2011-07-26
CJES - C&J Energy Services

CJES - C&J Energy Services plans on offering 13.225 million shares at a range of $25-$28. Goldman Sachs, JP Morgan and Citi are leading the deal, Wells Fargo, Simmons and Tudor co-managing. Post-ipo CJES will have 52.35 million shares outstanding for a market cap of $1.387 billion on a pricing of $26.50. Ipo proceeds will be used to repay all outstanding debt as well as assisting to pay for hydraulic fracturing fleets.

Energy Spectrum Partners will own 7% of CJES post-ipo. Ownership roster here is quite varied with numerous entities owning between 2%-6% of CJES.
From the prospectus:
'We are a rapidly growing independent provider of premium hydraulic fracturing and coiled tubing services with a focus on complex, technically demanding well completions.'
Conventional and unconventional well completion, with unconventional pushing growth. CJES focuses on the most complex hydraulic fracturing projects. What does CJES mean by complex? Long lateral segments and multiple fracturing stages in high-pressure formations.
CJES sees themselves as a 'technical expertise' operation.
***Direct play here on the recent increase in horizontal drilling, thanks to recent technical advances. These advances have lowered recovery costs and made harder to reach deposits more viable in potential long term profits. Essentially CJES has the expertise and equipment to complete these difficult to drill wells. 57% of US drilling rigs are now horizontal rigs, up from less than 20% in 2007.
Fracturing - The fracturing process consists of pumping a fluid into a cased well at sufficient pressure to fracture the producing formation. Highly technical process, and in addition to equipment, CJES services also include determining the proper fluid, proppant and injection specifications to maximize production.
Hydraulic fracturing fleets - CJES operates 4 modern, 15,000 psi pressure rated hydraulic fracturing fleets with 142,000 aggregate horsepower. ***Of note - CJES has four more fleets on order, and this will increase aggregate horsepower to 270,000 by the end of 2012.
Hydraulic fracturing equipment is designed to handle well completions with long lateral segments and multiple fracturing stages in high-pressure formations.
In addition CJES also operates a fleet of 14 coiled tubing units, 16 double-pump pressure pumps and nine single-pump pressure pumps.
Operations concentrated in South Texas, East Texas/Louisiana and Western Oklahoma.
Customers include EOG Resources, EXCO Resources, Anadarko Petroleum, Plains Exploration, Penn Virginia, Petrohawk, El Paso, Apache and Chesapeake.
In the first quarter of 2011 CJES completed 633 fracturing stages and 638 coiled tubing projects.
Growth - Plan is to continue acquiring hydraulic fracturing fleets. CJES believes their coming four units will be in strong demand in their current geographical areas of operations.
Current fleet is under contract though - from mid-2012 to mid-2014.
Revenues are derived from monthly payments for fracturing fleets plus associated charges for handling fees for chemicals and proppants. In addition CJES derives market rates for coiled tubing, pressure pumping and other related well stimulation services, together with associated charges for stimulation fluids, nitrogen and coiled tubing materials.
Hydraulic fracturing accounts for 80% of revenues.
Acquisition - On 4/28/11 CJES acquired Total E&S a manufacturer of hydraulic fracturing, coiled tubing and pressure pumping. Total consideration was $33 million. While this purchase will not directly expand their fleet, CJES believes it will be cost effective in the long run to own the manufacturing capacity.
