release. . M&A activity in the first half of 2007 was about as strong as it has ever been. That pace has slowed considerable thus far in the 2nd half of 2007. DUF's niche leadership is enough to recommend in range, however I'm not interested here on an aggressive opening until I see the third quarter earnings report.

September 21, 2007, 9:21 am

PRGN - Paragon Shipping

disclosure: does hold a position currently in PRGN. Full analysis pieces on every ipo for subscribers at

PRGN - Paragon Shipping

PRGN - Paragon Shipping plans on offering 10.3 million shares at a range of $16-$18. UBS and Morgan Stanley are lead managing the deal, Cantor Fitzgerald and Dahlman Rose are co-managing. Post ipo PRGN will have 26 million shares outstanding for a market cap of $442 million on a pricing of $17. IPO proceeds will be used to assist in purchasing PRGN's fleet.

Chairman and CEO Michael Bodouroglou will own 20% of PRGN post-ipo.

From the prospectus:

'We are a recently formed company incorporated in the Republic of the Marshall Islands in April 2006 to provide drybulk shipping services worldwide. We acquired our current fleet of three Handymax and three Panamax drybulk carriers, which we refer to as our initial fleet, in the fourth quarter of 2006 and the beginning of 2007.'

PRGN's initial fleet of six drybulk vessels achieved daily time charter equivalent rates of $24,080 the first quarter of 2007. All six are currently employed under fixed rate time charters with an average remaining term of 19.6 months as of June 30, 2007. In addition to the initial fleet, PRGN has agreed to purchase an additional three drybulk vessels. These three have existing charters with an average remaining term of 28.1 months as of June 30, 2007.

PRGN plans to distribute cash flows quarterly to shareholders. Based on projections, the initial dividend is expected to be $0.4744 quarterly. Annualized that will be $1.90. On pricing of $17, PRGN would yield a very strong 11.2%.

A quick glance at annual yields of similar public companies based on most recent quarterly payout:

OCNF 9.7%; DSX 8%; DRYS 1.5%; EXM 2.7%; EGLE 7.3%; GNK 4.8%; QMAR 7%.

Some of the public dry bulk shippers distribute bulk of cash flows to shareholders, some utilize cash flows to grow. PRGN on a mid-range pricing would be the strongest yielding public drybulk shipper it would appear. This strong dividend makes the deal work.

Note - PRGN has three time charters expiring over the next few months. They've already rechartered each at substantially higher rates then the previous charters.

CEO and Chairman Michael Bodouroglou will also act as Fleet Manager through another company he owns and operates. Fleet management fees appear as if they'll be approximately $2.2 million annually.

Average age of the combined fleet is 7.8 years.


Dry Bulk cargo consists of of iron ore, coal and grains as well as fertilizers, forest products and essentially any non-liquid, non-container cargo. Dry bulk cargo accounts for 33% of world seaborne trade with coal and ion ore combining for 51% of all dry bulk cargo. The dry bulk cargo sector has grown an average of 5% annually this decade.

Dry bulk rates exploded in late 2003 and hit all-time highs the second half of 2004. New shipbuilds had slowed to a crawl during the worldwide economic slowdown in 2001-2002 and there just were not enough vessels in use in 2003/2004 to handle the demand boom from China/India coupled with a worldwide economic activity pick-up. Since, the sector has seen a sharp rise in new vessel construction much of which has begun to come on-line the past 2 years. The result has been a move off the highs for the dry bulk spot rate market. Worldwide demand however has continued to remain strong and while dry bulk rates are not at their record levels, they have been in a fairly tight range the past two years at historically strong levels. The big risk in the shipping sector is a worldwide economic slowdown just as heavy supply of new shipbuilds come on-line.

The big risk here is that there is a global economic slowdown at just about the time PRGN's charters expire. If that is the case, PRGN may struggle to replace their vessels at a price near current charter rates. Also as this sector is notoriously cyclical, new shipbuilds tend to increase dramatically during periods of strong rates. That is occurring currently. As of 4/30/07 drybulk newbuilding orders had been placed for an aggregate of more than 20.0% of the existing global drybulk fleet, with deliveries expected during the next 36 months. This is a classic boom/bust sector with a few of the public companies in the sector managed by those that went bankrupt during the last cycle trough.


PRGN will have a bit of debt on the books post ipo, $126 million worth.

1 1/2 X's book value.

Forecast - As PRGN plans on distributing nearly all quarterly cash flows to shareholders, cash flow here is what to look at not earnings. PRGN forecasts approximately $85 million in revenues their first year public. Based on current charter rates, PRGN anticipates $45-$50 million in distributable cash flows.

conclusion - The initial yield makes this deal work. Keep in mind while the yield is strong, this a classic boom/bust sector currently enjoying a boom time. Recommend due to the 11.1% initial yield on a pricing of $16.

September 4, 2007, 7:22 pm


Well it appears the ipo schedule will commence next week after a 3 week or so lull. We should see quite a few the back half of September so we'll resume the one free weekly blog piece.

This weeks is an interesting China ipo from August, EJ. Note as always analysis pieces are available for subscribers before debut. The free blog pieces are all done pre-ipo and posted here after debut. We've analyzed pretty much every ipo here before debut for 2 1/2 years now. Subscriptions to the site are available at:

EJ - E-House(China) Holdings

EJ - E-House (China) Holdings plans on offering 16.8 million ADS at a range of $11.50 - $13.50. 4 million ADS will be sold by insiders. Credit Suisse and Merrill Lynch will be lead managing the deal, CIBC and Lazard co-managing. Post-ipo EJ will have 76 million ADS equivalent shares outstanding for a market cap of $950 million on a $12.50 pricing. Bulk of ipo proceeds will be used to fund capital expenditures.

Chairman and CEO Xin Zhou will own 30% of EJ post-ipo.

From the prospectus:

'We are a leading real estate services company in China based on scope of services, brand recognition and geographic presence. We provide primary real estate agency services, secondary real estate brokerage services as well as real estate consulting and information services.'

EJ has been the largest real estate agency and consulting services company in China for three years now (2004-2006). EJ has 2,100 real estate professionals in twenty cities throughout China. In the past five years they've sold 5 million square feet of properties worth a $5.4 billion US. EJ also operates the only information system that provides up-to-date, comprehensive and in-depth information covering residential and commercial real estate properties in all major regions in China.

Chinese sector leaders in fast growing sectors have done very well in the US market the past few years, usually garnering aggressive multiples. The US market has not been a 'one size fits all' for Chinese offerings, the differentiators would appear to be that sector leadership. Sector leaders tend to outperform non-sector leader Chinese ipos. Financials and valuation aside, EJ would appear to fit in the 'sector leadership outperformer' category.

Awards - EJ has been named "China’s Best Company" from the National Association of Real Estate Brokerage and Appraisal Companies in 2006, and the "Leading Brand Name in China’s Real Estate Services Industry" from the China Real Estate Top 10 Committee in 2006.

Sector - The real estate sector in China has experienced rapid growth with primary property sales revenue growing 38% over the past five years. Primary property refers to the sale of new properties, which is EJ's focus. As such, EJ's clients tend to be real estate developers who utilize EJ's middle-man services to consult on development and to sell their properties. 82% of revenues in 2006 were from services relating to 'primary' (newly developed) properties.

Approximately 45% of 2006 revenues were derived in the populous Shanghai, Jiangsu Province and Zhejiang Province.

Governmental Control - Since 2006, the PRC has instituted a number of initiatives to slow the swift property growth rates. These include: requiring that at least 70% of the land approved by a local government for residential property development for any given year be used for developing low- to-medium cost and small-to-medium size units and low-cost rental properties; 70% of construction be for 'small unit space' properties. Increasing the down payment required for larger properties; imposing a resale tax on properties held less than five years.

Note- EJ has very high 'receivables' for their revenues stream. The June 2007 quarter saw approximately $23.5 million in revenues, while receivables on the book totaled $48.5 million. This appears due to EJ receiving payment for services only after a development (or phase of development) has been completely sold. EJ reports revenue upon each sale, however they do not receive the actual monies until the entire development project has been completed and all units sold. I'm not real thrilled with this accounting method. It appears to be a concession EJ has made to garner business, which is fine. However they've substantial receivables on the books that they've already booked as revenues but have not yet been paid. Cash flows here are not nearly as impressive as revenues/earnings would indicate. If all goes well they would eventually see the cash, however there appears to be serious lag time here from 'booking' revenues and actually receiving monies.


$2 per share in cash post ipo.

Tax Rate - EJ is taxed a little more heavily than many of the Chinese based ipos we've seen. It appears EJ's current tax rate is in the 25%-30% ballpark.

Historically, EJ has booked an outsized revenue number in the fourth quarter of the year. For example in 2006 quarterly revenue numbers were (in millions) $4, $10, $8 and $34. I would expect a similar trend in 2007.

2006 - Revenues were $56 million, a 44% increase over 2005. Operating margins were a strong 44%. Net margins were 34%. Earnings per share were $0.24.

2007 - As the bulk of revenues will be booked in the fourth quarter, it is a bit difficult to forecast full year. However based on the growth in first and second quarters, I would expect revenues to rise sharply in 2007 to $115 million or so. That would be a very impressive 100%+ revenue growth in 2007. Operating margins should improve to 50%. *Note* - both revenue and operating margin numbers assume a strong fourth quarter of 2007. Net margins should be 38%. Earnings per share should be $0.55 - $0.60. On a pricing of $12.50, EJ would trade 22 x's 2007 earnings.

*Note* - EJ's net margins and earnings per share are not quite comparable to similar sector leader Chinese ipos in that their earnings are taxed at a higher rate than most of those.

Conclusion - Strong recommend in range. In fact, EJ is so attractive in range, I expect the range to be increased here. Sector leader in a fast growing sector, 100% revenue increase expected in 2007, coming at a pretty fully taxed 21 X's 2007 earnings. EJ is coming too cheap in range.

August 6, 2007, 2:21 pm

DM - Dolan Media

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DM - Dolan Media

DM - Dolan Media plans on offering 12 million shares(assuming over-allotments) at a range of $13.50 - $15.50. Insiders will be selling 1.5 million shares in the deal. Post-ipo DM will have 25.1 million shares outstanding for a market cap of $364 million on a $14.50 pricing. Goldman Sachs and Merrill Lynch are lead managing the deal, Piper Jaffray and Craig-Hallum Capital Group will co-manage. 3/4's of the ipo proceeds will be used to redeem preferred shares, 1/4 to repay debt.

Executives and Directors will own 20% of DM post-ipo.

From the prospectus:

'We are a leading provider of necessary business information and professional services to the legal, financial and real estate sectors in the United States. We provide companies and professionals in the markets we serve with access to timely, relevant and dependable information and services that enable them to operate effectively in highly competitive and time sensitive business environments.'

DM operates under two segments, Business Information and Professional Services.

Business Information - Business journal publishing, court and commercial newspapers and other publications as well as operating websites in 20 US markets. Third largest business journal publisher and second largest court and commercial publisher in the US. DM also believes they're one of the largest carriers of public notices in the United States. DM publishes 60 print publications consisting of 14 paid daily publications, 29 paid non-daily publications and 17 non-paid non-daily publications. Paid publications and non-paid and controlled publications had approximately 75,500 and 167,400 subscribers, respectively, as of March 31, 2007. DM's 42 on-line publication/non publication web sites also had approximately 315,000 unique users in March 2007.

Professional Services - This is the segment that is the most interesting. DM, via the ABC and Counsel Press brands names, provides services that enable law firms and attorneys to process residential mortgage defaults and court appeals. DM is the dominant provider of mortgage default services in Michigan and Indiana, which had the second and third highest residential mortgage foreclosure rates in the first quarter of 2007. DM serviced approximately 30,100 mortgage default case files relating to approximately 270 mortgage loan lenders and servicers that are clients of DM law firm customers in Michigan and Indiana during the first quarter of 2007. DM, via their Counsel Press brand, is the largest appellate service provider nationwide, providing appellate services to attorneys in connection with approximately 8,300 and 2,200 appellate filings in federal and state courts in 2006 and the first quarter of 2007. Customers of Counsel Press include 80 of the top 100 law firms in the US.

