ipo trader

Upcoming offerings...

3 scheduled this week, analysis of RACK available on the left margin, will be adding Aries/Xenoport next day or so.

The oft requested 'Upcoming offerings' section has been updated with capsule summaries for  'week of 6/6' and my initial opinion in bold.  Will add week of 6/13 this weekend and than continue updating that section each weekend thereafter. Those can be found here:

http://www.tradingipos.com/Upcoming.html

As mentioned before all ipo analysis from past 3 months has been shifted to tradingipos.com If you've not done so previous, feel free to knock around the analysis pages, I think you'll be a bit impressed.

Site look will be revamped here over next few weeks and will be adding a message board/moving blog to that domain as well....Aim is to offer the best analysis on the web on ipo's from a trading perspective: in other words I want to help you make money on these things either by 1) taking allocations on the good ones or passing on the bad 2) locating trading opportunities in the aftermarket.

I've spent a lot of hours doing just that the past 6 years, and think I'm the best out there at this.  Hopefully you all will hang in there with me as I get the new site looking good and adding more features etc...thanks so much for visiting the blog past 3 months, the nice comments/e-mails have been worth all the extra work and effort!

-Bill

SMA trade...

Booked 1/2 the SMA trade here for close to 4 1/2 this go round as it closed in on $23(have been fortunate to grab roughly 9 points on this playing it since it's ipo in december)

recommended it near $17 about a month ago:

http://www.tradingipos.com/analysis/special/SMA.html

Like it very much longer term, the sector has struggled to catch a bid last month, makes sma's move-up all the more impressive. SMA has now crept into the lower valuation ranges of it's group, after being severely discounted a month ago. 

would like to see a push up thru $23 to let the other 1/2 go, we'll see how that plays out

new site...

Should be fully complete/ready to go in a couple of weeks...all the 'analysis has been shifted over there currently than a few weeks hence will have messageboard/blog up and running there as well as the oft requested 'upcoming issues' looking at ipo's 2-3 weeks out via capsule summaries of prospects. 

can be found here(and keep in mind it is most definitely under construction).

www.tradingipos.com

morning...

Not sure about you, but I certainly am looking forward to the three day weekend.

RACK has been pushed back into next week---as I mentioned in my analysis, I'm not really impressed with this one under the surface. Quarterly revenues have been trending flat past 5 quarters and they've not been able to increase operating profit margin much over 2% since their big revenue jump 12/03...not a good combo for longer term stock price appreciation, much more so for disappointment. Not one ot overpay for at all in my opinion.

2 others on the schedule, Xenoport/Aries Maritime. Xenoport on the docket due to the success of NRPH, both are attempting to refine/improve existing drugs.  Aries, might be coming about a year too late, we shall see. 

It's not that I'm a curmudgeon on IPO's at all as I've made a living for close to 6 years now trading ipo's in the aftermarket for my own account....It's that the quality overall of the '05 offerings is well below 2003/2004. Well below, it's not even close. The good deals, priced for price appreciation have been few/far between the first 5 months of '05 unfortunately. Most times this year it's been better to step aside and save yourself a little money, or if allocated to turn the shares over quickly and stand aside...either way standing aside has been the best bet. We're starting to see here lately instituitons/funds finally do just that and there has been difficulty getting the shakier deals out the door at any price.

I do believe because of this newfound instituional reluctance we'll get a few good deals here going forward that are initially ignored/underpriced ..Usually when the bigger players stop taking down stock on deals, a few good ones sneak thru under the radar..and when they do I'll be here to let you know.

Have a good holiday weekend!

IHS/SSAG...

SSAG priced at $11, discounting their offering price 21% from midrange of the previous $13-$15. They reduced shares offered in the ipo from 14.3 million to 9 million. Also they've wiped out a 100 million dividend payout from offering to insiders....I think the deal now becomes something you can look at a bit closer. I still don't like that they've been unable to expand operating profit while rolling-up companies, but this slashing of price/restructuring of the deal probably means pricing level holds short term---if they'd gone ahead and shoved this offering in at $13 with the previous terms, it would have opened broken:  something I've seen more in '05 than any time since the market bottomed october '02.  It now goes from a shaky deal to one that the price is probably about right on offering. I don't think that it offers a compelling 'buy' still, but the deal will get done now and it should do okay shorter term.

IHS postponed ipo, either IHS didn't like the projected pricing point or they've a potential suitor. We'll find out eventually I suppose. 

RACK, Rackable Systems

RACK, Rackable Systems, planning to offer 6.3 million shares price range of $11-$13, Thomas Weisel lead underwriter, a bit different type company for them to lead as most of their deals past few years have been small development stage bios/pharmas.  Roughly 20 million shares outstanding post-offering.

According to the lead statement in the s-1: Rackable Systems provides turnkey servers and storage products for large scale datacenter deployments.