Risks - Obvious one here. CJES is growing like gangbusters and adding hydraulic fracturing fleets over the next year to nearly double capacity. Anything that negatively impacts horizontal drilling activity and equipment capacity utilization could easily erase CJES strong growth and cash flows. We've seen it before, companies expanding right at the peak of the sector. My feeling here as these fleets are very expensive and demand has been strong, that it would take something highly unusual for CJES to run into capacity utilization issues over the next year or so. Mid-term+ however there is a risk that the sector sees a glut of these fleets a few years from now. A glut would drive the revenue per month price down, possibly significantly.
Competition - Halliburton, Schlumberger, Baker Hughes, Weatherford International, RPC, Pumpco, an affiliate of Complete Production Services, and Frac Tech.
Financials
No significant cash on the books post-ipo as bulk of cash going to repay all debt. No debt post-ipo.
***Monthly revenue of $383 per unit of horsepower. Assuming CJES can sustain this rate, horsepower growth alone should account for an impressive $40 million in additional revenue in the 2nd half of 2011, $200 million in 2012 and $500 million in 2013.
2010 - $244 million in revenues, a 264% increase from 2009. The financial crisis and recession put a lot of new drills on hold, so 2009 was not an impressive year for CJES. However, they still managed a GAAP operational profit in 2009. Also additional fleets contributed to 2010 growth as well as much stronger pricing environment. Gross margins of 37%, operating margins of 29%. Strong operating margins here. Plugging in taxes, net margins of 18%. EPS of $0.83.
2011 - A ridiculously good start to 2011 for CJES. Looking at first half and plugging in new capacity, total revenues should grow to $650 million a stunningly strong 166% increase from 2010. This might be a bit conservative as well as CJES has put up $300 million in the first half of 2011 with new capacity coming online in August that should add $45 million on top of current capacity for the rest of 2011. That $650 million number is plugging in sequential declines from 2nd Q's blowout $180 million in revenues.
Gross margins look to improve to 40%. Operating margins of 33%. 22% net margins. EPS of $2.83. On a pricing of $26.50 CJES would trade 9 1/2 X's 2011 estimates.
Before we get too carried away, I would surmise that the 2nd quarter of 2011 represents pricing much closer to the top in this sector than the bottom. CJES cannot continue to see this strong a pricing environment without it eventually cutting a bit too deep into the drillers themselves. I attempted to be conservative with 2011's numbers in the back half of the year.
No pure play competitor as those public companies playing the hydraulic fracturing fleet space tend to be much larger and varied. They all tend to trade 15-22 X's 2011 estimates with a 30% or so growth rate. CJES is coming 11 1/2 X's 2011 estimates with a 165% growth rate.
Conclusion - When you see this type growth in what is historically a cyclical sector, the first thought is that the group must be near a cyclical top. That may be so, tops in cyclicals are much easier to see in hindsight. Regardless CJES looks to me to be a $50+ stock in the shorter run. Currently they have strong pricing power, full utilization with new capacity coming online nearly every quarter through the end of 2012. CJES does not even need to match their pricing from the first half of 2011 to increase earnings in 2012. Strong recommend here short term. Mid-term plus we'll have to follow the sector as this sort of massive growth usually means the beginning of a cyclical move or near the end of one. I wouldn't worry about that too much over the next 4 quarters though, CJES is poised to put up some impressive numbers over the next year.
Note - The blowout 2nd quarter results are tentative at this point and should be officially released shortly after the ipo. They are ridiculously good.