DM's Business Information segment collects revenues primarily via classified advertising, Professional Services via fee arrangements. Both segments have grown through acquisition, with the Business Information segment completing 38 acquisitions since 1992 and Professional services 5 since 2005.

In 2006 Business Information segment accounted for 55% of revenues Professional Services 45%. Display and classified advertising accounted for 21% of total revenues, public notices also 21% of revenues While DM has their hands in a few different pots, their more a classic classified advertising reliant publication company as anything else with 42% of total revenues derived from advertising and public notices. A risk here going forward is that a number of states are considering switching from required public notice postings in print publications to posting their own public notices online. If that is a trend that develops, DM could lose a substantial portion of their public notice business.

Mortgage foreclosure services accounted for 35% of revenues in the first quarter of 2007.


DM will have a bit of debt on the books post-ipo, $55 million. Fully expect DM to continue to acquire smaller publications and professional services businesses, so debt here should rise going forward.

Revenues in 2006 were $128 million. 2006 was the first full year DM derived revenues from their professional services segment, so comparables to previous years is not valid here. Operating margins were 17%. Interest expense 'ate' up 29% of operating profits. Net margins were 6%, earnings per share $0.31. On a $14.50 pricing, DM would trade 47 X's 2006 earnings.

2007 - DM had a solid first quarter. Full year revenues should be in the $150 million ballpark, a 17% increase over 2006. Revenue growth is being driven by the Professional Services segment. Operating margins look to be improving a bit past few quarter, full year could see 20%-21%. Interest expense should eat up 20% of operating profits. Net margins should be in the 9% ballpark. Earnings per share should be $0.50 - $0.55. On a $14 1/2 pricing, DM would trade 28 X's 2007 earnings.

Conclusion - I like the mortgage default processing segment quite a bit here, I'm not enamored with the publications side of the business. Problem is, DM conducts their mortgage default processing services in just two states, while they own publications in 20 markets and derive 55% of annual revenues from that segment. 28 X's 2007 earnings with a 17% organic revenue growth rate is an awful lot to pay for that segment. Mortgage defaults in Michigan and Indiana have been a growth business the past year and should continue to be a strong revenue driver for DM. On that basis this is a slight recommend in range. Frankly I'd be much more interested here if DM was ipo'ing just their higher margin, higher growth Professional Services segment here without the print publication business attached. I wouldn't pay up for this deal, but in range it is worth a shot due only to the Professional Services segment.

July 24, 2007, 5:39 am

OWW - Orbitz Worldwide

all of this week's deals analyzed pre-ipo at

While only 35 or so delayed pieces appear annually on the blog, every ipo is in the subscriber section of the site before ipo debut.

OWW - Orbitz Worldwide

OWW - Orbitz Worldwide plan on offering 39.1 million shares at a range of $16-$18. Morgan Stanley, Goldman Sachs, JP Morgan and Lehman are lead managing the deal, six other firms co-managing. Post-ipo OWW will have 88 million shares outstanding for a market cap of $1.497 billion on a $17 pricing. IPO proceeds will be going to parent company Travelport, which is essentially Blackstone(BX). They've structured the bulk of these proceeds directed to Blackstone as debt repayment, but it is essentially a nice payday for the Blackstone controlled Travelport.

This is 'round two' for Orbitz. Orbitz initially went public in December of 2003 under the symbol 'ORBZ'. Orbitz website was originally formed in 1999(and launched in 2001) by a group of major US airlines including American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Air Lines. In 11/04 Orbitz was acquired by Cendant. Cendant combined Orbitz with other online travel sites including to form the online segment of Cendant's Travelport. Travelport was then acquired by Blackstone and TCV in 8/06 via a leveraged buyout. Less than a year later, Blackstone is flipping Orbitz Worldwide back onto the public markets. As usual, Blackstone is making out nicely here on the transaction.

Through Travelport, Blackstone will own a 59% stake in OWW post-ipo. As one might imagine through Orbitz leveraged buyout history there is a bit of debt here post ipo, approximately $600 million. Not nearly as high as many similar leveraged buyout flips back onto the market, but a substantial debt presence none the less. In fact since OWW operates in a highly competitive, razor thin margin business the debt on the books is THE difference here between a bottom line profit and a bottom line loss.

From the prospectus:

'We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products.'

In addition to Orbitz and cheaptickets, assets include ebookers, HotelClub, RatesToGo and the Away Network and corporate travel brands, Orbitz for Business and Travelport for Business.

Air travel is OWW's largest on-line business segment. Other services include the obvious, hotels, rental cars and vacation packages that are customized by travelers. As Orbitz was originally designed and geared as a site for air travel, OWW feels they are currently under penetrated in the non-air online travel market. In 2006 OWW generated approximately $10 billion in worldwide bookers, 87% of which was US based.

Industry - Online travel is the largest e-commerce category. Approximately 47% of travel bookings in the US were booked online in 2006, and worldwide online travel growth grew by 30% in bookings for the year. While the US is by far the largest online travel segment, growth going forward in online travel is expected to be driven by Europe and Asia.

OWW has approximately 25 million unique users monthly and is the second largest online US travel company. Air travel accounts for 70%-75% of revenues annually. With 87% of revenues derived from the US it is not a stretch here to define OWW as an online US air travel booking entity. Yes OWW is branching out from this base via hotel related and non-US focused travel sites, but still the overwhelming majority of revenues are derived from air travel bookings in the US.

Risks here are obviously any occurrence that slows US air travel. Also competition is fierce in this space with a myriad of travel booking sites including the US airlines own websites. A few of the discount carriers such as Southwest do not make their fares available for OWW's sites either. Personally, I'm always much more comfortable booking directly from the airline site itself. I utilize sites such as Orbitz to locate fares, then I'll go directly to that airlines website to purchase, bypassing the booking fees that Orbits and related sites take.

Direct US competitors include Expedia, and Hotwire, which are owned by Expedia; Travelocity and as well as the airline sites themselves and a myriad of smaller fare aggregators/bookers. Offline competition includes travel agents and travel professional companies such as Liberty and American Express.


$600 million in debt, negative book value post-ipo.

2006 - As OWW has made a number of acquisitions comparing revenues from 2006 to prior periods does not indicate a whole lot. It appears that OWW's organic revenues were up 5%-10% or so for 2006 to $753 million. OWW has something I never like to see in a rather mature company coming public: Operating expenses for 2006 were higher than revenues. So OWW is already in the red before debt servicing charges are added in as 2006 operating margins were negative. Yes a portion of this is due to depreciation & amortization charges, but really OWW's cash flows for '06 were more or less flat as well. Factoring in debt servicing, OWW lost about $1 per share in 2006.

2007 - OWW had positive operating margins for the first quarter of '07(just barely), something they did not manage to do in 2006. Revenues were solid in Q1 and it appears OWW may grow revenues to $850-$900 million in 2007, a 16% increase over 2006. Yes a portion of this is due to acquisitions, and fully expect OWW to lay on additional debt in the future to continue to acquire smaller travel related websites and operations. I would anticipate OWW to be approximately break-even operationally in 2007, with a bottom line net loss of $0.50 due to debt servicing costs.

Note - OWW has been experiencing the past two quarters lower revenue per transaction. It appears they're getting squeezed a bit on their transaction fees. As I mentioned above, this is a very competitive sector and that will not change going forward.

Conclusion - a quick flip leveraged buy-out related ipo with a negative bottom line. I rarely recommend a leveraged buyout related quick flip ipo. Why? The leveraged buyout entity is essentially sucking out capital to profit themselves and that profit usually comes at the expense of the future public shareholders. OWW is an interesting combination of a number of online travel sites, primarily of course Orbitz itself. There is some value here. It is simply not an ipo for me. Orbitz struggled as a public company the first go round after pricing and opening enthusiastically. I'm not certain we need the leveraged quick-flip version of the Orbitz ipo a second time. Pass in range here, I'm simply not interested.

July 21, 2007, 8:07 pm

LIMC - Limco-Peidmont

As alway analysis pieces on every ipo every week available to subscribers at

disclosure - at date of blog post(7/20/07), does have a position in LIMC at an average of $12.60 per share.

following analysis piece was completed for sunscribers 7/08/07

LIMC - Limco-Piedmont

LIMC - Limco-Piedmont plans on offering 4 million shares at a range of $9.50 - $11.50. Majority owner TAT Technologies(TATTF) will be selling 1/2 a million shares in the offering. Oppenheimer and Stifel are co-leading the deal. Post-ipo LIMC will have 12.5 million shares outstanding for a market cap of $131 million on a $10.50 pricing. IPO proceeds will be used for general corporate purposes.

Pre-ipo, LIMC is a wholly owned subsidiary of TAT Technologies(TATTF). With this ipo TATTF is spinning off LIMC and will retain a 65% stake in LIMC post-ipo. It does not appear the TATTF is in a hurry to spin off the remainder of their ownership stake. TATTF has actually agreed to a one year lock-up arrangement instead of the usual 180 day lock-up period. If TATTF plans on divesting the remainder of their LIMC interests, it doesn't appear as if we'll get an announcement to that effect for at least a year. By agreeing to the extended lock-up period, it appears to me that TATTF plans on holding their majority stake in LIMC indefinitely.

From the prospectus:

'We provide maintenance, repair and overhaul, or MRO, services and parts supply services to the aerospace industry.'

LIMC operates four FAA certified repair stations. Two are located in Tulsa, Oklahoma, and the other two are located in Kernersville and Winston-Salem, North Carolina. The four service centers provide aircraft component maintenance, repair and overhaul services(MRO) for airlines, air cargo carriers, maintenance service centers and the military. In addition LIMC also is an equipment manufacturer of heat transfer equipment for airplane manufacturers and operates a parts services division that provides inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.

As the name would suggest, Limco-Piedmont is the result of two merged operations, Limco and Piedmont. Limco bought Piedmont in 7/05.

MRO Services - 61% of revenues in first quarter of 2007. Government regulations and manufacturing specs require aircraft to undergo MRO servicing at regular intervals, usually each three to five years of service. Warranty covers the first one to five years of aircraft components, LIMC's MRO services usually 'kick in' after the warranty expires. LIMC specializes in the repair and overhaul of heat transfer components for the aerospace industry, special air conditioning units for military operations, APUs, propellers, landing gear and pneumatic ducting, which is used to channel air through the air conditioning and other pneumatic systems on the aircraft. LIMC works on aircraft and components from all the major manufacturers including Boeing, Airbus, Lockheed Martin, General Dynamics and GE.

Parts Servicing - 39% of revenues in first quarter of 2007. LIMC supplies parts to approximately 500 commercial, regional and charter airlines and business aircraft owners.

Sector - MRO/parts servicing growth for aircraft is being fueled by the aging and growing worldwide aircraft fleet. 74% of the world aircraft fleet is 5+ years old. Global air travel is also expected to grow by 4%-5% annually over the next five years. While not a swift growing niche, the MRO component services sector generates over $8 billion in worldwide revenues and is expected to grow 4% annually over the next 5 years.

LIMC's five largest MRO customers account for 20% of revenues. Customers include Bell Helicopter, Fokker, Hamilton Sundstrand, KLM Royal Dutch Airlines NV, Lufthansa Technik AG, PACE Airlines, Piedmont Airlines and the U.S. Government. LINC derives nearly 10% of their revenues from the US Government, primarily Department of Defense related.

Competition - LIMC is a rather small player and competes directly with larger manufacturers whom also service their manufactured components. These include various segments of Honeywell, as well as Standard Aero Group, Aerotech, AAR, and a number of others.

LIMC's future growth strategies include expanding to additional MRO services as well as continuing to grow Western Europe based revenues. I would expect LIMC to utilize the ipo cash to make future acquisitions that assist them in their growth efforts. Fully expect one or more acquisitions here paid in LIMC's first year public.

70% of 2006 revenues derived from companies located in the US, 30% internationally.