Riding the wave of 'scale out' solutions, high density, lower price..RACK feels they've product/patents to compete in the 'scaling out' of server/storage solutions by offering high density servers/storage built to order/open source in a space saving fashion...specifically these guys sell to high volume data-centers, those that need massive server/storage space.   Alright sounds fine, let's see how that's working for them huh.

no debt, most proceeds going for general corporate purposes, $2 a share in cash post-offering. potential options dilution not particularly onerous, especially for a tech deal. 

they ramped up revenue significantly beginning in the December quarter of '03 but since than it's been erratic and not trending upwards overall. The quarterly revenue has been all over the place previous 6 quarters, and it's debatable how much top-line growth they'll put together in '05. the past 6 quarterly revenue numbers(beginning 12/03) have been:  $27 million; $18 million; $35 million; $34 million, $23 million, $30 million.

Very competitive sector, RACK competes with Dell/Hewlett Packard/IBM/Sun Micro, essentially much larger enterprises able to slash prices to compete effectively. RACK's gross margins bear this out as it's been in the 18-20% range past few years including march quarter...These gross profit margins don't give them a whole lot of wiggle room for net margin, now or in the future...

gross margins have remained consistent quarterly as have sales/marketing ratio of 10% of revenue...which means they probably won't really be able to leverage top-line gains straight to bottom line, stalling operating in the 2%ish range before taxes right where they've been recent quarters when you fold out stock compensation...this is a low margin, tough business indeed and 2% operating margin might as well be zero if you've any stock compensation or other charges at all.  It's more than a bit concerning that operating margins didn't increase with that 12/03 revenue ramp, a yellow flag at least...to me more of a red flag---in a healthy strong biz model, operating margin would be expanding with topline growth, and here it just hasn't.

Yahoo has accounted for over 1/4 of revenues since that 12/03 ramp and Microsoft was a significant customer in '04, but declined significantly in the march '05 quarter as a sales agreement with hp/Microsoft/rack expired 1/1/05...looks to me as if that 12/03 ramp was caused by Yahoo/Microsoft buying; questionable how much more revenue will come from MSFT as they went from 36% of '04 revenue to 6% of march Q '05.  almost looks as if they've moved on after the agreement expiry---that's pure speculation on my part, but that's a pretty large % drop, pretty quickly---dovetails too with the 2nd/3rd Q '04 being top-line peaks thus far. if this is the case, RACK is going to have trouble growing top-line significantly in '05---think expectations are going to be for 50% or so, and I think you could see something closer to 10% top-line growth in '05.

This deal has received a lot of positive press and it's being touted in some circles pretty heavily. I think it's a competitive little company that puts together a good product, judging by the overall revenue growth the past 3 years. But, this is a razor thin margin biz, they're a small player with 2% operating margin and stagnant revenue prior 6 quarters. On that basis, I don't see where the draw is here.

Does that mean one of their cash-rich competitors won't overpay to buy RACK? no of course not, it's a development I wouldn't be surprised to see actually. But longer term on their own, I'm not sure if they'll ever be able to reach a nice level of profitability.  I doubt it sincerely actually.

my guess is that RACK will do well early as there's been some tech enthusiasm lately, but longer term they should really struggle on their own. 

Conclusion: Operating margins and recent q2q revenue stagnancy should lead to disappointment for shareholders down the line..most likely after a little too much initial enthusiasm

I just can't get excited about RACK.  This is definitely one not to chase, the numbers just aren't there. 

TLP, TransMontaigne Partners

Petroleum pipeline/terminal/storage limited partnership offering roughly 3 1/2 million units at a pricing of $21.4.  UBS lead underwriter, Citigroup co-underwriter. TLP was formed by parent TMG specifically to launch a limited partnership unit offering. Roughly 7 1/2 million units outstanding after offering, including over-allotment. TMG will retain control/general partnership of TLP post-offering.

Petroleum and natural gas pipeline/terminal/storage limited partnership ipo's have been by far the best performing ipo group of the past 5 years: from VLI, SXL, thru XTXI/HEP/CPNO/HLND and a few others, they've all done quite well. 

TLP operates terminals/pipelines in Florida/Missouri/Arkansas. Parent Transmontaigne is largest customer and has contracts with TLP for $20 million annual revenue or roughly 60% of TLP's total revenue in '04. 

TLP operates like most of these limited partnership pipeline/terminal offerings in that they charge for the flow of petroleum products thru their pipelines and at their terminals/storage facilities...they consistently make money as long as the product is flowing pretty much regardless of the price of the underlying product....they than pass all available cash directly to unit-holders each quarter. It's been a nice secure yield in the sector past 5 years as energy demand has remained consistent and product has flowed heavily thru these partnership's pipelines/terminals.

Nearly all of the ipo proceeds will flow directly to the parent TMG; Debt not much of an issue here.

