FOUR PROFITABLE IPOs
(1) IPO pick of the week
Noah Holdings Limited (NOAH).
Small $84mm IPO with a market cap of $547 at a price range mid-point of $10. Scheduled for Wednesday, November 10, 2010
Distributes wealth management products in China. Impressive results for the nine months ended September 30. Compared to the year earlier period:
- Sales increased 260%
- Income increased 500%
- For the six months ended June 30, 2010 average transaction value per client increased to US$1.0 million from US$0.5 million
With a P/E of 41 (annualizing the September three months) NOAH should attract considerable investor interest, because there is room for substantial growth.
Conclusion: based on recent quarterly results, NOAH should be a good IPO trade, at least.
Conclusion: RDA looks like a good speculation at the price range mid-point of $9.50
RDA’s business is characterized by volume increases and price declines driven by competition. Annualizing September quarter results shows a P/E ration of 13, low for a fast-growing company. The low gross margin of 30%, however, suggests the value add isn’t especially unique & may not be defensible over the longer term.
(3) Inphi (IPHI)
Fabless semiconductor based in Sunnyvale, California with most of its customers in Asia. Small $88mm IPO with a market cap of $312mm at price range mid-point of $11. Scheduled for Thursday, November 11, 2010
Conclusion: IPHI looks like a safe bet at the IPO price of $11. However, 1/3 of revenue is generated from Samsung (GM:SSNLF), which together with associated entities, holds over 13% of IPHI’s stock, pre-IPO.
One issue is that IPHI supplies a high-speed interface (converter) between analog signals and digital information in high-performance systems. The world, of course, is moving to a more digital environment.
Smaller fabless semiconductor companies with good growth and good gross margins (such as IPHI’s 64%) can achieve higher multiples than IPHI”s IPO P/E multiple of 27
Conclusion: Based on recent financial results -- slow sales growth, earnngs decline -- and high P/E of 54 (annualizing September 30, 2010 nine months results) IKAR seems risky at $16.
- IKAR posted a posted a 55% decline in profit for the nine months ended September 30, 2010 (compared to the year earlier period) to $6.5mm from $14.6mm.
- Revenue increased only 10%, and a large part of that increase was due to a price increase.
- Gross profit declined to 78% from 81%
- Operating earnings declined to $27mm from $32.7mm
- Interest rose to $14mm from $7mm
- Extinguishment and modification of debt accounted for a $3.7mm charge
FOUR MONEY LOSING IPOs
(1) Complete Genomics (GNOM)
Offers DNA/human genome sequencing an outsourced basis, which means customers don’t make capital expenditures, a plus in today’s economic climate. A relatively small IPO of $78 million, with a market cap of $338 million at the price range mid-point of $13. Scheduled for Wednesday, November 10, 2010
Conclusion: If you liked Pacifc Bioscience’s (PACB) recent IPO, then you might want to diversify and own some GNOM. On the other hand, if you like visible sales and profits, you’ll pass on both companies.
Pacific Biosciences had its IPO on October 26 at $16 and is now a little above $16. PACB offers a platform which needs PACB consumables. GNOM has a backlog of $9 million. PACP has a backlog of $15 million.
GNOM IPO pricing is based on PACB’s IPO pricing. For example, notice in the table below very similar valuation metrics.
Annualizing June, 2010 six months results. GNOM vs PACB
Market cap: $338 vs $819
Price/Backlog: 38 vs 55
Price/Earnings: -6.3 vs--6.5
Price/Book Value: 2.9 vs 2.6
(2) Richmond Honan Medical Properties REIT (MOB)
$273mm IPO at a price range mid-point of $14. Scheduled for the week of November 8, 2010. It's a money losing medical properties REIT. It wants to make its IPO at 1.6 times tangible book value, and doesn’t specify the payout target.
Conclusion: Stay away from MOB. Losing money and overpriced.
For example, on a compare and contrast valuation basis, two fairly recent IPO REITS sell at 1.5 times tangible book value and pay (or plan to pay) in the 5% range: Campus Crest (CCG) and Piedmont Office REIT (PDM).
Other REITS that pay in the 2.3 to 3% range sell for 1 to 1.2 times tangible book: Whitestone REIT (WSR) and Hudson Pacific (HPP) both sell for 1.2 times tangible book. Excel Trust (EXL) REIT sells for 1 times tangible book.
(3) Wave2Wave Communications (WAV)
$40mm IPO, $120mm market cap at price range mid-point of $9. Scheduled for Wednesday, November 10, 2010. Provides broadband communications services to business buildings.
Conclusion: Stay away from WAV. Breakeven isn’t in sight.
WAV is overpriced because
(a) Sales declined for the six months ended June 30, 2010 vs. the year earlier six months.
(b) For the six months ended June 30, WAV generated operating losses of $7mm loss vs a $1.2mm loss for the comparable year earlier period.
(c) Negative price-to-tangible-book value of –3.3, indicates the balance sheet is highly leveraged and constrains growth.
(4) Cutanea Life Sciences (CTNA) is a development stage specialty pharmaceutical company planning a phase III clinical trial. It's a small IPO with a $25mm projected market cap at the price range mid-point of $6.50. Scheduled for Wednesday, Nov 10, 2010
The payoff could be big, but not all phase III trials are completed successfully.
Conclusion: CTNA seems more like a public venture capital investment with a high degree of risk. Stay away.