$2 per share in cash, no debt. LINC does not plan on paying dividends.

3 X's book value on a $10 1/2 pricing.

LIMC has swiftly grown revenues since the mid 2005 acquisitions of Piedmont. In conjunction with the acquisition, LIMC instituted a number of cost cutting initiatives to reduce redundancies between the two companies.

Revenues in 2006 were $59 million. LIMC, which has been profitable since 2002, earned a fully taxed $0.38.

2007 - LIMC had a strong first quarter. Revenues should hit $90 million in 2007, an impressive 52% revenue increase from 2006. LIMC attributes recent quarterly revenue growth from both existing customers as well as winning new MRO/parts services contracts. Both increased due to LIMC receiving FAA approval to expand MRO services to include a greater number of aircraft components. Gross margins are not strong in this sector. I would expect 2007 gross margins to hit the 23%-25% area. GSA expenses should hit 10% levels of revenues. Operating margins then should be in the 14% ballpark. Net margins for full year should be in the 8%- 9% ballpark. This is slightly higher then LIMC has booked in recent quarters and is attributable to debt paid off on ipo as well as pre-ipo stock compensation charges. Earnings per share should be $0.60-$0.65. On a pricing of 10 1/2, LIMC would be trading 17 X's 2007 earnings.

Conclusion - Market cap on ipo here gives LIMC plenty of room for growth. LIMC his hitting on all cylinders the 2 quarters leading into the ipo, booking two strongest quarters in corporate history. The gross margins in this sector are rather thin and this is not traditionally a high growth sector. Those two factors mean you do not pay fat multiples for this type of company. However coming at a $131 market cap(on a $10 1/2 pricing) and 17 X's 2007 earnings with a strong year to year growth rate this is an easy recommend in range. I like this ipo in the $9 1/2 - $11 1/2 range quite a bit actually. Strong recommend here, there is plenty of market cap room here for substantial appreciation going forward.

Note - While I would doubt 2008 revenues will grow at close to the pace of 2007 revenues, I fully expect LIMC to utilize the ipo cash to acquire one or more smaller component service companies

July 4, 2007, 3:13 pm

SHOR - ShorTel


This analysis piece was done for subscribers on 6/23 well before Mitel filed a patent infringement suit against SHOR. On site we've been discussing post-suit in subscribers forum section.

Also does own shares in SHOR at an avg of $10.10, again as posted on forum section of susbcribers site real-time on tuesday 7/3.

SHOR - ShorTel

SHOR - ShorTel plans on offering 7.9 million shares at a range of $8.50 - $10.50. Lehman and JP Morgan are lead managing the deal, Piper Jaffray, JMP, and Wedbush co-managing. Post-ipo SHOR will have 41.3 million shares outstanding for a market cap of $392 million on a $9.50 pricing. IPO proceeds will be utilized for working capital and general corporate purposes.

Crosspoint Venture Partners will own 22% of SHOR post-ipo. Note that Lehman and JP Morgan related venture funds will own a combined 22% of SHOR post-ipo also.

From the prospectus:

'We are a leading provider of Internet Protocol, or IP, telecommunications systems for enterprises. Our systems are based on our distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single telecommunications system. Our systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location.'

Enterprise IP communications systems. Products consist of ShoreGear switches, ShorePhone IP telephones and ShoreWare software applications. SHOR sells 9 switch products and 5 different IP phone systems. SHOR sells their products through 3rd party sales channels(resellers). As of 3/31/07, SHOR has sold to 4,500 enterprise customers through 400 different channel partners.

Of note, SHOR's enterprise IP telecommunications systems received PC Magazine’s Best of the Year 2005 Editors’ Choice designation. In addition for the past four years IT executives surveyed by Nemertes Research, an independent research firm, have rated ShoreTel highest in customer satisfaction among leading enterprise telecommunications systems providers. These two nuggets make this SHOR ipo at least worth a closer look.

Sector - This is a fairly large sector with an estimated $17 billion in overall worldwide enterprise telephony systems equipment revenues. The past few years has seen a shift by enterprises from separate voice and data networks to a single IP network for both. SHOR operates in the voice and date IP niche, expected to grow 19% annually, far outpace overall enterprise telephony growth. It is estimated that currently voice and data IP systems equipment market alone will be nearly $8 billion by 2010. As would be expected there is substantial competition in the space. The usual communications equipment players all offer some form of enterprise IP telecommunications equipment including Cisco, 3Com, Alcatel-Lucent, Inter-Tel Incorporated, Mitel Networks Corporation (which recently announced plans to acquire Inter-Tel Incorporated) and Nortel. In addition Microsoft is entering the space and appears to be developing an IP partnership with Nortel in which Nortel will produce IP-based communications equipment that will be integrated with the Microsoft systems and Office Communicator.

SHOR's IP solution. Many of SHOR's competitors offer a hybrid IP telecommunications solution, meshing it with existing legacy communications equipment and products. SHOR offers switch-based IP telecommunications systems for enterprises that address the limitations of hybrid and server-centric IP systems. SHOR lists the usual benefits in these prospectus including scalability, ease of use, reliability etc...A few highlights:

1) Personal Call Manager allows end users to control their phones from their PCs, regardless of their location, and integrates with enterprise software applications, such as Microsoft Outlook and

2)IT management via anywhere use browsers.

3) SHOR believes their system costs less to install and operate.

In these filings every company states why their products are superior. In this case, SHOR has PC Magazine and four year's worth of IT managers' recognition to back their claims up. It would appear from gross margins below and awards that SHOR may indeed offer a superior product.

Historically SHOR has sold their products to small and medium size enterprises. A key growth strategy going forward in FY '08 is to begin selling into larger companies.


$2 a share in cash, no debt.

SHOR's fiscal year ends on 6/30 annually. FY '07 ends 6/30/07.

Revenues have increased sequentially each quarter for over two years. I always like to see this. Revenues past four quarters(ending 3/31/07) were(in millions) $19, $20.5, $22.5 and $26 million.

FY '07(ending 6/30/07)

2 quick points. SHOR has booked more stock compensation expenses in FY '07 then they will post-ipo. I smoothed this out a bit by 'pro forma'ing' the stock comp numbers for FY '07 cutting them slightly. SHOR does not have excessive options dilution in their future and stock compensation charges annually should be around $1 million, while for FY '07 pre-ipo they'll be in the $2.5 million ballpark.

2nd point is taxes. SHOR has substantial deferred losses as they did not shift into profitability until FY '06. Their effective tax rate for FY '07 and FY '08 should be in the 10% ballpark.

Revenues for FY '07 with one quarter to go should be in the $97 million ballpark, a strong 60% increase over FY '06. Gross margins for this type of highly competitive communications equipment sector are very strong at 62%. Gross margins are up in FY '07 from FY '06 56%. SHOR attributes this to the release of higher margin products. We've seen a slew of very aggressively valued networking equipment ipos with 40% gross margins, SHOR here in what should be a somewhat commoditized sector is doing something very right to be garnering 62% gross margins.

Operating expense margins have risen pretty evenly with revenues. Ideally you want to see expenses decreasing as a % of revenues as revenues increase. With SHOR we're not seeing that quite yet. for the past four quarter operating margin expense ratio has been in the 52%-55% of revenue range. Going forward I'd like to see SHOR be able to lower that operating expense ratio. That will be a key to future profit growth.

Operating margins for FY '07 were 8%. Plugging in taxes, earnings per share should be $0.17.

FY '08(ending 6/30/08) - If the past three years are indicative, SHOR should continue to grow revenues sequentially each quarter. I would estimate FY '08 revenues in the $120-$125 ballpark, a 25% increase over FY '07. Gross margins should be in the 60% ballpark again. I'd like to see operating expense ratio dip. However I'm not going to plug in much of an operating expense ratio dip as they've not demonstrated they've been able to do that past four quarters. Operating margins should be in the 9%-10% ballpark. Earnings per share should be in the $0.25 - $0.30 range. On a pricing of $9.50, SHOR would be trading 34 X's FY '08 earnings.

Conclusion - The only negative here is that earnings have not quite caught up yet with valuation on ipo. Still a number of things to like here: 1)Award winning product; 2) Gross margins actually increasing in a very competitive sector; 3) Quarter to quarter top and bottom line growth; 4) A valuation on ipo, that would make them very attractive buyout candidate; 5) Directly benefiting from the enterprise switch(pun!) from legacy communications systems to an integrated single platform all IP network.

Definite recommend here in range. I like this one quite a bit in single digits. I've no idea if this works initially, but mid-term plus I can envision SHOR much higher down the line due to the factors

June 23, 2007, 7:02 am

SLT - Sterlite

9 deals on tap upcoming week, just after the huge Blackstone ipo. this week celebrated our 2nd anniversary of providing in-depth pre-ipo analysis from a trading/investing perspective on every ipo every week.

Every pre-ipo analysis piece is available to subscribers. We also have stored every piece since 3/05 and we feature a lively forum section in which we discuss ipos and give pre-open indications.

Past few weeks have featured pieces we've not been interested in buying here at We do like/own SLT however.

Disclosure: has a position in SLT at date of blog post.

SLT - Sterlite Industries

Sterlite Industries, SLT plans on offering 125 million American Depository Shares (ADS) at an estimated price of $14 per ADS. Each ADS is equivalent to one share. This offering includes 113.5 million ADS on the NYSE and 11.5 million ADS in Japan. The ADS offering in Japan will not be listed in an exchange. Merrill Lynch, Morgan Stanley and Citibank are lead managing the deal, Nomura co-managing. Post-offering SLT will have 683.5 million shares outstanding for a market cap of $9.57 billion on a pricing of $14. IPO proceeds (which will be significant at an estimated $1.65 billion) will be used for general corporate purposes.

Note - The SLT offering on the NYSE is technically a secondary as Sterlite is currently listed and traded in India on the NSE and the BSE; it is also a component of the exchanges’ major index. Over the past year, SLT's dollar adjusted shares have traded in a range of approximately $6 - $14. Like many foreign stocks trading elsewhere in the world, they tend to make their debut in the US right at all-time highs in stock price. The overall trend has been an initial 'sell the news' on the US debut, although that is not an across the board trend.

Vedanta Resources, a listed London metals and mining company will own 60% of SLT post-offering. Vedanta ipo'd in London in late 2003 and is up over 300% since ipo.

From the prospectus:

'We are India’s largest non-ferrous metals and mining company based on net sales and are one of the fastest growing large private sector companies in India based on the increase in net sales from fiscal 2006 to 2007.'

SLT operates three primary businesses in India:

1) Copper - SLT is one of the two custom copper smelters in India, with a 42% primary market share by volume in India in fiscal 2007. In 2006, SLT was the worldwide 5th largest custom copper smelter and operated two of the five lowest costs of production copper refineries in the world.

2) Zinc - SLT is India’s only integrated zinc producer and had a 61% market share by volume in India in fiscal 2007. SLT's zinc mine is the third largest in the world in terms of production and 4th largest on a reserves basis. SLT operates both zinc mining and smeltering operations in India. SLT has plans to open an additional zinc smelter over the next couple of years.

3) Aluminum - one of four primary aluminum producers in India, with a 25% market share in FY '07. In addition to current production, SLT owns a 30% minority interest in Vedanta Alumina. Vedanta Alumina has commissioned a new 1.0 million tons per annum aluminum plant in India. While initial product is expected to be shipped from the plant beginning in June 2007, it will be 2009-2010 before the plant is shipping extensive product.

In addition to copper, zinc, and aluminum, SLT is getting into the power generation business in India. SLT has experience in building and managing the seven power plants that service their metal smelting operations. SLT is now investing $1.9 billion to build the first phase, totaling 2,400 MW, of a thermal coal-based power facility expected to be complete in 2010. This is an aggressive investment for SLT, as the power plant will be 2 1/2 X's the size in terms of power generated as all of their smelter power plants combined. This facility will be used to sell power to the Indian power grid.

