Playing the IPO Market: Is Fairway Group the Next IPO Disaster?

Francis Gaskins |

Francis Gaskins, President and Editor of IPOdesktop

Last week saw a mixed bag of IPOs on the market, with several stronger performers, and others not so much. Meanwhile, one particularly name may be a solid candidate for joining the ranks of Groupon (GRPN), Facebook (FB), and other unfortunate names that will go down as some of the worst IPOs in history. Which company is it?

In this week’s interview with Francis Gaskins, President and Editor of IPOdesktop.com, we discuss some solid debuts last week, one setting up for a fall sooner or later, and what's in store for this week’s IPO slate. 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: BlackHawk shares debuted Friday, and jumped as high as 17 percent from its IPO price of $23 per share. The company focuses gift cards and prepaid credit/debit cards. Why are investors so keen on this industry?

Gaskins: Blackhawk (HAWK) dominates the gift card industry, sells through 100,000 stores, and has pretty much of an unbroken track record of financial metric success since 2009.

The gift card segment makes up 84 percent of its revenue. The rest is from General Purpose Reloadable debit cards, competing with NetSpend (NTSP), which is in the process of being acquired for $1.4 billion and Greendot (GDOT), both of which have struggled to show increasing top-line revenue and bottom-line profits.

Pre-IPO HAWK was 95 percent owned by Safeway (SWY) which didn't load up HAWK with debt the way almost all the other companies have done--for example Pfizer (PFE) with animal health company Zoetis (ZTS).

IPOdeskop recommended HAWK as a buy pre-IPO and also issued a buy in the aftermarket at $25, to paid subscribers.

EQ: Seaworld was another notable IPO on Friday, jumping up almost 25 percent at the day’s peak. Were you surprised that investors were willing to pay such a premium on a pretty what seems like a pretty mature business?

Gaskins: SEAS has become an iconic brand that is basically impossible to duplicate in this difficult regulatory climate.

Its core property is 50 years old and maintains its freshness. SEAS' properties are especially kid-friendly, more so than Six Flags Entertainment (SIX) and Cedar Fair (FUN).

Also SEAS was priced favorable at a discount relative to SIX & FUN with regard to price to sales and price to tangible book value.

For 2012 revenue was up 7 percent, attendance was up 4 percent and revenue per attendee was up 3 percent, based on an improvement in the US economy. Top-line revenue should continue to increase as and if the economy continues to improve.

IPOdesktop recommended SEAS as a buy pre-IPO to paid subscribers.

EQ: This week’s group of IPOs seemed to attract mixed reviews from investors, with a few trading below their offering price and others trading much higher. What were your thoughts overall for the week?

Gaskins: Financial fundamentals almost always drive institutional IPO interest. This week, however, Fairway Group Holdings (FWM) IPO'd at $13 and rose to $18. Fairway is a group of 12 high-end food stores, four in New York City and the others in the Connecticut area.

Management says they plan to expand to another 30 to 300 stores over time. But, FWM has never made any money, so if they open more stores they'll lose more money.

FWM is up, it seems, because it has a cult following in the New York area. Some people have even been married in FWM stores.

However, over time fundamentals almost always win out. Right now, FWM is levitating at a $741 million market capitalization--which reminds me of Groupon (GRPN) levitating above $20 for a long time. GRPN is currently at $6.35.

Just after GRPN's IPO, we went on Bloomberg TV and said GRPN was the 'Webvan' of the year.  Webvan was an IPO disaster in November 1999.

In both cases (FWM & GRPN) I'm sure the initial 'cult' buyers had absolutely no idea of the disaster of the underlying financial fundamentals.

Regarding Fairway Group, our call to paid subscribers was that it was an IPO trade but dangerous to hold in the aftermarket.

Three other IPOs had weak financial fundamentals. We advised paid subscribers to avoid them. They were

    • Intelsat S.A. (I) which priced at $18, 22 percent below mid-range and traded up 6 percent.
    • Taminco (TAM) which priced at $15, 21 percent below mid-range and traded down by 4 percent.
    • Hannon Armstrong Sustainable Infrastructure Capital (HASI) which priced at $12.50, 17 percent below mid-range and traded down by 9 percent.

EQ: The first half of April started off strong in terms of the total number of IPOs on the calendar, but the next two weeks seem much quieter. What do you see on the horizon?

Gaskins: The last two weeks have been the most active so far this year. The week of April 22 is light.

However, for the week of April 29, four IPOs are currently scheduled, with more to come, I'm sure.  For example, so far this year IPOs often set price ranges in the Monday-Tuesday time frame and IPO the following week.

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
DELTW Delta Technology Holdings Limited Warrant 0.08 0.00 0.00 0
FB Facebook Inc. 128.27 0.18 0.14 18,400,985
FRM Furmanite n/a n/a n/a 0
FUN Cedar Fair LP Depositary Unit 57.29 -0.21 -0.37 192,004
FWM Fairway Group Holdings Corp. n/a n/a n/a 0
GDOT Green Dot 23.06 0.15 0.65 238,644
GRPN Groupon Inc. 5.15 0.05 0.98 6,206,199
HASI Hannon Armstrong Sustainable Infrastructure Capita 23.37 -0.29 -1.23 288,159
HAWK Blackhawk Network Holdings Inc. 30.17 0.22 0.73 635,151
I Intelsat S.A. 2.71 -0.10 -3.56 284,162
PFE Pfizer Inc. 33.87 0.55 1.65 28,593,974
SIX Six Flags Entertainment Corporation New 53.61 0.36 0.68 1,455,959
ZTS Zoetis Inc. Class A 52.01 0.99 1.94 3,971,569

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