June 29, 2010, 11:28 am

TSLA - Tesla Motors

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

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

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

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

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

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

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

From the prospectus:

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

Two things of note:

TSLA focuses exclusively on electric automobiles and electric powertrains.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

June 21, 2010, 1:07 pm

ONE - Higher One Holdings

ONE - Higher One Holdings

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

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

From the prospectus:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

June 15, 2010, 12:20 pm

CBOE - CBOE Holdings

CBOE - CBOE Holdings

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

From the prospectus:

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Page :  1