SLT has grown revenues swiftly the past three years due to capacity growth and commodity price increases. Really SLT has been positioned perfectly over the past 3-4 years. If this entity had come public 4-5 years ago it would be one of the biggest winners this decade. Keep in mind that here in 2007, SLT is coming to the US with a $9.57 billion market cap, far far higher than wold have been the case had they listed in the US closer to the beginning of the commodities boom.

Being located in India, SLT enjoys a low cost of production making them quite competitive in the world commodities market. SLT enjoys a leading market share in India in all three of their primary business lines, Copper, Zinc and Aluminum production.

While zinc mines much of their own end product, they source the majority of their copper and aluminum requirements from third parties. Copper concentrate is purchased on the London Metals Exchange, alumina from third party suppliers.

78% of revenues are derived from sales in India and Asia combined.

Indian government - There appears to be some issues in the divestiture of the Indian government’s minority ownership in both SLT's aluminum operations and zinc operations. The Indian government currently owns 49% of SLT's aluminum operations and 30% of SLT's zinc operations. The issue with the zinc operations actually pertains to the government of India's original divestiture of 64% of the zinc operations to SLT earlier this decade. This one by a public interest group appears to have little chance of success. In 2004, SLT exercised an option to purchase the remaining 40% Indian government interest in SLT's aluminum operations. The Indian government has and still is disputing this exercise. As of 6/07 there has been no resolution. There is also another issue with SLT's optioning the 30% remaining Indian government interest in the zinc mines. This pertains to claims that SLT did not act in the best interest of India. This one has been dragging on for over 5 years, although there has been no further action by the Indian government since 2005. If down the line the Indian government again asserts these claims and were to eventually win the resulting legal case, the penalties for SLT are quite harsh. I've no idea what the chance of this happening may be, although it would appear this would not occur for 4-5 more years at least....and it appears the Indian government may have decided to drop this last one altogether. Also it appears SLT plans on ending this, by issuing a 'call right' in which SLT would overpay the Indian government for their remaining 30% interest in SLT's zinc operations. SLT is actually planning on using the ipo cash for this very purpose. I think the takeaway here overall is that government intervention is a definite risk here. At the least, SLT has extensive regulation and a not so silent partner in the Indian government. If for some reason the government of India shifts to a more anti-capitalist stance, operations such as SLT would indeed suffer. In other words, public shareholder would suffer.

Commodity risks -- stating the obvious, but should the strong commodity market of the past 5 years turn down, SLT would definitely be affected. With the continued strong growth in Asia and India, it would probably take a prolonged worldwide economic slump for this to occur.


SLT's fiscal year ends 3/31 annually. FY '07 ended 3/31/07.

$1.8 billion in cash post-ipo, $300 million in debt. SLT will most likely use the cash on hand to purchase the Indian government’s minority ownership of SLT's zinc operations. This is not a given however.

Dividends - SLT has paid dividends in the past and plans to in the future. Dividends are payable annually soon after the end of the fiscal year(3/31). FY '07's dividend was equal to $0.075 per share. On a pricing of $14, SLT would be yielding 1/2 of 1% annually.

2 1/2 X's book value on a pricing of $14.

Fueled by the strong commodity market in both demand and price, SLT doubled revenues in FY '06 and then again in FY '07.

FY '07(ending 3/31/07) - Revenues increased by 100% to $5.65 billion. Copper operations accounted for 47% of revenues, zinc operations 33% of revenues and aluminum operations 20% of revenues. Gross margins were a strong 40%. Operating margins were 38%. SLT's tax rate was 27%. Net margins after taxes were 28%. After removing minority interests (which will remain post-ipo also), net earnings were $1.61. On a $14 pricing, SLT would trade 9 x's trailing earnings. Interestingly, the bulk of SLT's net earnings are derived from their zinc operations. While the zinc operations accounted for 33% of revenues, they accounted for 60% of operating profits. Pretty easy to discern the reason: SLT mines the majority of their own zinc production, while they source the majority of their raw aluminum and copper. The cost of production for their zinc operations remains rather constant even with the underlying commodity price rise. Because SLT mines their own zinc they're able to benefit from any commodity price rise of zinc in their end selling price. While they're able to pass along the commodity costs of the procured aluminum and copper, their raw materials costs in these two segments rises with the underlying commodity price rise. The following fueled earnings for SLT: 'The daily average zinc cash settlement price on the LME increased from $1,614 per ton in fiscal 2006 to $3,581 per ton in fiscal 2007, an increase of 121.9%.' SLT's operating margins in their zinc business literally went through the roof in FY '07 to the tune of 73%!

FY '08(ending 3/31/08) - Copper and aluminum are low margin segments for SLT, as long as zinc prices remain robust, SLT will produce strong results. Through the first quarter of FY '08, zinc prices have remained quite strong. Results for FY '08 will also depend on SLT's ability to purchase the Indian government’s 30% remaining stake in SLT's zinc operations. If they're able to reclaim this stake, the bottom line should grow nicely the remainder of the fiscal year as few earnings in SLT's zinc operations will be funneled off to minority investors. SLT has increased capacity each of the past two years across their operating segments. I would anticipate a 5% -10% capacity increase in FY '08. Assuming a continued robust end market price/demand wise for copper, aluminum and (especially) zinc, I would expect to see SLT grow the top-line by 10%-15% in FY '08. This does not assume SLT is successful in buying that 30% zinc stake from the government. Bottom line could grow 20% due to very little relative GSA expense. Earnings per share on $6.4 billion in revenues would be $1.80 - $1.90. Note that these estimates assume rather flat commodity prices in 2007, no large gains or dips in aluminum, zinc and copper. Zinc is the one to watch here. If zinc prices fall, SLT's earnings will as well. If SLT earns $1.80 - $1.90, on a pricing of $14 it would trade 8 x's FY '08 earnings.

Power generation is sort of the wild card here. While SLT already operates seven power plants that supply power to their metal production facilities, they're planning construction of a general power plant. This plant will not be online until at least 2010.

The other wild card is SLT's ability post-offering to purchase the remaining 30% interest in their zinc operations from the Indian Government. If this transpires, and if the price of zinc remains strong, SLT's earnings will be substantially higher then projected.

Conclusion - SLT will be an institutional favorite on offering. There are a huge number of shares being offered here. Also there most likely will not be the usual 'ipo effect' as SLT is already trading in India. The result should be a rather muted opening here. This is a solid operation, printing money in this commodity bull run the past few years. If this were a straight ipo with fewer shares, this would be a 'must own' on the offering price of $14. I like this deal even with the large number of shares and that it is a secondary coming to the US market at all-time trading highs. Keep in mind the huge number of shares in this deal (125 million) and the run-up to all-time highs for Sterlite on the Indian exchange pre-US offering. Plus this deal is pretty substantially dilutive, adding 23% to SLT's worldwide market cap. I like this company and think the deal works over time. The external factors mentioned just prior, however, should really mute near-term performance. I would be very surprised if SLT appreciated substantially near-term. Over time, if the price of zinc remains strong, SLT will do quite well.

Also keep an eye on SLT's efforts to purchase the Indian government's 30% stake in SLT's zinc operations. If they're successful that could be a nice bottom line driver in a strong zinc pricing market. Recommend the deal, but with substantial near term deal related headwinds would not expect much appreciation here near term. Recommend as mid-term plus play in a strong zinc pricing environment.

copyright © 2007

June 15, 2007, 7:40 am


Pre-ipo analysis of all deals available to subscribers at

BAGL - Einstein Noah Restaurant Group

BAGL - Einstein Noah Restaurant Group plans to offer 5.8 million shares(assuming over-allotments) at a range of $19-$21. Morgan Stanley and Cowen are lead managing the deal, Piper Jaffray co-managing. Post-ipo BAGL will have 16.4 million shares outstanding for a market cap of $328 million on a pricing of $20. IPO proceeds will be used to repay debt.

Greenlight Capital(affiliated with recent ipo GLRE) will own 60% of BAGL post-ipo. Greenlight assumed 97% ownership in BAGL following BAGL's reorganization from bankruptcy in 2003. Greenlight was a corporate bond holder in BAGL prior to the bankruptcy and those debt notes were converted to a nearly full equity stake following reorganization. Greenlight is not selling any shares on ipo, although a chunk of ipo proceeds will be used to close out a debt note held by Greenlight.

BAGL's shares currently trade(pre-ipo) on the 'pink-sheets' under the symbol NWRG. Looking through NWRG's most recent earnings release, it appears this is a very 'clean' move from the pink sheets to the nasdaq on ipo. Company structure wise it will act as a secondary offering of 5.8 million shares, which will be used to clean the balance sheet up by paying down debt. Debt levels will go from $227 million pre-ipo to $138 million post-ipo, assuming a pricing of $20. NWRG's stock price has ranged from $17-$22 over the 30 days pre-ipo, with very few shares generally traded.

From the prospectus:

'We are the largest owner/operator, franchisor and licensor of bagel specialty restaurants in the United States. We have approximately 600 restaurants in 36 states and the District of Columbia under the Einstein Bros. Bagels, Noah’s New York Bagels and Manhattan Bagel brands.'

The Einstein brand is located in 33 states, Noah's in 3 states and Manhattan concentrated in the northeast US. As with most bagel spots, focus is on morning and into early afternoon. Offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels and breads, gourmet soups and salads, decadent desserts, premium coffees and an assortment of snacks.

Fast casual morning niche - Highly competitive segment in which BAGL operates. BAGL's largest component Einstein Bagels was created in 1995 by Boston Chicken. It appears much as Boston Chicken, Einstein expanded too quickly laying on debt to open new locations. This actually occurred pretty much across the board in the bagel segment as the bagel chains races to open new stores to grab the 'bagel' segment market share in attempts to be the 'bagel' Starbucks. Pretty much all of them ran into financial difficulty as debt servicing overcame sluggish revenues. Consolidation ensued, the debt holders took over the various companies and a few years later we get the BAGL ipo. Even with consolidation in the sector, competition is fierce. BAGL competes directly with other bagel chains such as Brueggers, as well as coffee chains such as Starbucks, Dunkin' Donuts and Caribou and other 'fast casual' morning stops such as Panera. In addition many fast food restaurants such as McDonalds are focusing more on premium coffee and offerings that are directed at taking market share from the coffee chains and fast casual breakfast spots such as BAGL. It is a tough niche. The history of the 'bagel wars' from the late '90's is a perfect example of why debt levels are always extremely important to keep an eye on. When operations lay on heftier and heftier debt to expand either through new locations or acquisitions, the bar to insolvency gets lower and lower. For those that are interested in a primer on the importance of debt should research the bagel 'boom' and the theater chain expansions of the late '90's.

60% of BAGL's revenues are derived during the 'breakfast' portion of the day. BAGL post-ipo will be the largest 'bagel' operator in the US. 10 consecutive quarters of positive same store sales. This should have an asterisk though as BAGL had negative same store sales for 2-3 years in a row prior to this pick-up, so the starting point here was low.

New stores - For the past 5 years BAGL has focused on getting their financial house in order. This has included closing under performing stores, reworking their entire in-store concept and managing the business(and each store) more efficiently. The result has been that BAGL has seen the number of stores decrease annually each of the past 5 years. As of 4/4/07, BAGL had 597 total locations, 410 of which were company owned, 100 licensed and 87 franchised. In 2007 however, BAGL plans to begin a moderate expansion of company owned stores by opening 10-15 new stores under the Einstein and Noah brands. BAGL also plans on much more aggressive licensing and growth. Licensed locations are located in airports, colleges and universities, hospitals, military bases and on turnpikes. BAGL opened 29 new licensed locations in 2006 and plans to open 30-40 new licensed locations in 2007. During BAGL's reorganization and aftermath, the franchising segment suffered greatly. BAGL has lost franchises annually each year this decade. They plan on growing this part of the business, however it appears much of the non-company owned growth is being directed towards the licensing concept.

Company owned restaurants account for 90%-95% of overall revenues.

Property - BAGL does not own any properties, they lease all restaurant space at company owned locations.


BAGL will have fairy significant debt post-ipo of $138 million.

