by David Sterman
It can pay to keep an eye on companies that have been public for only a few quarters. Many of them stumble out of the gate and get lost in the crowd. By the time these companies start to get back on track, you may be one of the few investors still looking at them. I specifically focus on companies that have been public for about a year. That’s just enough time to iron out the kinks.
The table below highlights seven companies that went public in the second quarter of 2010, all of which are now trading below their offering price (with one exception, which I’ll soon explain). For this exercise I'm looking only at companies with market capitalizations larger than $150 million, because companies with market values below that level may toil in anonymity for a long while to come. Of the group, several stand out as clear rebound candidates.
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Click to enlarge
Candidate #1: Alimera Sciences (Nasdaq: ALIM)
It’s been a challenging first year for Alimera, which has developed an injectable tube that provides localized steroids that keep the eye healthy. Clinical trials have shown that the device, known as Illuvien, has provided a clear benefit for those suffering from diabetes-related blindness. Soon after its initial public offering, the company received considerable buzz in anticipation of an imminent approval from the Food and Drug Administration (FDA). Instead, the FDA hit the brakes, and rather than accepting 24 months worth of clinical data, insisted on 36 months’ worth of data. Well, that data have come in and Alimera expects to re-file an application with the FDA in coming months.
Many investors have already moved on. They had been expecting FDA approval in 2010 with product sales ramping in 2011. Instead, that timeline has been pushed out by a year, which pushed shares of Alimera down by a third since late November. Of course, FDA approval is not guaranteed, but the prospects look quite good as the clinical data have shown impressive efficacy. This stock could move right back up to its 52-week high -- a 50% gain -- if this scenario comes to pass.
Candidate #2: Excel Trust (NYSE: EXL)
This is a case of right company, wrong time. This owner of strip malls went public at a time of investor uncertainty over these assets, as major retailers such as Blockbuster (OTC:BLOAQ) and Borders (NYSE: BGP) have been closing stores. This trend has been bad news for many existing players that carried plenty of debt and saw cash flow take a big hit, as occupancy rates drop at strip malls. Yet for Excel, the trend has actually been positive. Excel went public with plenty of financial firepower to pick up these assets on the cheap while others had to shed them to lighten their debt.
As a result, Excel has been steadily buying, focusing on healthy properties anchored by healthier retailers such as Walgreens (NYSE: WAG) and Lowe’s (NYSE: LOW). Those purchased assets are leading to improving cash flow and a rising dividend (54% of the properties are in Texas, California and Pennsylvania). Right now, with the retail sector still under pressure, this business model won’t be truly loved by investors. Financial services firm UBS believes that Excel’s assets are worth about $15 a share right now, and perhaps a good bit more when the real estate sector turns around. That’s still good for 19% price appreciation. Just as important, the slumping share price has created an impressive yield: management expects to boost the dividend from a current $0.56 a share to somewhere between $0.60 and $0.75 a share. That equates to a potential yield of 5.1% to 6.3%. Along with the projected capital appreciation, you’d be looking at a potential 25% return.
Candidate # 3 Motricity (Nasdaq: MOTR)
This IPO is an exception to the others I mention here, as it’s actually above its offering price. I’m including it in this article because it has lost more than half of its value since I wrote about it in late November. Here’s what I wrote back then:
“...with shares approaching $30, they clearly look overvalued. And we have stock cheerleader Jim Cramer to thank for that. He's been talking up the stock recently, even though it now trades for more nearly seven times projected 2011 sales and more than 30 times next year's profits. Needham's Mark May, who has been a booster of the stock since its June 2010 IPO, thinks it's worth only $23 -- roughly 20% below current levels.”
The Cramer effect eventually wore off and shares are back down in the low teens. I think Needham’s assessment remains on the mark. This is a fast-growing company in a hot sector, so shares may well claw back to his target, which remains at $23 a share. Motricity sells software and services that allow for the delivery of content and applications, targeted marketing, billing support and messaging on mobile platforms such as smartphones.
Why did shares get crushed? There are several reasons. First, investors made the mistake of extrapolating a few very strong quarters well into the future and placed unrealistic expectations on the company. Second, Motricity spent $100 million to acquire a European mobile advertising firm. That move looks set to consume most or all of Motricity’s IPO cash. Third, the company issued downbeat guidance for the first and second quarters, confirming the notion that scorching quarterly results last fall couldn’t be sustained.
Yet as I noted earlier, this is still a solid long-term growth story. That first half slowdown is likely to abate, as Motricity is rolling out a new software offering, which analysts think will see strong demand later this year, at which time the company could also start to benefit from the European acquisition. Those factors are likely to set the stage for solid full-year results. Needham sees sales rising 25% in 2011 and 2012, and expects earnings per share (which were $0.39 in 2010) to surpass $1 2012. At $30, it’s not clear that shares were any sort of bargain, but now that they’re back below $15, Motricity looks again like a growth-at-a-reasonable-price ((GARP)) play.
It’s too soon to write off these stumbling IPOs. A tough start as a public company is often to be expected. That’s just the nature of young companies. Yet, as they mature and rebuild their shareholder bases, their second act could prove to be a lot more successful.