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Playing the IPO Market: When to Flip ‘Em and When to Hold ‘Em

The IPO market saw some strong debuts last week with Taylor Morrison Home Corp. (TMHC), Rally Software Development Corp. (RALY), and Chimerix, Inc. (CMRX) enjoying successful first days.In this

The IPO market saw some strong debuts last week with Taylor Morrison Home Corp. (TMHC), Rally Software Development Corp. (RALY), and Chimerix, Inc. (CMRX) enjoying successful first days.

In this week’s interview with Francis Gaskins, President and Editor, we discuss why investors were chomping at the bit for these new issuers, and what companies are 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 here.

EQ: Taylor Morrison Home Corp. (TMHC) completed its IPO this week, and is up almost 10 percent from its debut price of $22 per share. This was one that you seemed to like when we last spoke. How long do you plan to keep tracking this stock now that it has completed its IPO?

Gaskins: We generally track IPOs for several weeks after they IPO. For almost all IPOs the flippers flip quickly, usually in the first minutes. If an IPO has good financial fundamentals and is somewhat undervalued relative to its peers, then traders sometimes can buy in the first few minutes for a small quick gain, often larger if they hold it for several weeks.

Here are two recent examples

Enanta Pharmaceuticals, Inc. (ENTA):

Aviv REIT, Inc. Common Stock (AVIV):

Regarding Taylor Morrison Home, the flippers flipped quickly and the stock traded down the first day. However, because it has good fundamentals and is in a sector that is doing well, the stock price increased in days two and three of trading.

EQ: Housing is a hot sector right now in the market, and it seems that investors are hungry for more ways to get into this market. Do you think this will encourage more IPOs out of this industry in the near to intermediate future?

Gaskins: Most likely yes. In this market it almost always depends on financial fundamentals and how the investment bankers price the IPO.

As for upcoming IPOs to watch for in this industry, William Lyon Homes (WLH) filed an S-1 April 9, 2013, and could set a price range as early as next week and be public within two to three weeks time. William Lyon Homes is one of the largest regional homebuilders in the Western U.S., and is headquartered in Newport Beach, California.

According to the company’s description, it is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado, with its core markets being the Orange County, Los Angeles, San Diego, the San Francisco Bay Area, Phoenix, Las Vegas and Denver markets.

More from William Lyon Homes: “We have a distinguished legacy of more than 55 years of homebuilding operations, over which time we have sold in excess of 75,000 homes. Our markets are characterized by attractive long-term housing fundamentals and, based upon the Burns Home Value Index, eight of our markets have experienced double-digit year-over-year home price appreciation. We hold leading market share positions in most of our markets and we have a significant land supply with more than 11,800 lots owned or controlled as of December 31, 2012, representing a 13-year supply of lots based upon our 2012 home closings.”

EQ: Chimerix and Rally Software, which debuted on Friday, were the best performers among IPOs of this past week. Can you tell us about these offerings?

Gaskins: Rally provides solutions through the cloud and has significant top line revenue increases, year-over-year. It also has losses but 77 percent of top line revenue is recurring subscription revenue, which the stock market loves. Investors are excited about Rally getting to break-even with subscription revenue, which is costly to acquire in terms of marketing and sales.

There was a lot of interest in RALY pre-IPO because several cloud companies IPO’d recently and traded up from their IPO prices. The flippers flipped and the ‘cloud’ buyers stepped in, so the stock traded relatively flat in its first day, last Friday.

Chimerix is a biopharma that priced mid-range. IPO flippers flipped and CMRX ‘believers’ stepped in. Biopharma’s are notoriously hard to evaluate because they often have drugs in Phase 3 clinical trials, which of course don’t all turn out favorably.

Morgan Stanley was the lead underwriter, is active in the biopharma IPO area, and has a good reputation. They probably priced CMRX attractively so that it would be a success in the aftermarket, which is very good for them in terms of getting other biopharma companies as IPO clients.

IPO aftermarket traders did make money with CMRX.

EQ: There are about seven IPOs scheduled for next week. Can you discuss the ones that stand out to you?

Gaskins: Blackhawk (HAWK) is our ‘IPO pick of the week’

HAWK is a premier company in its market segment, gift cards, and should be bought on the IPO. Its future is bright.

HAWK has been incubated by Safeway (SWY) — $6.4 billion market cap — since its founding n 2001. HAWK now

• dominates the gift card market,
• has a very clean balance sheet,
• pays high commissions to its resellers and
• has no interest payments to private equity sponsors such as Blackstone and Apollo, both of whom are using the current stock market to cash out of many of their private equity investments.

SeaWorld Entertainment (SEAS) is also interesting. SEAS is a collection of differentiated theme parks, with SeaWorld itself the core brand.

At the price range mid-point SEAS/Blackstone intends to pay a 3.1 percent annualized dividend.

Comparing 2012 with 2011 — revenue is up 7 percent, attendance is up 3 percent, revenue per capita is up 4 percent, operating income is up 58 percent and net income is up 305 percent. SEAS is benefiting from an improved economic climate, relative to 2009. However, the rate of growth in operating earnings and net income can’t continue.

Fairway Group Holdings (FWM) is a retail food chain based in New York City. There appears to be IPO demand for FWM. However, FWM just cannot make money. For the December 2012 nine months revenue was up 19 percent to $482 million, losses increased to -$30 million from $-17 million, interest payments increased to $17 million from $12 million.

And, FWM has an accumulated deficit of -$251 million. Plus, 62 percent of the IPO proceeds are going to pay past due preferred stock dividends, equity sponsor termination fees, and management bonuses. Only $51 million is allocated for new store openings and growth.

If FWM increases in price from its price range mid-point of $11 then we know the ‘greater fool theory’ is back, at least regarding FWM.

Intelsat is the world’s largest provider of satellite business services. It is one of the most leveraged (both balance sheet and income statement) businesses IPOdesktop has seen:

Negative tangible book value: The post-IPO balance sheet shows a negative net worth of $1.05 billion. However, that balance sheet also shows goodwill of $6.7 billion and amortizable assets of $700 billion, for a total of $7.4 in ‘water’ on the balance sheet.

Adjusting for the ‘water’ on the balance sheet Intelsat shows a negative tangible net worth of $8.4 billion, not including ‘unamortizable assets’ of $2.5 billion.

In balance sheet terms, Intelsat is the most highly leveraged – and still operating — company IPOdesktop has ever seen. The leverage also shows up on the income statement where about 50 percent of revenue goes to pay interest.

Flat top line revenues: The Fixed Service Satellite (FSS) sector, as a whole, has experienced growth over the past few years, but Intelsat has grown revenue only 1 percent per year for the past several years.

Do Fed bank regulators not at least read about what their monetary policy brethren are doing? Rates have been rising for a year! The regulatory executives who somehow overlooked this should be asked to polish their resumes and seek other pastures.