Even with 10 straight quarters of same store sales growth, revenues have been sluggish this entire decade. As BAGL has operated more efficiently and grown same store sales the past 2 1/2 years, the impact in overall revenues has been nil due to store closings and loss of franchisees. Overall, looking at BAGL's revenues the past five years is akin to looking at a flat line with revenues 'stuck' from 2002-2006 at $374 million - $399 million.

2006 - $390 million in revenues, 20% gross margin. Indicative of improving store performance(and closing poorly performing locations), gross margins were highest in 4 years. Operating margins were 11%. Debt servicing costs(factoring in reduced debt servicing based on debt paid on ipo) ate up 40% of operating profits. Depreciation & amortization charges took away a bit more as well. Note that BAGL has approximately $150 million in tax loss carryforwards from pre/post bankruptcy days. Even though they're capped on how much they can utilize in a given year, BAGL won't be paying taxes on any earnings for the foreseeable future. So we'll give a 'no tax' number here for net and then a 'tax plugged in' number so that BAGL can be compared apples to apples with the sector. 'No tax' net margins for 2006 were 3%, fully taxed would have been 2%. Earnings per share not taxed were $0.80, plugging in taxes they would have been $0.50.

2007 - Much as rest of decade previous, first quarter 2007 revenues were flat compared to first quarter 2006. Same store sales increased 1%. BAGL had 21 fewer restaurants in the first quarter of 2007 as compared to first quarter 2006. It would appear BAGL is about completed shuttering non-performing stores(only 20 more anticipated closing next three years as leases expire) and is about to embark on company owned store expansion. The plan is for controlled growth, so I would expect the number of overall company stores to grow all that much in 2007 overall. I would expect overall revenues to be in the $390-$400 million ballpark for 2007. Gross and operating margins should be similar to 2006. BAGL will benefit in 2007 from decreased amortization & depreciation costs which will assist to boost the net margins and bottom line. Net margins('no tax') should improve to 3 1/2%, taxed to 2 1/2%. Official untaxed earnings should be in the $0.85-$0.90 range. Plugging in taxes, earnings would be $0.55-$0.60.

Conclusion - Coming out of bankruptcy reorganization, management the past 3 years has done a nice job improving margins and same store sales comparables. Keep in mind much of this same store sales growth is attributable to sluggish performance in 2003/2004 as well as management simply closing non-performing stores. BAGL has extensive tax carry-forwards, meaning the bottom line here is greatly benefiting from not being taxed. Plugging in taxes, BAGL looks awfully pricey in range, especially keeping in mind past bankruptcy(for Einstein and Noah) and the not insignificant debt being carried on the books. Revenues have been stagnant, competition is fierce. BAGL to me looks to be a turn-around story at least fully valued in range.

June 1, 2007, 12:44 pm


pre-ipo analysis pieces available to subscribers at

RRR - RSC Equipment Rental

RRR - RSC Equipment Rental plans on offering 24 million shares(assuming over-allotments) at a range of $23-$25. Note that 11.5 million shares in this deal are being offered by insiders. Deutsche Bank, Lehman and Moran Stanley are lead managing the deal, five firms co-managing. Post-ipo RRR will have 103.1 million shares outstanding for a market cap of $2.47 billion on a $24 pricing. IPO proceeds will be used to repay debt as well as $25 million going to terminate a 'monitoring' fee. This $25 million is heading into insiders pockets.

Ripplewood and Oak Hill will each own approximately 32% of RRR post-ipo. combined they'll own 64% of RRR. Recently RRR recapitalized their operation resulting in the Ripplewood and Oak Hill majority ownership. As is the norm these days with this these sort of deals, Ripplewood and Oak Hill funded their recap investment primarily by laying on substantial debt to the back of RRR. RRR operates in a business in which they will have debt on the books as it is. They finance equipment purchases and then enter into leasing agreements with customers for said equipment. However the recapitalization more then doubles RRR's debt on the books, and did so without generating any future revenues as RRR's business related debt would. Even by paying off debt on ipo, RRR will have $2.7 billion in debt on the books post-ipo. This is simply too much for my tastes, especially with RRR's type of operation. By laying more debt onto RRR, Ripplewood and Oak Hill slow RRR's ability post-ipo to grow via laying on debt to finance greater number of equipment to then lease. RRR is a large established successful operation. However the balance sheet here stands in direct contrast to the recent ACM ipo whose balance sheet post-ipo is pristine. Different businesses yes, but all in all I'll go with a cleaner balance sheet ipo every time. Not only will the 'un-natural' debt laid on in the recap potentially slow growth, this substantial debt level will also eat into operating profits. As usual, I dislike seeing third parties come in and finance company purchases(or majority ownerships) via laying debt onto the back of a solid cash flow generating operation. It really handicaps the newer public shareholders post-ipo. Oak Hill, Ripplewood and minority owner ACF are the selling shareholders in this deal. ACF was the owner that sold a % in the recap to Ripplewood and Oak Hill. These two private equity firms will do quite well on this deal with the ipo cash-out as well as shares held post-ipo. We've seen this sort of thing a number of times previously.

Contingent 'earn-out' notes - In addition to the debt outstanding, there is the potential for more due to something called a contingent 'earn out' notes deal. If RRR has combined EBITDA of $1.54 billion or better for the fiscal years 2006 and 2007 combines, RRR will owe the pre-ipo shareholders(primarily Oak Hill, Ripplewood and ACF), a $150+ million bonus. If EBITDA is $800+ million in FY '08 then an additional $250+ million bonus is due. these bonuses would mature beginning in a decade or so and would go on the books I believe as new debt until then. There are a number of exceptions to this payout delay that would kick in principal payment earlier. It would appear RRR has a 50/50 or so chance at hitting the $1.54 combined 2006/2007 EBITDA number which would kick in the 'earn out' notes deal.

From the prospectus:

'We are one of the largest equipment rental providers in North America. As of March 31, 2007, we operate through a network of 459 rental locations across 10 regions in 39 U.S. states and four Canadian provinces.'

RRR believes they're the #1 or #2 equipment rental provider in the majority of regions in which they operate. Customers are primarily non-residential construction and industrial markets. Equipment ranges from large equipment such as backhoes, forklifts, air compressors, scissor lifts, booms and skid-steer loaders to smaller items such as pumps, generators, welders and electric hand tools.

85% of revenues are derived from equipment rentals, 15% from sales of used equipment. Average fleet age is 25 months, which RRR believes is one of the youngest in the industry. Original equipment cost of the fleet was $2.5 billion. RRR has invested $2.2 billion in their fleet over the past four years.

Fleet utilization was 70% over the 15 months concluding 3/31/07. Over the period, RRR has had over 470,000 customers with the top 10 customers representing 7% of overall revenues.

Business has been strong the past 4 years as RRR has achieved 15 consecutive quarters of positive 'same store sales' growth. This would mesh with the strong nature of the of non-residential real estate construction sector since 2003. The equipment rental market was $34.8 billion business in 2006 and is expected to grow 8%-9% overall in 2007. The top 10 companies in the sector accounted for 30% of overall revenues in 2006. Interestingly while this is a fairly fragmented sector, RRR has grown exclusively organically and not via acquisitions.

Competition - National competitors include United Rentals, Hertz Equipment Rental Corporation and Sunbelt Rentals. Regional competitors are Neff Rental, Ahern Rentals,. and Sunstate Equipment Co. A number of individual Caterpillar dealers also participate in the equipment rental market in the United States and Canada.


Substantial debt of $2.7 billion post-ipo is the issue here. The nature of RRR's business is going to mean there will be debt on the books. Prior to the recapitalization however, RRR was doing a very nice job of maintaining level debt levels of $1.2 billion in 2004, 2005 and into 2006 while expanding their equipment fleet. They were adding a lot of new equipment through cash flows while keeping debt levels stable. Sign of a strong business and solid management. My issue here(and it is a big one) is that the substantial additional debt added recently due to the recapitalization did nothing to help grow the business. All it did was help the private equity interests make money.

As RRR states, 'Our revenues and operating results are driven in large part by activities in the non-residential construction and industrial markets. These markets are cyclical with activity levels that tend to increase in line with growth in gross domestic product and decline during times of economic weakness.'

Debt servicing costs will now eat up roughly 50% of RRR's operating profits post-ipo. While business is strong currently RRR will still have nice cash flows even at these debt levels. However their business is highly dependent on overall non-residential construction. We saw this segment of the economy slow substantially in 2001-2002. While a similar future slowdown most likely would not mean difficulty in servicing their debt, it could easily mean servicing debt wipes away cash flows and bottom line net profits. My issue here is not RRR's debt as they're going to have debt in their line of business. My issue is the substantial debt laid on during the recap that does nothing to assist the business. The newer debt is debt that is dragging the business, not debt in which they're making a profit by leasing equipment financed. Big difference. THE difference maker for me when it comes to this RRR ipo.

Business has been strong: Same store sales increases were 12% in 2004, 18% in 2005, 19% in 2006 and 13% the first quarter of 2007. Keep in mind this sector is not apples to apples comparison to retail and restaurant same store sales growth. While the latter two tend to have a finite selling space, RRR is able to add equipment and overall rental capacity annually much easier in a strong demand environment. This is not really a 'finite selling space' type business. Still the same store sales do indicate an overall healthy operating climate for RRR the past few years.

Note that 2006/2007 numbers include a look at the company as if both the recapitalization and the ipo had closed 12/31/05. In other words a look at operations as the company will be structured post-ipo.

2006 - Revenues were strong at $1.65 billion, a 14% increase over 2005. Reasons for the increase were additional rental equipment added as well as higher purchase and rental rates on equipment. Gross margins are rather strong here at 36%. RRR is in many ways a 'middle man' type operation. These are impressive margins for this type of business. Operating expenses were 11% of revenues. RRR has held operating expenses in this 10%-11% range over the years. Operating margins were 26%. Pre-recapitalization, net margins would have been 12% with earnings per share of nearly $2. Without the recap debt, RRR would be dirt cheap in range and strong recommend. However that isn't the case. Including the recap debt, 2006 net margins were 7% with earnings per share of $1.17. Huge difference, all into the pockets of the Oak Hill and Ripplewood.

2007 - RRR had a solid first quarter, even though equipment sales were down a bit. It appears in 2006 RRR cleared out a lot of old equipment via sales and replaced rental fleet with newer stuff. Overall revenues look as if they may grow by 10% in '07 to $1.82 billion. Gross margins should again be in the 36% range. As RRR as managed operating expenses to that 10%-11% area for years now, I would expect similar in 2007 meaning operating margins should again come in around that 25%-26% number. Debt servicing will 'eat' up approximately 50% of all operating profits in 2007. Again a chunk of this debt is recap related and not debt RRR will be making money off of through equipment purchases and then renting out said equipment. Net margins should be 7 1/2% - 8%. Earnings per share should be in the $1.30 range. On a pricing of $24, RRR would trade 18 x's '07 earnings.

RRR's closest public comparable is United Rentals(URI). A quick look at each.

URI - $2.83 billion market cap, currently trades 0.72 X's '07 revenues and 13 X's 07 earnings estimates. URI is heavily leveraged with $2.7 billion in debt. Revenue growth estimates are in the 5%-7% range.

RRR - $2.47 billion market cap on a $24 pricing. Would trade 1.4 X's '07 revenues and 18 x's '07 earnings estimates. RRR is heavily leveraged post-ipo with $2.7 billion in debt. Revenue growth estimates for '07 in the 10% ballpark.

Conclusion - If not for the recap debt laid onto RRR, this would be an easy recommend. As it is, the multiple here seems a bit steep in relation to both URI and the amount of debt on the books post-ipo. RRR is a solid company that has booked strong cash flows and earnings the past four years. This is a good company that appears to have managed growth very well. However I can't recommend this deal, due to the debt laid on here to directly benefit Ripplewood and Oak Hill(and not the company and public shareholders). In solid economic climate, I would expect RRR operationally to continue to do well. Neutral overall here on this deal. Strong business and sector leadership with a private equity related drag on the bottom line.

May 23, 2007, 8:30 pm


As always analysis pieces on ipos are available in subscriber section of site before offering dates.

