Turmoil in the Middle East and the disaster in Japan were primary contributors to market volatility and a lower number of global IPO issuance in the first quarter of 2011. However, IPO issuance in the United States picked up substantially year over year due in part to a few mega private equity backed IPOs. While technology stocks such as Linkedin (LNKD) tend to receive more of the press, there are other sectors for initial public offerings besides technology investors should consider. HCA Holdings (HCA), Kinder Morgan (KMI), and Nielsen Holdings (NLSN), have been three of the largest private-equity backed IPOs on record with proceeds raised coming in at $4.35 Billion, $3.29 Billion and $1.89 Billion respectively.
Thus far in 2011 there have been 76 IPO's priced, a 25 percent increase from last year. Year-to-date totals proceeds raised have increased 187% over the same period in 2010. The average IPO returned just over 6% from its offer price. While the high profile IPO's continue to favor those in technology – the less "glitzy" sectors of business and public services and industrial & materials hold some of the leaders in terms of proceeds raised and % returns.
Although investors continue to be drawn to potential growth stories in the technology sector (29 deals) – returns have initially been strong (19% average first day return) but have quickly lost their "shine" with very paltry returns of less than 1% overall YTD.
Revere dug into the less "glitzy" sectors of business and public services and industrial and materials to reveal IPO's that have fared much better. Thus far in 2011, recent IPO's within the business and public services sector have averaged 27.8 percent first day returns and a YTD return of 35 percent thus far in 2011. Industrial and materials may have been a bit slower out of the gate with a 1% first day return, but have maintained a strong 19% average return YTD.
Notables to date in 2011:
1. Nielsen Holdings B.V. - Business & Public Services (Market Research)
2. CVR Partners LP - Industrial & Materials (UAN) (Fertilizers)
3. TMS International Corp - Industrial & Materials (TMS) (Metal Processing & Recycling)
4. Golar LNG Partners LP - Business & Public Services (GMLP) (Liquid Natural Gas Transportation)
REVERE RESEARCH REVEALS:
While the allure of an IPO continues to grab the headlines and the attention of investors the current market conditions have not favored the well publicized IPO's. We took a more bottom up approach and looked more closely at the sectors that didn't receive as much press but nonetheless have provided stronger more sustained returns. By digging deeper into business and public services and Industrial & Materials we were able to uncover subsectors that have outperformed their larger parent sector as well as the S&P 500 over the short term as well as the longer term.
We took a longer term view of three subsectors within the larger industrial and materials sector (26% - 1 year return and 65% - 2 year return) The chemicals subsector outperformed the parent sector with a 1 year return of 39% and a 2 year return of 76%. We found two additional subsectors that outperformed the S&P 500 ( 1 year return 19% and 2 year return 40%) over the same period. Mining and metal and mineral products both returned 22 percent over a 1 year period and 59 percent and 46 percent over a 2 year period.
Industrial & Materials Subsectors:
Using the Revere Hierarchy we took a deeper look into the focused subsectors of two notable IPOs of 2011.
1. Nitrogenous Fertilizers is where CVR Partners LP is focused – Nitrogen fertilizer manufacturing captures naturally occurring nitrogen from the atmosphere and combines it with hydrogen from natural gas (under heat and pressure) to form anhydrous ammonia. Primarily used in agricultural where it is applied directly to crops and plays a major role in boosting crop yields. CVR Partners derives its revenue from the production and sale of nitrogen fertilizers, primarily in the agricultural market. Included amongst its customers are Gavilon LLC (12% of revenue) and CHS Inc. CVR report 1st quarter total revenue of $57.4 Million and net income of $16.7 Million.
2. Metals Processing and Recycling – is somewhat of a "specialty" sector. Companies focused here provide a range of products and services in processing and recycling of raw and scrap metals. its supply chain within durable equipment, oil and gas, commercial aircraft, construction equipment and steel mills. Scrap management and preparation, metal recovery and slag handling are some of the services offered by TM International a recent IPO (formerly Metal Services Acquisition Corp) TMS has a strong existing customer base from which it operates across North America, Europe and Latin America.
3. Revere's Market Research sector falls under Business and Public Services. Companies focused here have strong customer bases providing consumer and consumer behavior information and market measurements. The sector has returned 5% YTD vs. the S&P 500's 2% YTD. Longer term returns have been solid with the 1 year return at 37% and 2 year return 105% vs the S&P 500 at 19% and 41% respectively. Nielsen Holding N.V. is one of the largest IPO's completed thus far in 2011. Raising $1.89 Billion – this international company provides clients with critical media and marketing information, analytics and industry expertise about what consumers buy and what consumers watch on a global and local basis. Its customer base includes the Coca-Cola Company (KO), NBC Universal (GE), Nestle S.A. (OTC:NSRGY), News Corp (NWA), Proctor & Gamble (PG) and Unilever Group (UL). The company forecasted EPS for 2011 is $1.35 on revenue of $5.5 Billion.
4. The LNG (Liquid Natural Gas) Transportation sector is also a more specialized sector. Companies focused here provide a vital service in moving liquefied natural gas around the globe. GMLP's parent company Golar LNG Limited is the owner and operator of LNG carries and floating storage regasifications units. Currently they have a fleet of 13 vessels, 10 LNG carriers. The company also specializes in the development of liquefaction projects. Golar LNG Partners LP - has a strong customer base providing LNG transportation through it's network of vessels and carriers.
IPO's have historically provided investors with solid gains and quick profits. While this pattern initially was ture with LinkedIN and Pandora this year, their soaring stock prices quickly changed and came tumbling down within the first week. However, by digging a bit deeper and taking a look at less "glitzy" sectors of the market we continue to find opportunities among recently listed companies that should provide long term growth and stability even during tumultuous times.The IPO market continues to provide such opportunities.
We continue to favor companies with strong customer bases along diversified product lines.