Playing the IPO Market: Investors Hope Noodles Can Replicate Chipotle's Success

Francis Gaskins |

GaskinsThe first half of the year closed out with a flurry of IPOs, as covered here. Will the momentum carry over to the next six months? Francis Gaskins, Director of Research for Equities.com, discusses his thoughts. Gaskins has been recognized by major financial media outlets such as Forbes, CNBC, Bloomberg, and many others as 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: Last week, Noodles & Co. (NDLS) completed their IPO, and shares have already more than doubled since Friday. Is this the most successful IPO so far in 2013? Why were investors so excited about this company?

Gaskins: Noodles IPO'd on June 28, 2013, at $18 and closed up 104 percent. It traded recently up 27 percent, after the 104-percent moonshot. A moonshot is when an IPO closes up the first day 100 percent or more.

Noodles management came from Chipotle (CMG), which IPO'd at $22 on Jan. 2, 2005, closed around $46 the first day, and recently traded at $371. Noodles stock is being bought now without regard to current finandcials.

EQ: When an IPO jumps as much as Noodles has from its offering price, does that typically mean that the underwriters mispriced the stock? One example we've seen would be the fallout between Dangdang's (DANG) CEO and Morgan Stanley (MS) a few years ago.

Gaskins: The Noodles IPO after-market price activity took everybody, including the underwriters, by surprise. Otherwise, the underwriters would have priced it higher. On a fundamental comparative valuation basis, Noodles pricing seemed in range pre-IPO, without considering the 'Chipotle' factor.

What was misestimated was the Chipotle "glow". That has transferred to Noodles. Also, the NDLS IPO was relatively small at $97 million. It's easier for smaller IPOs to 'moonshoot'.

EQ: There were also some signs that demand for certain IPOs may be weakening. HD Supply and CDW had to lower their offering prices, and some companies are reportedly backing away from their IPO plans altogether as the market has gotten more volatile. Is the flurry of debuts starting to cool off?

Gaskins: In June, 33 companies filed new registration statements with the SEC. Given the shortened IPO 'runway' due to the JOBS Act (companies only file now after they and the SEC have reached agreement), those companies will want to IPO if possible before the second week in August, when institutional investors leave town for Nantucket or similar places.

The overall market seems to want to go up right now, so the chances of a robust IPO market in July are fairly high.

EQ: There are still a few names grabbing attention on Wall Street right now. Candy Crush maker Midasplayer International Holding Co. and high-end retailer Neiman Marcus are both reportedly in the process of doing their IPOs soon. How do you feel about their prospects?

Gaskins: Candy Crush is as good as their recent releases, which have vaulted them to numer one on Facebook's list of popular games. However, Zynga (ZNGA), which has crashed since its IPO, once had that top spot, which suggests that game companies must run very fast to stay in the same place.

Candy Crush should benefit from investor interest in the videogame field, which some expect will rebound with the release of Microsoft's (MSFT) Xbox One and Sony's (SNE) PlayStation 4 later this year.

Nieman Marcus is a leveraged buyout. TPG and Warburg Pincus LLC are the sponsors. Nieman's financials are solid for the past several years, but the growth rate in revenue is only 5 percent to 10 percent, not much to write home about.

How Neiman performs depends on how the underwriters price it compared to its segment competitors. A number of institutions 'buy the segment' and likely will be buyers based on expectations of increased consumer buying later in the year.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CDW CDW Corporation 46.00 -0.28 -0.61 15,831
CMG Chipotle Mexican Grill Inc. 412.14 -1.67 -0.40 26,988
DANG E-Commerce China Dangdang Inc. American Depositary 6.63 0.00 0.00 0
HDS HD Supply Holdings Inc. 31.62 -0.28 -0.88 36,289
MSFT Microsoft Corporation 56.91 -0.53 -0.91 1,253,338
NDLS Noodles & Company 5.23 -0.06 -1.23 7,376
SNE Sony Corporation 33.43 -0.17 -0.51 26,900
UK Union Carbide Corporation n/a n/a n/a 0
ZNGA Zynga Inc. 2.82 -0.03 -0.88 33,712

Comments

Emerging Growth

AfterMaster Inc

Studio One Media Inc is a diversified media and technology company. It is engaged in the development and commercialization of proprietary, edge audio and video technologies for professional and consumer…

Private Markets

Initial State

Initial State is an Internet of Things (IoT) data analytics & data management platform company. We turn sensor and event data into information that matters by making it easy to…

8tracks

Our mission is to be the best place for people who care about music to create and discover thoughtfully curated playlists. In essence, 8tracks is a platform for online mixtapes.