SKH - Skilled Healthcare

SKH - Skilled Healthcare Group plans on offering 19.1 million shares(assuming over-allotments) at a range of $14-$16. Insiders are selling 10.8 million shares in the deal. Credit Suisse is lead managing the deal, with eight firms co-managing. Post-ipo SKH will have 37.4 million shares outstanding for a market cap of $561 million on a $15 pricing. IPO proceeds will be used to repay debt.

Onex, a Canadian conglomerate, will own 47% of SKH post-offering. Onex will control SKH through a separate share class. Onex is the primary selling shareholder in this deal. Onex brought EMS public in 12/05. Post-ipo Onex owned 77% of EMS, they currently have an approximately 27% stake. EMS has nearly tripled since ipo debut.

Onex formed SKH in 12/05 by merging together two nursing/assisted living companies. They owned one and completed a leveraged buyout of the other on the merge. Post-merger Onex owned 95% of the combined entity. It also appears as if there was a roughly $100 million dividend payout to Onex in there as well. The result is that SKH was heavily leveraged after the merger. Even after paying off debt on ipo, SKH will still have significant debt on the book of $414 million. Keep in mind that one of SKH's predecessor's filed for bankruptcy in 2001.

I would much prefer to see Onex withhold selling shares on ipo here to allow SKH to offer more shares themselves and help the balance sheet.

From the prospectus:

'We are a provider of integrated long-term healthcare services through our skilled nursing facilities and rehabilitation therapy business. We also provide other related healthcare services, including assisted living care and hospice care.'

As of 4/1/07, SKH owned or leased 64 nursing facilities and 13 assisted living facilities comprising 8,900 beds. SKH owns 75% of their operated facilities which are located in California, Texas, Kansas, Missouri and Nevada. SKH focuses on urban and suburban locations with 67% of locations in non-rural areas.

Higher reimbursed non-Medicaid patients comprised 70% of patients the first quarter of 2007. Medicare patients accounted for 38% of 2006 revenues, while Medicaid patients accounted for 30% of revenues. Medicare patients are reimbursed at a pre-determined rate adjusted for inflation. SKH is seeing downward reimbursement pressure on Medicaid patients due to rapid Medicaid spending growth and slower state revenue receipts. Currently Medicaid is reimbursed at lower rates then Medicare, a trend SKH foresees continuing. Both Medicare/Medicaid tend to be reimbursed at lower rates then private insurance.

Roll-up - SKH has grown via the acquisition route, making 30 nursing home and/or assisted living purchases over the past 4 years. Count on SKH to continue to grow by purchasing(or leasing) additional facilities going forward. I would expect SKH to mimic the 7 1/2 facility per year acquisition pace of the previous four years.

Sector - The US nursing home market is a $120 billion annual business. Growth is being driven by the aging of the US population coupled with longer life expectancies. The annual growth rate of those in the US 65 years of age or older is expected to be 2% over the next decade. The market is highly fragmented and consists of approximately 16,000 facilities with 1.7 million licensed beds. The top 5 operators run only 10% of these facilities. This is a prime consolidation niche and companies such as SKH plan on growing via the consolidation/acquisition route.

Organic growth - In addition to future acquisitions, SKH is constructing two new facilities: a nursing facility in the Dallas/Fort Worth area and an assisted living center in the Kansas City, MO area. The Kansas City location will add 45 beds by 9/08 while the Dallas location will add 385 beds by 4/09.

53% of revenues are derived from facilities in California, 32% from Texas. Occupancy percentage in SKH facilities has been 85%-86% the past few years. 85% of all revenues are derived from SKH's nursing facilities.

Medicare/Medicaid - Approximately 70% of SKH's annual revenues come from Medicare/Medicaid. An ongoing risk for this type of business is the annual budgeting process. In the current budget proposal, there is a 'freeze' on Medicare nursing home payments as well as reduce payments for hospice services. The same budget including a proposed $25 billion cut in Medicaid over the next five years. SKH expects Medicaid/Medicare cost containment measures for nursing homes to be an ongoing issues for them into the future.

Referral Network - SKH relies on a hospital referral network for a portion of their new business. SKH believes forming alliances with leading medical centers improves their ability to attract high-acuity patients to their facilities because an association with such a medical center typically enhances SKH's reputation. Current alliances include Baylor Health Care System in Dallas, Texas, St. Joseph’s Hospital in Orange County, California and White Memorial in Los Angeles, California.


Debt is the issue here, $414 million post-ipo. Nearly a third of this debt is at a rather high interest rate of 11%. Debt servicing in 2007 will be $40 million, approximately 50% of operating profits. That is substantial and more then I'm comfortable with.

Negative book value post-ipo.

2006 was SKH's first year of operations as a combined entity. SKH was kind enough to 'back in' acquisitions as if they occurred 12/31/05, as well as take into effect alterations based on ipo. Essentially the following 2006 numbers take into account how the company will look post-ipo. All numbers then are pro forma, but a better indication of public SKH then the actual numbers. Revenues for 2006 were $564 million. Gross margins were 25%. Operating margins were 14%. Debt servicing is the killer here eating up substantial operating profits. Net margins after debt servicing and taxes were 4%. Earnings per share were $0.56. On a pricing of $15, SKH would be trading 27 X's 2006 earnings.


SKH is adding 500 beds just in time for the 2nd quarter of 2007. Following numbers take that into account but do not take into account any future acquisitions in 2007...of which I've no doubt there will be a few.

2007 revenues should be in the $625 range, an 11% increase over 2006. Gross margins should be in the same 25% ballpark as 2006. Operating margins also should be in the 14% range. Debt servicing will still be in the $40 million ballpark, but due to greater operating earnings, it will be less a % which will help net margins slightly. Debt servicing is still hefty here, make no doubt. I believe debt servicing in 2007 will ear up close to 1/2 of all operating profits. I would anticipate net margins in the 4 1/2% range. Earnings per share should be in the $0.75 range. On a pricing of $15, SKH would be trading 20 X's 2007 earnings.

Competitors include Manor Care(HCR) and Sun Healthcare(SUNH). In the same general sector is 2005 IPO Brookdale(BKD). BKD focuses more on senior living and senior communities but does also operate low to mid acuity assisted living centers. SKH and BKD are not 'apples to apples' comparables as BKD is not nearly as reliant overall on Medicare/Medicaid as SKH. BKD has done well, even though they came public heavily leveraged.

BKD - $4.5 billion market cap


Pretty simple business model. This is a rather low margin business with very little gross/operating margin improvement potential. 70% of revenues come directly from Medicaid/Medicare and if margins look a little high, they'll slash reimbursements next cycle. Also we're currently in a budget deficit with both the Executive/Legislative branch looking for places to cut. The 30% non direct Medicare/Medicaid is often indirectly linked to Medicare rates. Pretty much any way you look at it this is not a business in which gross/operating margins are going to improve much. To lay more money on the bottom line, facility operators are looking to acquire and consolidate what is a very fragmented sector. That is the SKH plan, to grow through acquisition as well as constructing new facilities in key areas.

Thus far that plan is working for them SKH is on pace to have a strong operational 2007. The issue here for me is the debt. I'm not comfortable with the debt levels here, particularly in a sector that had a rash of bankruptcies just 6-7 years prior.

The pluses: SKH appears well managed and operationally should put together a strong 2007. This ipo is being brought public by Onex, which also brought public EMS. EMS is up 3 fold since 2005 debut. Also in the same general 'senior living' sector, another heavily leveraged ipo BKD has performed quite well over the past 1 1/2 years. 20 X's 2007 earnings here is not unreasonable at all considering SKH growth patterns.

The negatives: The debt. Debt servicing will eat up nearly 50% of 2007 operating revenues. Also should something occur to slash either Medicare/Medicaid funding, the drag on SKH's cash flow could potentially cause repayment issues. Also current debt levels could slow future growth.

Without the debt, this would be a strong recommend in range. I can't recommend a company leveraged this much. I like the niche and I like the business and growth plan. In range I think this deal works. However keep in mind this is a heavily leveraged company, and it doesn't take too much bad news before a leveraged operation runs into trouble.

May 14, 2007, 2:58 pm

ACM - Aecom Technology

Disclosure. At date of posting to blog(5/14/08), does have a position in ACM from 21.2 avg.

ACM - Aecom Technology

ACM - Aecom Technology Corporation plans on offering 35.2 million shares at a range of $18-$20. Insiders are selling 15.3 million shares in the deal. Morgan Stanley, Merrill Lynch and UBS are lead managing the deal, Goldman Sachs, Credit Suisse, and DA Davidson are co-managing. Post-ipo, ACM will have 92.4 million shares outstanding for a market cap of $1.76 billion on a $19 pricing. approximately 1/2 the ipo proceeds will be used to repay debt, 1/5 to fund employee stock plan and the rest for general corporate purposes.

Note that ACM is paying off essentially all debt on offering. For a company that has made numerous acquisitions the past decade, a clean balance sheet gives them a nice competitive advantage.

ACM's own retirement and trust plan will own 20% of ACM post-ipo. this is a bit unusual and is a result of Aecom beginning life as an independent entity from an employee buyout in 1990.

From the prospectus:

'We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government.'

A government engineering and construction contractor focusing on general building, transportational and environmental markets. Quite similar in project scope to 2006 ipo KBR. ACM is large, in fact they're the largest general architectural and engineering design firm in the world. ACM has grown via acquisitions with over 30 acquisitions over the past 10 years. Interestingly, while ACM absorbs these acquisitions under the ACM 'umbrella' nearly all of them continue to operate under their original names and keep much of their organizational structures intact. The result is that ACM operates subsidiaries all under different names.

ACM operates under two business segments, Professional Technical Services and Management Support Services. Professional Technical Services is ACM's higher margin growth driver in which they've a worldwide leadership role in their target markets. Management Support Services is ACM's low margin employee intensive government fulfillment segment.

Professional Technical Services

81% of revenues, this is the business driving segment. planning, consulting, architectural and engineering design, and program and construction management services to government, institutional and commercial clients worldwide. Current projects include 2012 London Olympics, Pentagon Renovation, JFK airport in New York, and a Russian Independent Power Project. Private sector accounts for 45% of revenue, public sector 55%. Public sector breakdown is 31% US state and local, 11% direct US federal and 13% non-US government.

A quick look at ACM's core Professional Technical Services end markets:

Transportation - ACM's prime growth driver includes design and construction management of airports, seaports, bridges, tunnels, railway lines and highways. Domestically this is a direct play on the aging US infrastructure.

General Building - Includes the construction of commercial buildings, office complexes, schools, hotels and correctional facilities.

Water, Wastewater and Environmental - Projects include water treatment facilities, water distribution systems, desalination plants, solid waste disposal systems, environmental impact studies, remediation of hazardous materials and pollution control.

Energy/Power - Revitalizing energy and power transmission and distribution systems in the United States.

Management Support Services

19% of revenues. Facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. Clients include Department of Defense, Department of Energy and the Department of Homeland Security. Projects include managing and maintaining Camp Arifjan Army Base in Kuwait, Fort Polk Training Center and operating for the Department of State an international civilian police force.

ACM 25 largest worldwide projects accounted for 14% of 2006 revenues. ACM operates in 60 countries worldwide. Backlog was $3.1 billion as of 3/31/07. Overall a little over 60% of revenues are derived from government contracts.


$3 a share in cash post-ipo. This takes into account the small amount of debt on the books after offering. What impresses me here is the lack of debt on the books post-ipo. Fully expect ACM to use the clean balance sheet and cash on hand to aggressively acquire smaller operations first year public.

Dividends - ACM does not plan on paying dividends.

4 X's book value on a $19 pricing.

ACM's fiscal year ends 9/30 annually. FY '07 will end 9/30/07.

FY '07

Revenues appear on track to grow 24% to $4.2 billion for the year. Much of this growth is due to acquisitions. Gross margins are in the 26% range.

