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

Francis Gaskins  |

The 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, 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 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.

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