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Good And Bad IPOs From The Third Quarter
Thirty companies went public on U.S.
The Good - Part One
The first stock I would consider buying is Gordmans Stores (Nasdaq:GMAN), a Nebraska-based off-price retailer. It currently operates 68 stores with plans for more new locations annually for the foreseeable future. The company's management believes the marketplace will support up to 150 new stores in 16 states so they should be busy for years to come. GMAN's stores average 50,000 square feet, which is much larger than either TJX (NYSE:TJX) or Ross Stores (Nasdaq:ROST).
In September 2008, Gordmans was acquired by private equity firm Sun Capital and they went to work making it more profitable. Gordman's best year in terms of profitability prior to the buyout was in fiscal 2007 when its operating profit was $6.2 million on $420.5 million in revenues. In fiscal 2010, it generated $26.2 million in operating profits from $457.5 million in revenues, a 400-basis-point improvement in operating margins; yet its price-to-sales ratio is half of its competitors. Gordmans went public at $11, a fair price for a growing business and has since appreciated by 8%.
The Good - Part Two
If you're in the academic or healthcare fields, you might be familiar with SciQuest's (NYSE:SQI) electronic procurement solutions. Essentially, it helps organizations manage their businesses more efficiently through a number of different solutions using on-demand, software-as-a-service. I like three specific things about SciQuest and its IPO. First, it didn't go public until it was making money and had a demonstrated track record for consistent revenue growth. SQI's increased revenues for five straight years and made an operating profit in the last two. Secondly, insiders and management only sold 900,000 shares, and those were from the over-allotment, none came from the original 6 million. Lastly, the company's shares trade at comparable multiples to that of its competitors such as Ariba (Nasdaq:ARBA).
The Bad - Part One
My first pick, RealPage (Nasdaq:RP), has a market cap of $1.3 billion; this for a company whose first operating income came in 2009, a minuscule $6.9 million on $140.9 million in revenue. For the same market cap, you could buy CommVault Systems (Nasdaq:CVLT), a data management software company with $32 million in operating income from $271 million in 2010 revenues. To make matters worse, RealPage's operating income for the first six months of 2010 were actually $1.3 million less than in 2009. Valuation metrics suggest that other firms in the industry are a better deal than Real Page. In addition, CommVault is considered an excellent takeover target for Dell (Nasdaq:DELL) and other large technology companies.
The Bad - Part Two
This one takes the cake. Not $1 of Green Dot's (NYSE:GDOT) July IPO benefited the company. The entire net proceeds of $152 million went to selling shareholders. IPOs are supposed to be about companies accessing growth capital. This offering exhibits none of this. Green Dot is extremely profitable and many would argue that its prepaid credit cards provide a valuable service to the young and those with poor credit; however, others feel the fees charged by Green Dot for reloading cards are excessive and keep the poorest from advancing.
While I don't view Green Dot with the same disdain I have for payday loan companies, I do take offense when Tech Crunch founder Michael Arrington writes an entire blog post about how wonderful early investor Michael Moritz (Sequoia Capital) is and what a compelling story Green Dot makes. The fact is: Moritz and company are making a ton of money from the Green Dot IPO because investors are willing to pay 42 to 56 times earnings for a company that essentially sells gift cards.
Bottom Line
Looking back at the 30 IPOs from the third quarter shows that there are some good options out there, and also that there's a sucker born every day.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
The Good - Part One
The first stock I would consider buying is Gordmans Stores (Nasdaq:GMAN), a Nebraska-based off-price retailer. It currently operates 68 stores with plans for more new locations annually for the foreseeable future. The company's management believes the marketplace will support up to 150 new stores in 16 states so they should be busy for years to come. GMAN's stores average 50,000 square feet, which is much larger than either TJX (NYSE:TJX) or Ross Stores (Nasdaq:ROST).
In September 2008, Gordmans was acquired by private equity firm Sun Capital and they went to work making it more profitable. Gordman's best year in terms of profitability prior to the buyout was in fiscal 2007 when its operating profit was $6.2 million on $420.5 million in revenues. In fiscal 2010, it generated $26.2 million in operating profits from $457.5 million in revenues, a 400-basis-point improvement in operating margins; yet its price-to-sales ratio is half of its competitors. Gordmans went public at $11, a fair price for a growing business and has since appreciated by 8%.
The Good - Part Two
If you're in the academic or healthcare fields, you might be familiar with SciQuest's (NYSE:SQI) electronic procurement solutions. Essentially, it helps organizations manage their businesses more efficiently through a number of different solutions using on-demand, software-as-a-service. I like three specific things about SciQuest and its IPO. First, it didn't go public until it was making money and had a demonstrated track record for consistent revenue growth. SQI's increased revenues for five straight years and made an operating profit in the last two. Secondly, insiders and management only sold 900,000 shares, and those were from the over-allotment, none came from the original 6 million. Lastly, the company's shares trade at comparable multiples to that of its competitors such as Ariba (Nasdaq:ARBA).
My first pick, RealPage (Nasdaq:RP), has a market cap of $1.3 billion; this for a company whose first operating income came in 2009, a minuscule $6.9 million on $140.9 million in revenue. For the same market cap, you could buy CommVault Systems (Nasdaq:CVLT), a data management software company with $32 million in operating income from $271 million in 2010 revenues. To make matters worse, RealPage's operating income for the first six months of 2010 were actually $1.3 million less than in 2009. Valuation metrics suggest that other firms in the industry are a better deal than Real Page. In addition, CommVault is considered an excellent takeover target for Dell (Nasdaq:DELL) and other large technology companies.
The Bad - Part Two
This one takes the cake. Not $1 of Green Dot's (NYSE:GDOT) July IPO benefited the company. The entire net proceeds of $152 million went to selling shareholders. IPOs are supposed to be about companies accessing growth capital. This offering exhibits none of this. Green Dot is extremely profitable and many would argue that its prepaid credit cards provide a valuable service to the young and those with poor credit; however, others feel the fees charged by Green Dot for reloading cards are excessive and keep the poorest from advancing.
While I don't view Green Dot with the same disdain I have for payday loan companies, I do take offense when Tech Crunch founder Michael Arrington writes an entire blog post about how wonderful early investor Michael Moritz (Sequoia Capital) is and what a compelling story Green Dot makes. The fact is: Moritz and company are making a ton of money from the Green Dot IPO because investors are willing to pay 42 to 56 times earnings for a company that essentially sells gift cards.
Bottom Line
Looking back at the 30 IPOs from the third quarter shows that there are some good options out there, and also that there's a sucker born every day.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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