Operating margins are 3.3%. Note that ACM has much stronger gross margins then similarly sized recent government contractor ipos SAI/KBR. While this is in part due to nearly 40% of ACM's revenues being derived from non-government sources, it also appears to be in part an accounting function of employee costs. The operating margins of the three are the apples to apples comparison. Based on recent quarters, operating margins of the three look like this:

ACM 3.3%

KBR 2.7%

SAI 6.8%

Note that SAI has a much lower employee intensive business then ACM/KBR. KBR is a closer pure comparable to ACM.

Net margins for FY '07 look to be in the 2% range. Earnings per share look to be in the $0.90 range. On a pricing of $19, ACM would be trading 21 X's FY '07 earnings.

A quick glance at ACM/KBR

KBR - $3.7 billion market cap, trading 0.4 X's revenues, 2 X's book value and 19 X's FY '07 earnings. Note KBR is expecting a significant revenue decrease in FY '08 due to splitting of Iraq contracts.

ACM - $1.76 billion on a $19 pricing. Would be trading 0.4 X's revenues, 4 X's book value and 21 X's FY '07 earnings. Difference here is that ACM is growing revenues to the tune of 24% in FY '07. ACM fueled with IPO cash and a clean balance sheet should be able to grow revenues double digits in FY '08 through acquisitions as well.

ACM is much strong then KBR simply due to their ability to grow revenues(and the bottom line) going forward.

Conclusion - ACM has a very nice revenue mix from government contracts and private contracts. They rank #1 or #2 in US companies in engineering and consulting services for the following sectors: Mass Transit and Rail; Airports; Marine and Ports; Highways; Bridges; Educational Facilities; Government Offices; Correctional Facilities; Sewage & Solid Waste. That is one impressive list. Factor in the clean balance sheet post-ipo and the strong cash position and this is an easy recommend in range.

Note - With 35 million shares(15 million from insiders) in the offering this is a bulky deal. It is also a low margin business. While ACM has enough going for it to make this a very easy 'recommend' in range, I'm less constructive the higher the pricing/open. This is not the type of company or offering you want to pay way up for, however ACM ipo does offer a nice mid-term risk reward opportunity in pricing range.

April 29, 2007, 6:19 pm

EDN - Edenor

EDN - Edenor

EDN - Edenor plans on offering 15.2 ADS on the NYSE and 4.07 ADS equivalent shares in Argentina at a US dollar price range of $16-$18. 11.4 million of the 19.9 million total ADS offering will be coming from selling insiders. Citigroup and JP Morgan will be co joint book runners on the ipo. Post ipo EDN will have 45.3 million ADS equivalent shares outstanding for a market cap of $770 million on a $17 pricing. IPO proceeds will be utilized to repay debt, capital expenditures and general corporate purposes.

Electricidad Argentina will own 51% of EDN post-ipo.

From the prospectus:

'We are the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2006...We believe we are also one of the largest electricity distributors in Latin America in terms of customers and volume of electricity sold.'

EDN has the exclusive concession to distribute electricity to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires. Electricity distribution area comprises 4,637 square kilometers and a population of approximately seven million people. In 2006, EDN sold 16,632 GWh of energy and purchased 18,700 GWh of energy. EDN purchases 19% of all electricity wholesale purchases in Argentina.

Approximately 2.5 million total customers in 2006. 32% of total energy revenues are derived from residential customers. EDN has averaged 11%-11.5% losses of energy power the past three years. This being power that EDN purchased but did not pass through to paying customers. EDN is reimbursed by the Argentina government for lost energy up to 10% annually.

Regulation - EDN is regulated by the Argentinian government. EDN passes through to customers their cost of energy plus a regulated distribution margin. In January '07 EDN received a a 28% increase in the distribution margin charged to non-residential customers.This is the first margin increase approved for EDN since 2002. The increase was effective retroactively to 11/05. EDN's non residential customers will be charged the retroactive margins monthly over 55 months. The upshot for EDN is that the margin increases they're now able to charge non-residential customers coupled with the retroactive payments mean their gross margins in 2007 should be significantly stronger then historical gross margins. EDN's long term viability is a public company depends squarely on EDN's ability to continue to receive distribution margin increases from the Argentinian government.

Dividends - Since electricity distribution isn't normally a growth business, there is often a pretty significant dividend to entice shareholders. Note though that EDN does not plan on paying a dividend initially. In fact they're not permitted to pay dividends until mid-'08 at the earliest. Expect then no yield here for at least the first year public. All things being equal, a significant negative.

Argentina - During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. The inflation rate in 2002 reached 41%. Beginning in 2003, the Argentinian economic climate has stabilized and since Argentina has outpaced most of the rest of the world. Inflation still tends to be high in the country with inflation rates topping 12% in 2005 and nearly 10% in 2006. GDP growth has averaged 9% annually since 2003. Argentina's strong economic growth the past few years has boosted electricity demand in the country. EDN estimates that overall electricity demand in Argentina has grown 5.8% annually from 2003-2006.

EDN collects revenues in pesos but their debt is denominated in US dollars. EDN does not hedge for currency risk.


Debt - In 4/06 EDN restructured the bulk of their debt. Note that until this restructuring EDN had been in default on this debt since 2002. Post-ipo EDN will have a substantial amount of debt on the book, approximately $358 million. In a very slim operating margin business, you don't want to see substantial debt on the books. This is particularly the case here in which the slim operating margin is strictly regulated by the Argentina government.

1.3 X's book value in a $17 pricing.

Thanks to a strong economy in Argentina, EDN has been able to grow electricity sold and revenues by 8% - 10% the past 3 years.

Note that EDN seems to consistently be fined substantial amounts of monies. In 2006 EDN was fined approximately $8 million, in 2005 approximately $22 million and in 2004 approximately $12 million.

2006 - Total revenues were $450 million a 9% increase over 2005. Gross margins were 42%. If EDN's retroactive distribution margin increase was in effect for 2006, gross margins would have been a much stronger 57%. Operating margins were a very slim 2 1/2%. EDN has plenty of relatively fixed costs, the only hope they've got of growing operating margins are government regulated increases in the distribution margins. Again if those 2/07 retroactive distribution margin increases had been in place for all of 2006, operating margins would have been 18%. Debt servicing ate up all actual operating margins in 2006. Losses for the year were in the $0.50 range for 2006. Actual numbers look quite different in the prospectus due to 1) a one-time $59 million gain from debt restructuring and 2) $55 million in income tax gain. EDN lost massive amounts of money in 2001 and 2002 and still has substantial tax breaks and refunds assisting the bottom line. Neither of these are operational earnings, so I folded both out.

2007 - Revenues should grow strongly due to 1)the distribution margin increase for non-residential customers; 2) received payments for the retroactive increases covering 9/05-1/07; 3) the continued strong economy in Argentina. I would expect overall revenues in 2007 to increase in the 25% ballpark to $550-$570 million. EDN estimates that the non-residential distribution margin increases alone should account for a 17% increase in revenues. Gross margins will be much strong as well thanks to the the margin increase. Operating margins should approach 19%-20% in 2007. Net margins(excluding income taxes and income tax carryfowards) should be in the 14% range.

Earnings per share(before any income tax refunds from prior years) in 2007 should be in the $1.70 ballpark. Keep in mind these are untaxed earnings. On a $17 pricing, EDN would be trading 10 X's 2007 earnings. The ruling allowing a more favorable distribution margin for EDN shifted them from a money losing operation to a nicely profitable one.

Conclusion - Argentina's economic growth the past fours years has opened the door for an operation such as EDN to come public. The deal only works in range however due to EDN's winning approval of a distribution margin rate increase to non-residential consumers. That approval shifts them into a nice bottom line profit operation. What EDN is not - EDN is not a high growth enterprise. They will experience substantial growth in 2007 due to a couple of one-time factors.In the future(2008 and beyond) I would expect EDN's revenues to by closely tied to Argentina's economic climate. EDN is also not paying a dividend. This is the type of business, electricity distribution, in which I'd like to see a nice slice of the cash flows returned to shareholders. However I do think this deal works in range due to Argentina's strong economic climate in recent years. Investors have been eager to find companies operating in countries growing faster then the US and Europe and EDN fits the bill. I expect this deal to work in range, recommend. One reason I believe EDN will work is that they'll be reporting stronger financials in 2007 then anytime in their operating history. I tend to like ipos that will be reporting very strong quarter first year public and that will be the case here.

April 21, 2007, 1:23 pm

VRAZ pre-ipo analysis piece on VRAZ. Piece was on site for subscribers 4/1. On 4/5 VRAZ priced at $8, below the $10-$12 range. VRAZ currently trades near $7 a share.

VRAZ was touted by a nationally televised financial program to be a 'buy' up to $15, disagreed with that assesment as the piece below indicates. This isn't a bad company, just yet another tech ipo coming public a little too soon on the growth and earnings curve for my tastes.

VRAZ - Veraz Networks

VRAZ - Veraz Networks plans on offering 9 million shares at a range of $10-$12. Insiders will be selling 2.2 million shares in the deal. Credit Suisse and Lehman Brothers are lead managing the deal, Jefferies and Raymond James will be co-managing. Post-offering VRAZ will 39.5 million shares outstanding for a market cap of $435 million on an $11 pricing. IPO proceeds will be utilized for capital expenditures, working capital and for general corporate purposes.

ECI, the selling shareholder, will own 25% of VRAZ post-ipo.

From the prospectus:

'We are a leading global provider of Internet Protocol, or IP, softswitches, media gateways and digital compression products to established and emerging wireline, wireless and broadband service providers. Service providers use our products to transport, convert and manage voice traffic over legacy and IP networks, while enabling voice over IP, or VoIP, and other multimedia communications services.'

IP Products:

ControlSwitch softswitch solution - Manages and directs the IP traffic (such as a voice call) to its appropriate destination, whether it starts out as IP traffic or is traditional traffic that has been converted.

I-Gate 4000 family of media gateway products - convert traditional telephone voice traffic into IP, compress the data packets and transport this data on IP networks.

VRAZ two product families work in conjunction with each and according to the company, 'convert traditional voice traffic to IP and back allows our customers to operate two distinct networks as a single network and thereby continue to utilize their existing wireless and wireline legacy networks while simultaneously offering next generation IP applications and services.'

Advantages include: 1)seamless migration of legacy networks to IP; 2)cost reduction; 3)rapid introduction of new services; 4) compatibility with current systems.

Legacy Products:

Digital circuit multiplication equipment(DCME) - Communications systems that use proprietary signal processing technology to increase the effective capacity of transmission links by compressing voice and fax traffic while maintaining the quality of that traffic.

While DCME products made up 38% of revenues in 2005, they've been declining in recent years. The growth driver for VRAZ has been their IP products which doubled in revenues in 2006. VRAZ is leveraging their installed base of DCME customers to position to be the provider of IP network solutions to customer base as they migrate to IP networks. Much like a slew of recent tech ipos, VRAZ is a play on the increased traffic growth over networks and the upgrade cycle of said networks by service providers. Pushing this growth is increased subscriber demand for advanced voice, video and data telecommunications services and the broad adoption of broadband.

Customer base includes 400 service providers that have deployed VRAZ DCME products and 55 customers that have deployed VRAZ IP Products.

As with most of the networking sector, competition in the Internet Protocol space is fierce. Direct competitors to VRAZ include Alcatel-Lucent, Ericsson, Nortel Networks, Siemens, Cisco Systems, Sonus Networks, Tekelec and Huawei. Note that this has also been a notoriously cyclical sector. Business for IP networking products has been robust the past few years. However even in a robust environment, VRAZ has never been able to book a profit. Another cyclical slowdown at some point in the future would hurt a company like VRAZ a great deal.

VRAZ sells their products mainly through resellers and distributors. VRAZ largest shareholder ECI has been responsible for generating 25%-30% of VRAZ sales the past two calendar years.

82% of revenues are derived outside the US. Much of VRAZ research and development staff is based in India.

Flextronics manufactures all of VRAZ IP products, largest shareholder ECI manufactures all VRAZ DCME products.