2011-07-16
DNKN - Dunkin' Donuts

DNKN - Dunkin Brands plans on offering 25.6 million shares at a range of $16-$18. JP Morgan, Barclays, Morgan Stanley, BofA Merrill Lynch and Goldman Sachs are leading the deal, Baird, Blair, Raymond James and six others co-managing. Post-ipo DNKN will have 129.7 million shares outstanding for a market cap of $2.205 billion on a pricing of $17. Ipo proceeds will be used to help retire 9.58% senior debt notes.

3 private equity funds(Bain/Carlyle/Lee)will own a combined 75% of DNKN post-ipo. Those three took control of DNKN in a 2006 leveraged buyout. The buyout loaded up DNKN's balance sheet with a massive amount of debt. Even utilizing ipo proceeds on ipo to repay debt, DNKN will have a shade under $1.5 billion of debt on the balance sheet post-ipo. Way too much for this sort of business, most of it there to pad the pockets of the private equity manjority owners.
In addition, the controlling private equity entities paid themselves a $500 million dividend pre-ipo.
From the prospectus:
'We are one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream.'
***DNKN does not operate restaurants, they only franchise brands.
Two brands, Dunkin' Donuts and Baskin Robbin's. Dunkin Donuts is a market leader in New England and New York while Baskins Robbins has been a bit of a disaster performance wise in the US the past few years.
16,000+ franchised stores in 57 countries. 9,805 Dunkin' Donuts bringing in an average of $42,500 in annual franchise fees. 6,482 Basking Robbins bringing in an average of $20,700 in franchise fees annually.
Dunkin' Donuts has the #2 position in US coffee servings and breakfast sandwiches. Baskin Robbins is the #1 chain for hard serve ice cream.
Dunkin' Donuts accounts for 76% of revenues, Baskin Robbins 24%.
Revenues from Dunkin' Donuts are nearly all US based, Baskin Robbins however generates 1/3 of their revenues internationally.
Same Store Sales - Dunkin' Donuts was on a roll before the 2008 recession hit with 45 straight quarters of same store sales growth. 2 negative years in 2008/2009 rebounding with just a 2.3% same store increase in 2010. Coming off two negative years of same store sales, the 2.3% increase in 2010 is not that impressive. Great brand name, however it appears the recession may have permantly changed some of their customer's spending habits permantly. On a per store basis, DNKN is pretty much where they were in 2007 revenue wise.
Baskin Robbins though has been losing traction rapidly with three straight years of same store sales declines. 2008 saw a 2.2% decrease, followed by 6% in 2009 and an alarming 5.2% dip in 2010. A fading brand.
In the 2nd quarter of 2011 Dunkin' Donuts same store sales increased 4%, while Baskin Robbins decreased again 3.5%.
Dunkin' Donuts holds a whopping 52% 'quick service restaurant'(QSR) in New England. That is a stunning number. In addition they hold a 57% coffee QSR market share in New England.
Coffee represents 60% of Dunkin' Donuts sales overtaking donuts sometime in the '90's.
Dunkin' Donuts has over 1/2 their stores in New England and only 109 stores total in the western US. Focus going forward is to increase store count in eastern cities outside of New England.
39 new Dunkin' Donuts stores in the 2nd quarter of 2011.
Competitors include 7 Eleven, Burger King, Cold Stone Creamery, Dairy Queen, McDonald’s, Quick Trip, Starbucks, Subway, Tim Hortons, WaWa and Wendy’s.
Financials
$1.5 billion in debt. Huge issue here.
2010 - $577 million, a 7% increase over 2009. Solid 34% operating margins. Good margins here due to the pure franchise model. ***Debt servicing(taking into account debt paid on ipo) ate up 37% of revenues, simply way too much for a franchise business model that should have this extensive debt. Net margins of 15.5%, EPS of $0.70.
2011 - Revenues look to grow 10% in 2011, driven by Dunkin' Donuts same store sales growth and new franchised locations. Total revenues of $635 million. Operating margins and net margins in the same ballpark. Lets go with 16% net margins. At that run rate EPS would be $0.78. On a pricing of $17, DNKN would trade 22 X's 2011 earnings.
Quick look at THI and SBUX:
SBUX - $29.8 billion cap with a great balance sheet, $1.4 billion in net cash. Trades 27 X's 2011 estimates with an 8% growth rate.
THI - $7.96 billion market cap with a solid balance sheet of a shade over $100 million in net debt. Trades 20 X's 2011 estimates with an 8% growth rate.
DNKN - $2.2 billion cap at $18. Lousy private equity bloated balance sheet of $1.4 billion in net debt. Would trade 22 X's 2011 estimates with a 10% growth rate.
Conclusion - Great brand name here in Dunkin' Donuts. However a whopping $1.5 billion in debt, laid on to pad the pockets of private equity. Baskin Robbins appears to be a fading brand name, losing customers per location at a frightening clip.
We've seen strong brand name deals awash in debt work if priced correctly. Range here seems about right when one factors in the negatives. Nothing to get too excited about. Solid sector, great brand name and looks priced about right in range. Neutral to slight recommend due to the Dunkin' Donuts brand name in the northeast.

Update - Priced and opened strongly. However been a dud early in the aftermarket dropping below pricing. I suspect this has quite a bit to do with the perceived losses in 2010, nearly all of which were non-operational and non-reappearing. Tradingipos.com has no position in SKUL currently, waiting for it to get back above pricing after being stopped on break.


2011-07-12
SKUL - Skullcandy

SKUL - Skullcandy plans on offering 9.6 million shares at a range of $17-$19. Insiders plan on selling 5.4 million shares in the deal. BofA Merrill Lynch and Morgan Stanley are leading the deal, Jefferies, Piper Jaffray, KeyBanc and Raymond James are co-managing. Post-ipo SKUL will have 26.8 million shares outstanding for a market cap of $483 million on a pricing of $18. Ipo proceeds will be used to repay debt.

