Petrie Parkman IPO: Beware The Valuation

Another boutique investment bank has filed for an IPO. Petrie Parkmark (PDP) is in the energy sector, so given the current market dynamics everyone will agree that now is the time.

Having worked at firms like this for years, I can't resist having a look to see if they have an innovative business model indicating that outside equity holders could earn strong returns.

Petrie actually appears far worse than average. At first glance, one is struck by their stunning growth - revenues were up 79% YoY for 1H06 to $62.3M. However, expenses up 81% to $62.2M wiped out any profit for the period. We understand that typically this is a high period for compensation so overall profits will be better for the calendar year, as they were for the full year 2005 (see below).

Aside from the fact that the company revenues are all directly linked to the red-hot energy sector, they are actually even more concentrated -- with a full third coming from just one client in 1H06.

For the full year 2005, the company generated 5.6% margins. Looking at 2006 we can use $125M as full year revenue and suggest a 10% margin target to guess at a $12.5M net. Putting a 10x multiple on what could be peak earnings for the company and adding the $60M in cash we get to about $200M valuation.

There are plenty of expansion opportunities for the firm in related areas and geographically, but they will all involve investment. Due to the compensation overhead ($1.2M/employee in 2H06) the outcome will depend on a sustained level of high activity in energy.

On the surface, Petrie looks to be an outstanding company in its niche and provides excellent value for their clients and employees. Yet the risk/reward for outside equity holders doesn't look very good unless the stock is priced at a very reasonable valuation (the IPO pricing has not yet been established).

Investors need to price in the likely case that revenue in a future year will be down. Given the business
model and compensation structure, Petrie is not likely to fare well then.

Related: Energy Investment Bank IPO: Highlights from Petrie Parkman's S-1 Filing