$2 a share in cash post-offering, no debt

Revenues have been increasing annually past few years solidly if not spectacularly. All of the growth has been fueled by VRAZ IP products. Their legacy DCME products appear to be slowly drying. DCME product revenues has declined each of the past two years and is expected to once again in 2007. In comparison, IP product revenues have doubled the past two years.

2006 - Total revenues were $99.5 million, a 30% increase over 2005. All of that revenue increase was due to VRAZ IP product line. Gross margins were 54%, a decline from 2004/2005's 56%. Led by R&D and sales & marketing, operating expenses were hefty at 58% of total revenues. Operating expense ratios have really not declined all that much past few years as revenues have increased. This is just not what one wants to see. Unless VRAZ either ramps revenues much fast then they've been or somehow manages to lower operating expense ratios, they'll never be able to put much on the bottom line. Losses in 2006 were steep at $0.34. VRAZ did approach break-even in the fourth quarter of 2006, however they've noted a few times in prospectus that they expect hefty losses to resume the first quarter of 2007.

2007 - VRAZ expects DCME product revenues to continue to decline, so revenues growth will depend on their IP products line. It appears VRAZ did not have a stellar first quarter of 2007. In fact they expect overall revenues to decline sequentially in the first quarter of 2007. Why? Apparently their IP product revenues did not grow in the first quarter of 2007. So we've got an operation losing significant monies whose growth driver looks as if it may have least for a quarter. I would expect 2007 revenue growth here to be in the 10%-20% range overall. Losses should be in the $0.25 - $0.35 ballpark.

Conclusion - VRAZ is another tech ipo coming a bit too early. The revenue growth and steady losses just do not justify appreciation from ipo range. Pass.

April 16, 2007, 6:23 am


Other then BBND, I've really not been enamored by the recent tech ipos...a little too much enthusiasm and a little too many operating losses seem to be the norm of later. VRAZ latest example of an unrealistic ipo range.

SMCI priced below range at $8, which was quite appealing. We like SMCI anywhere in single digits actually.

Following is our pre-ipo piece on SMCI.

Note that does currently have a position on SMCI.

SMCI - Super Micro Computer

SMCI - Super Micro Computer plans on offering 9.2 million shares (assuming over-allotments) at a range of $9.50 - $11.50. Merrill Lynch is lead managing the deal, Needham and UBS co-managing. Post-offering SMCI will have 28.6 million shares outstanding for a market cap of $300 million on a $10 1/2 pricing.

*Note* - This SMCI deal is another of those tech ipos structured more like a 1999 ipo than should be in this day and age. This means there are excessive outstanding, already in the money and exercisable, options here. SMCI has a whopping 15 million shares of common stock issuable upon the exercise of stock options outstanding at a weighted average exercise price of $2.12. You can bet over the next few years these options will be exercised, converted into shares and sold. Factoring in this dilution, SMCI would have 43.6 million shares outstanding for a market cap of $458 million on a $10 1/2 pricing. This is a trend we've been seeing way too much of lately and one I do not care to see. While these options will not effect early trading of SMCI, they do create a pretty significant headwind for a stock over the first few years of trading. What we will see here with SMCI is a continued stream of insiders exercising and selling options beginning at the 180 day market and most likely continuing quarterly for a few years. SMCI as a company will have to outperform operationally to simply 'stand still' on stock price as these options will be growing market cap, even with stock at same price. Please keep this in mind for those looking to hold SMCI longer term - you will be diluted heavily by insiders. Many of the options shares are part of SMCI's 1998 stock option plan. As most options need to be exercised within 10 years, there is a pretty good chance that many of the 15 million option shares will be exercised and sold by the end of 2008.

Approximately 1/3 of ipo proceeds will be used to repay all debt, 2/3's for general corporate purposes.

Chairman of the Board, President and Chief Executive Officer Charles Liang will own 32% of SMCI post-ipo.

From the prospectus:

'We design, develop, manufacture and sell application optimized, high performance server solutions based on an innovative, modular and open-standard x86 architecture. Application optimized servers are configured to meet specific customer needs in contrast to typical servers which are offered in limited standardized configurations.'

Customizable server company. SMCI customizes their servers to meet specific customer requirement by adjusting memory, processing power, and/or input/output capabilities. SMCI's servers are based on x86 which is the open standard utilized by both Intel (INTC) and Advanced Micro Devices(AMD) in their microprocessors. INTC and AMD are SMCI's only suppliers of microprocessors. Note that SMCI does not participate in the traditional UNIX server market. The open architecture server market in which SMCI participates is growing much faster than the traditional UNIX server market. Going forward the UNIX server market is expected to grow 6%-7% annually the next 4 years, while open architecture servers are anticipated to grow 40%+ over the same period of time.

SMCI's open architecture approach allows for easy integration of their servers as well as allowing for the ability to 'stack' their servers to create scalable server systems. The selling point for open system servers is the ease of scaling when compared to the traditional UNIX server market. SMCI also offers server components to OEM's. Majority of revenues are from individual servers and server components, not complete server systems. As SMCI sells through distributors, this is not surprising. Companies purchasing from distributors can/do stack SMCI's servers and components to create their own specialized server system.

SMCI commenced operations in 1993 and has been profitable every year since. Pretty impressive considering the various tech cycles since. SMCI sells primarily through distributors, whom accounted for approximately 70% of revenues past two years. In 2006, 400 companies in 70 countries purchased SMCI servers and server components.

SMCI believes their advantages include: 1) Customizable and flexible; 2) Rapid time to market; 3) Power efficiency and thermal management; 4) High density - Density is amount of space required by a server. By being 'high density', SMCI's servers require less floor space.

As of 12/31/06, SMCI did not offer a 'high performance blade server' solution. However SMCI expects in the first half of 2007 to launch a high performance blade server solution, called Superblade. Blade servers are specifically designed for high density by sharing power, cooling, networking and other resources within a single server-rack enclosure, compared to standard servers which each require their own independent resources. By eliminating these repetitive components and locating them in one place, a greater number of blade servers can be used in a smaller physical area as compared to standard servers. This would appear to be SMCI's answer to servers offered by companies such as Rackable (RACK).

No single customer accounted for more than 10% of revenues each of 2005 and 2006.

SMCI utilizes Ablecom Technology for contract design and manufacturing coordination support. SMCI’s purchases from Ablecom have accounted for roughly 1/3 of cost of sales expense the past 5 years. Ablecom is a private company owned by the brother of SMCI President/CEO Charles Liang.

Legal - In 9/05 Rackable Systems filed a patent infringement suit against SMCI. In 2/07 the Court threw out much of the lawsuit, ruling very favorably for SMCI. The remaining claims in the suit are set to go on trial in 8/07. Also SMCI was fined by the US Government for sales to Iran during the 2001-2003 period. In 2006, SMCI settled the charges and paid what appears to be approximately $500,000 in fines to the US government.


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

The server market is notorious for lumpy revenues. A large order in any particular quarter can help a server company blow away estimates and.....conversely a company pushing out an order into another quarter can mean a pretty ugly looking quarterly earnings miss. Servers are generally not purchased on long term contracts, or even that far in advance. SMCI notes in the prospectus that most sales in a given quarter come from orders placed in that specific quarter. The fact that SMCI has been able to achieve and maintain profitability for 15 years in this highly competitive 'lumpy' sector is a pretty strong selling point here.

Note that SMCI accounts for revenues upon shipment to distributors, not the final sell-through from distributor to end user/customer. This has led to approximately $1-$3 million annually in 'inventory writedowns' for returned and/or excess product inventory.

SMCI's fiscal year ends 6/30 annually. FY '07 will end 6/30/07. 50% of revenues are derived from US customers, 50% from outside US. Revenues from outside US are growing more briskly and SMCI should generate more non-US revenues than US revenues in FY '07. Specifically SMCI is focusing future growth in China and throughout Asia.

Revenues have ramped impressively since 2002. Revenues in fy '05 (ending 6/30/05) were $211 million, $302 million in FY '06 and on pace for $400-$425 million through first half of FY '07.

Gross margins are slim in this niche. Through the past 18 months, SMCI has had gross margins in the 18%-20% range. This does not leave much margin for error. To be a successful company with these gross margins, managing operating expenses is crucial. In a niche in which SMCI must continue to develop new/better servers annually, R&D is the heftiest operating expense annually. Fortunately sales & marketing expenses are controlled at a low rate thanks to SMCI selling most of their products through distributors. Overall operating expenses equaled 10% of revenues in FY '06 and 11% through first two quarters of FY '07. SMCI has kept operating expenses in that 10%-11% of revenue area the past three fiscal years. I would expect that to continue to be the case going forward.

Net margins for FY '06 were 6%. EPS for the officially post-ipo share-count of 28.6 million was $0.63. When option shares are included, EPS dips to $0.41. On a 10 1/2 pricing, SMCI would be trading 17 X's trailing earnings without options shares included, 26 X's trailing earnings with future option dilution factored in. Big difference.

FY '07 (ending 6/30/07) - Based on first half of FY '07, we should expect full year revenues in the $400 - $425 million range. This would be approximately a 33% revenues increase from FY '06. Gross margins and operating expense ratios look to be in range of previous few fiscal years. Note however, that gross margins ticked down a bit in the 12/31 quarter from that 18%-20% range to 17%. While not dramatic, this will most likely drop FY '07 net margins by 1% for the full fiscal year. Net margins then should be in the 6% range, instead of FY '07's 7%. Earnings per share based on 28.6 shares outstanding should come in $0.80-$0.85. When factoring in option shares, earnings for FY '07 should be $0.55. On a $10 1/2 pricing, SMCI would trade 13 X's FY '07 earnings when no option dilution is factored in, 19 X's FY '07 earnings when full dilution is factored in.

Rackable Systems is the recent ipo most similar to SMCI. This will even be more the case when SMCI starts shipping their blade server product and components the first half of calendar year 2007. Let's take a brief look at the two. Note, in looking at SMCI's metrics below, we'll 'split the difference' on options and factor in 50% option dilution. As mentioned above, these options will not be in play until beginning approximately 180 days after ipo, although some may hit 90 days post-ipo. These options will be exercised, so when looking at SMCI we must factor in a good chunk of these options. The numbers below reflect SMCI as if 50% of outstanding in the money options were exercised.

RACK - $525 million market cap. Currently trades 1.1 X's FY '07 revenues and 22 X's FY '07 earnings estimates. Note that these estimates have been reduced substantially the past 90 days. RACK is expected to post a 27% revenue increase in FY '07.

SMCI - $380 million market cap (assuming 1/2 option dilution) on a $10 1/2 pricing. Would trade just less than 1 X's FY '07 revenue estimates and 16 X's FY '07 earnings with an expected 33% revenues increase in FY '07.

Conclusion - due to the lumpiness of revenues and the low gross margins, this should never be a sector in which a company is valued aggressively on forward PE's. RACK holders discovered this recently as a few good quarters in a notoriously lumpy sector were then forecast as the 'norm' going forward. Factoring in a huge quarter as the norm going forward will nearly always be a mistake in this sector. SMCI has done a terrific job over the years managing their business and growth through 13-14 profitable years in a row. This tells me a couple of things: 1) SMCI has been able to continually innovate over the years. This is a must in this sector as new products/components are constantly being introduced. 2) SMCI has done an excellent job managing operating expenses in a low growth margins sector. Both these are exactly what you need in a lumpy low gross margin sector. You need constant innovation and strong management. SMCI's years of continued profitability would seem to indicate they've both.

Revenue growth has really ramped here the past three years. I'm skeptical that this swift growth will continue. However if SMCI is simply able to grow in the 20%-25% range in FY '08, this is a very attractive ipo in range. The wild card for FY '08 and beyond is SMCI's Superblade server being introduced first half of 2007.

Keep in mind, the coming option dilution is a big negative here as ipo buyers will be massively diluted over the next few years. However even factoring in this dilution, SMCI still looks attractive to me in range. This dilution, coupled with low gross margins would lead me to pass here on any aggressive opening prints as it is doubtful those would be long-term sustainable.

This is not a sector in which you ever want to pay high multiples. In range and $1-$2 above however, SMCI is a recommend.

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