In this week's interview with Francis Gaskins, Equities.com discussesthe fall and current state of the Chinese IPO market, companies going public this week, and one niche retailer that is planning to do so in the near future. Gaskins has been recognized by major financial media outlets such as Forbes, CNBC, Bloomberg, and many othersas one of the best resources for the IPO industry available today. Gaskins is a highly sought-after expert for his insights and opinions as an IPO analyst. Readers can see his previous weekly interviews with Equities.com here.
EQ: This week, LightintheBox (LITB) debuted on the Nasdaq on Thursday. Shares jumped considerably from the offering price of $9.50 per. What were your thoughts on this IPO?
Gaskins: If LITB has a good June quarter after its first profitable quarter, which was March ’13, then the stock should do well. It’s trading like it wants to go higher, which suggests the June quarter may show a profit. And by now the IPO flippers are all out of their stock.
EQ: LITB was also the first Chinese IPO this year, which underlines just how much that market has dried up the last two years. But the last three or four Chinese IPOs have fared well. Does this help to remove the stigma that hurt this market over the past several years?
Gaskins: The stigma is because all Chinese IPOs have to IPO using a shell type structure, typically in the Cayman Islands, while the actual operating companies are ‘protected’ back in China. Also, there have been numerous accounting issues with Chinase IPOs.
A lot of the stigma came because smaller investment banker firms brought questionable Chinese companies public, without regard to quality.
Now, it’s very important to look at the lead underwriters, because they are putting their reputation on the line by underwriting Chinese IPOs. I think the market is gaining confidence in the bigger underwriting firms that are doing the Chinese IPOs. At this stage, we’d shy away from any Chinese IPO underwritten by a non-major investment banking firm.
EQ: There are three IPOs scheduled for next week with Coty (COTY), Gigamon (GIMO), and Aratana Therapeutics (PETX). What are you expecting here?
Gaskins: COTY is a smaller competitor to L'oreal S.A (OR), Estee Lauder (EL) and Avon Products (AVON). COTY’s financial record shows spotty profitabilty trends. They do intend to IPO at a P/E discount to segment competitors. COTY has a negative price-to-tangible book value, which suggests it’s been stripped of cash by its leverage buy-out owners.
100% of the proceeds are going to selling shareholders, which isn’t a positive. We expect COTY to be OK, not great, in the IPO aftermarket.
Gigamon, on the other hand, is our IPO pick of the week because of increases in top line revenue. GIMO has identified a specialized niche in switch traffic management & reporting, and appears for the time being to have a niche jump on its larger competitors, which include Cisco Systems (CSCO), Juniper Networks (JNPR) and Brocade Systems (BRCD).
GIMO was profitable in 2010, 2011 and 2012.
For Aratana Therapeutics, since its founding in 2010, it has licensed three compounds, and is developing into six products for use in pets in the United States and Europe.
Potential competitors include large animal health companies, such as Merck Animal Health, the animal health division of Merck & Co., Inc.; Merial, the animal health division of Sanofi S.A.; Elanco, the animal health division of Eli Lilly and Company; Bayer Animal Health, the animal health division of Bayer AG; Novartis Animal Health, the animal health division of Novartis AG; Boehringer Ingelheim Animal Health, the animal health division of Boehringer Ingelheim GmbH; and Zoetis, Inc.
Aratana is currently conducing clinical studies, and then plans to conduct clinical trials, so it appears that revenue generation is a long way off. We believe PETX will price below its initial range.
EQ: There are also reports that retailer The Container Store is planning to do an IPO soon. Does this niche company have much potential to grow?
Gaskins: The Container Store is a specialy reatailer that created the storage and organization retail category in 1978. They have 64 stores now, and several years ago had 49 stores, so the annual store opening growth rate isn’t very high.
They have only 10 stores in California and 13 in Texas, where they are headquartered. They are in 22 states plus D.C., so it looks like they’ve cherry picked their locations (makes sense).
Their stores are about 25,000 square feet, which is a little more than half an acre. If they are going to grow meaningfully, then they may have to downside their store size to get to smaller communities. And once their S-1 is filed it will be interesting to see what percentage of revenue is generated from online activity.