TLP plans to pay a 40 cent quarterly yield, $1.60 annually...at $21.5 it would be 7 1/2% and rarely in the past two years  have these pipeline/terminal partnerships trade much higher than 6% annually, and when they do it doesn't last very long.

TLP notes however that pro forma, as if the offering had taken place 9 months prior, they would not have been able to fulfill minimum distribution for all units ALTHOUGH they do state they would have been able to pay the full distribution on all common(those sold on offering are 'common units' and get paid first) units for the prior 7 quarters and believe due to a TMG/Morgan Stanley deal(of which MS essentially gets paid via 450,000 shares in TLP) they'll have enough cash via operating profit to pay all unit yield thru june '06....that's 11 straight quarters of yield past/present/future for the common holder I'm not concerned at all about ability to distribute the 40 cents quarterly---I don't believe with this offering, distribution will exceed 40 cents a quarter by all that much in the foreseeable future though--however TMG/TLP have on the table potential future terminal acquisitions for TLP which would increase yield down the line

TLP not nearly as strong as XTXI/SXL/VLI in that their parent TMG not as strong an operation, and future growth/acquisitions will most likely not be quite as available as they've been to the three mentioned. Also it's much smaller than those three and smaller than independents CPNO/HLND. CPNO/HLND both trade at roughly a 5 1/2% yield and these type plays trade on a yield/future expected yield not pe or peg or any of those things---SXL which just held a secondary that knocked it's stock down is at roughly 6% post offering, XTXI 4% and VLI 5% etc...

TLP at $21.4 will trade at a 7 1/2% yield...these pipeline/terminal limited partnerships don't usually trade at this yield level. TLP is the weakest of these offering past few years as noted above---I'd expect TLP to find it's way in the 6% yield area at some point which would be the $27 area for the stock--that's probably the high end here unless or until TLP is able to acquire assets to boost the yield on down the line. 

Conclusion: a relatively/comparatively weak deal right smack in the best performing ipo niche of the past 5 years.....pricing has left potential upside in the stock price on a strictly yield basis, while distribution of $1.60 looks quite secure into the foreseeable future.

an open in the $22-$24 range should allow for stock price appreciation, based simply on it finding a 6% yield basis at some point, which would place it at a bit of a (deserved imo) discount to other similar tickers. 

next 2 days...

RACK/TLP/SSAG scheduled for tomorrow will have analysis of RACK/TLP up this evening. IHS for thursday will have analysis on blog tomorrow evening for that one.  Will also update SSAG based on pricing...hope you all are well and thanks for stopping by---hope you find my little corner of the web somewhat useful...as always please feel free to comment, and always receptive to e-mails(link on upper corner of blog)

one product bio/pharmas & CHCI

I've written in the DXCM analysis about the danger of essentially one product in the pipeline pharma/biotech offerings---they always to me seem to be very optimistically priced and rarely take into account potential pitfalls...one offering that opened 50% or so above pricing last year EYET, once again proves out this point. I don't know how or why people take on this kind of risk with these things, so many year after year lose 50-90% of their value when something goes wrong. Please be aware when you're buying issues like DXCM/EYET that they're priced for their product hitting market and being successful, anything other than that and you will lose a significant amount of your investment, potentially overnight.  These kind of offerings in my opinion are rarely good risk/reward situations and I'm not posting this entry as a hindsight 'ha-ha', but rather to point out the temptation and the danger---because there will be plenty more of these kind of offerings over the next few years...and to me it's virtually impossible to pick the one or two every couple of years that goes on to be huge long term winners, but it is easier just to step aside so as to avoid all the rest that cause pain and hurt to your account.  No matter how good the story, you can't buy these type offerings 'up', only when the optimism is sucked out, usually after a prolonged market slump when they lose 50%+ of their offering price....anytime else and you're potentially looking at this:

and this type chart happens all the time with these sort of offerings..and no I've no interest in trying to bottom catch EYET here, that's not what I do. You've just got to look for good risk/reward set-ups and not expose yourself to potential charts like this one...go to vegas and play the craps table if you're looking for excitement or put some money to work in a venture fund if you're looking for 'the next big thing'....a lot of former traders have looked for excitement and 'the next big thing' in the market..a lot...former traders.

chci diluting shareholders by roughly 20% with this secondary...surprised it's only down 5% here, should be closer to 10%, think it may be. they'll be able to use the cash to help biz, but down 5% on a 20% dilution of shareholders a bit too small...bet price catches up a bit, maybe overshoots at some point? I'd like it on that gap fill for sure.