Founder and former CEO Rick Alden will own 26% of SKUL post-ipo. Note that in 3/11, Mr. Alden abruptly resigned as CEO without giving a concrete reason.
From the prospectus:
'Skullcandy is a leading audio brand that reflects the collision of the music, fashion and action sports lifestyles.'
Not that one could discern from that above sentence, but SKUL is the 2nd largest headphone seller in the US and #1 for earbuds . Sony is #1 in headphones. SKUL has positioned themselves as a trendy and cool action sports accessory maker utilizing snowboarders, skateboarders, NBA players and even Snoop Dogg to hawk their headphones.
Great name by the way. Target market is teens and young adults, using hip and trendy “pitch people”. SKUL has focused on distribution through specialty retail shops focusing on action sports and youth lifestyles. As they've grown, they have also since branched out into mainstream retailers such as Target and Best Buy. In fact Target and Best Buy were SKUL's largest customers over the past year each accounting for 10%+ of sales.
SKUL claims to have 'revolutionized' the headphone market by turning a commoditized product into a 'must own' for certain subgroups. While I like the name and growth has been solid, the margins here do not indicate a revolutionary product at all. Less hype, more information is the way to go with prospectus' in my opinion.
SKUL's success lies in branding, marketing and redefining the headphone market by using bold color schemes, loud patterns, unique materials and creative packaging with the latest audio technologies.
Price points appear to be roughly $20-$150 with majority $70 and under. SKUL believes their target market owns multiple sets of headphones and replaces them frequently.
Market - SKUL was an early mover in envisioning the increasingly mobile communication society. Headphones and earbuds have seen a resurgence this past decade with the increase of mobile media devices beginning with portable MP3 players such as the iPod, followed by smartphones and the iPad and other tablets.
Growth - SKUL plans to begin selling directly internationally as opposed to via 3rd party distributors. In addition SKUL is broadening product line by adding speaker docks and mobile phones cases in the summer of 2011.
Competitors include Sony, JVC and Bose. Recently Adidas and Nike have introduced headphones. Barrier to entry here is quite low.
International revenues account for 20% of total revenues.
Nearly all of SKUL's products are manufactured in China.
Financials
$1 per share in cash post-ipo with $11 million of debt also on the books.
Seasonality - As is par for the course with a retailer, back half of the year is seasonally strongest.
***In 2010, SKUL had substantial one-time compensation expenses. Some of these were cash expenses. However as these expenses will not repeat once SKUL is a public company, we folded them out to get a better look at operations. In addition, numbers for 2010/2011 below take into account the debt being paid down on ipo.
2010 - Revenues of $160.6 million, a solid 36% increase from 2009. Gross margins of 53%. 24% operating margins. Operating margins were relatively flat with 2009 and 2008. I would not expect a substantial increase in operating margins going forward here, bottom line growth will have to come from top line growth. Net debt servicing will only eat up 1% of operating profits, debt not an issue here at all post-ipo. Net margins of 15%, EPS of $0.90.
2011 - Strong first quarter in what is traditionally the weakest seasonally. Revenues should increase 31% to $210 million. Much of this number relies on the 4th quarter annually, business as usual for a retail related ipo. Looking at core operations the past few years, pretty safe assumption that gross and operating margins will be in 2009 and 2010's ballpark. Plugging 53% gross margins and 24% operating margins we get 15% net margins. EPS of $1.17. On a pricing of $18, SKUL would trade 15 X's 2011 estimates.
Good looking deal here, 'sneaky profitable' due to pre-ipo compensation charges that will not reappear. I would expect most to underestimate SKUL's 2011 bottom line due to the perceived loss in 2010.
A couple of issues here though. First, not ideal when the CEO/founder abruptly resigns a few months prior to ipo. Second, SKUL is another one of these trendy retail ipos and those sometimes do not end well. For every SODA there is a Healy's. One thing has remained consistent with these type deals though: They do tend to do very well the first year public. Some end up being long term winners such as UA, others fall by the wayside and/or get bought out down the road a la VLCM.
Based purely on growth, potential bottom line and valuation, SKUL is a recommend in range. Strong recommend in range actually. I can easily envision SKUL trading up to 30 X's 2011 earnings, which would be the mid $30's on stock