Heelys Holders Cash Out with a Planned Secondary Offering

Heelys (HLYS) planned a secondary offering of up to 9 million shares on May 8th, with the stock price at 36.98. Then, according to Marketwatch, 8 million shares were expected to be priced in a follow-up offering this Thursday. According to Heelys' latest SEC filing, that number is now down to 4.5 million shares. The proceeds will not benefit the company and coincide with their insider lock-up period of 180 days after the IPO for insiders who owned shares for less than a year. Doesn’t it seem like most IPOs come back to their initial IPO level in the first year at some point? Management may have cut the additional shares in the offering to wait for a higher price rather than selling at today’s price, considering that the stock is down around 20% in the last week and down about 30% since announcing this offering. They know that the interest is not there now for the secondary, without bringing the stock price down further.

A reason to be cautious with IPOs is the likelihood that the unsuspecting public will be stuck holding the bag while insiders and brokerages profit from selling overinflated stock. It is important to value an IPO correctly, even when sometimes management juices the numbers prior to the IPO and there is a unexpected drop in revenue and EPS growth in the first quarter or year after the IPO.

If Heelys can continue to grow revenue and earnings at 20%+ the stock should be okay; any less than that and it may come down more. The stock, with a greater than 40% growth rate for the next few years, could see a significant increase in price. Analysts are forecasting 24% earnings growth this year. It should also be noted that they beat earnings estimates by 57% last quarter and it would be hard to really determine with accuracy what earnings will be this year since this company doesn’t have a long history to base estimates on, and the timing of orders, inventory and the demand for their shoes are all subject to wide changes at this point.

HLYS 6-mo chart

Disclosure: Author has no position in Heelys