SSAG-SSA Global Technologies

UPDATE 5/25:SSAG priced at $11, discounting their offering price 21% from midrange of the previous $13-$15. They reduced shares offered in the ipo from 14.3 million to 9 million. Also they've wiped out a 100 million dividend payout from offering to insiders....I think the deal now becomes something you can look at a bit closer. I still don't like that they've been unable to expand operating profit while rolling-up companies, but this slashing of price/restructuring of the deal probably means pricing level holds short term---if they'd gone ahead and shoved this offering in at $13 with the previous terms, it would have opened broken.  It now goes from a shaky deal to one that the price is probably about right on offering. I don't think that it offers a compelling 'buy' still, but the deal will get done now and it should do okay shorter term.

Original analysis follows:

Roll-up global enterprise software/related services provider. 14.3 million share offering, 71 million outstanding. JP Morgan/Citigroup lead, price range $13-$15. Main focus is 'resource planning' essentially software suite/packages that manage a company's backbone from HR/thru sales & marketing/budgeting/supply chain etc...

Offering $$ is going to pay off insiders..where have we heard this before?

We've seen a plethora(of pinatas?) of LBO offerings in '05, we really haven't seen many roll-up offerings however. the 2005 version of SSAG is comprised essentially of four companies melded together over the past 5 years: Systems Software(whose assets were in bankruptcy, Infinium Software, Baan UK ltd., and EXE Technologies. There have been 4 or so other smaller deals, but these 4 represent the bulk of SSAG's revenue.

Offices all over the world, plenty of customers in a myriad of businesses, 70 patents etc...here worldwide really means worldwide, not like those airports that call themselves 'International' and have one flight to Toronto---you know who you are MDT.

To be honest I tend to step aside on most of these roll-up type ipo's---why? Well they often tend to be a bit bloated and one thing I'm looking for(one of the main things) is a lean company that will be able to flow future revenue growth right to the bottom line---roll-ups tend to have trouble with this all things being equal.

Industry is projected to grow revenue annually by 8-9% over next 3 years....however one thing we learned from the last economic slowdown is that new enterprise software purchases/licenses are one of the first expenditures to be reigned in during the tough times, so take those growth projections with that in mind.

Okay on to SSAG: Spread nicely all over the world, diverse product base, receives roughly 50% of revenue from servicing licensees; growth strategy appears to be to continue doing what they're doing.

Organic growth: looks like licensing fees grew about 20% organically thru 9 months ending 4/05(after a stagnant '04 though), but revenue itself grew organically only roughly 5% thru that time period. Including acquisitions revenue for that 9 month period grew roughly 12%.

sales/marketing jumped 17% for 6 months ending 1/1/05 while overall organic revenue grew just 6% thru that 6 month period.  sales/marketing growing slower than licensing revenue so not disastrous, but I'm wondering why, with the nice recent licensing growth, the service/other revenue growth really not there past 6 months. They do note that support renewals have grown significantly in the past year, while reason for service revenue decline is a pullback on consulting concentration...really hard to get a handle on their numbers/growth as different segments have gone up/down as a % with each new acquisition.

debt to equity after offering manageable at about .16, so expect plenty more acquisitions to come.

Trailing earnings tough to get a clear picture due to the '04 acquisitions, but looks like roughly 30-35 X's earnings for 2004. Looks like they could potentially put 45-50 cents on the bottom line in '05 putting them roughly 28-30 X's earnings for '05 at mid-range of offering...actually a bit pricier than SAP/ORCL using just that measure.

I believe they'll continue to show nice top-line growth due to acquisitions but I'm not certain how well they'll be able to flow that to bottom line...They've done a nice job keeping overall expenses in line and more or less maintaining margins, so the companies have been integrated fairly well from that point of view. However the bottom line growth pales in comparison to the topline acquired revenue growth: their operating income has been comparitively flat since mid '02 even while doubling+ revenue

For every positive here to recommend this deal there seems to be a corresponding question mark...this isn't a bad deal, just one to me with some very real issues, the biggest being that organic revenue growth for the 9 months ending 4/05 trails the industry growth for that period--I don't like that in a new offering at all....what I'd like to see in a company like this is organic growth exceeding industry growth AND acquiring immediately bottom line accretive businesses. Yes that's a high bar, but it's what I want to see in this type of biz/company before I get interested....they don't seem to be really be doing either. the acquisitions seemed well managed and some have seemed to be accretive to earnings immediately while others seem to be more in the 'longer term investment' category.

I don't see really why one would want to own SSAG in the $13-$15 price range rather than say SAP or ORCL, two competitors...not a bad company or offering, just not real enticing in the $13-15 range to this analyst/trader.

Should be interesting to see if institutions want to take blocks of this one in range...I think it may be a tough sell, but a lot of '05 pricings have surprised me.  I'll update should they slash this to $10-$11, that would be the price range to get me to take a 2nd closer look here.  My guess is that with software finally catching a bid here recently, the window to get this out might be open. We'll see, I'm going to pass in the $13-$15 range, not with the disdain of many recent deals, but politely..pass nonetheless here.