As usual, the IPO market was "off" during the last two weeks of August after pricing 7 deals in the first half of the month. To refresh your memory, these were: Hi-Crush Partners (HCLP), Manchester United (MANU), Performant Financial (PFMT), Peregrine Semi (PSMI), Bloomin' Brands (BLMN), Globus Medical (GMED) and Eloqua (ELOQ).
Filings continued to improve with 17 versus the average of 10 filings for June and July. Some of the more notable filings include: Workday (SaaS HR), Lifelock (identity management), and Trulia (online real estate).
Seven deals were withdrawn, which is the same number as June and July. One particularly large private equity deal, Momentive Performance Materials, was pulled. The IPO was filed in April 2011 with a plan to merge three companies into a large $7B revenue company and offer stock to the public for the first time. Could be that a specialty chemical play wrapped in a financial engineering wrapper isn't a very sweet package.
September will kick off what should be a busy IPO season as bankers and companies want to get their deals priced this year, knowing that we have some political and economic uncertainty looming.
For investors, IPO deals at this time of year are especially interesting because post-deal lockups won't normally come off until after the calendar year is over. Banker coverage and one quarterly report will occur before year-end, but often a company has the current quarter "in the bag" when they are in IPO marketing. Overall, it gives investors a way to add to calendar year performance (and their year-end bonus) by selectively adding new IPO stock to their portfolios.
TOP 5 in August
Chinese Internet SW
High Speed Servers
The ecosystem bounced back a little in August with a 2% average gain. The top 10 names were up 34% and the bottom 10 were down 35%.
The top performing stocks in August all pretty much moved ahead on better quarterly reports and/or increases in guidance.
BOTTOM 5 in August
IP Video Chips
Envivio reduced guidance dramatically with new expectations of $10-11M for the quarter versus its prior $17-18M guidance. As a very recent IPO, this puts the management team in the wilderness.
Reality came knocking on the door at Digital Domain as continuing losses were amplified when it came out that the CEO had taken a loan out to buy shares that he might not be able to repay.
A123 and Groupon continued to suffer as more shareholders doubt about the companies' ability to ever turn a profit. In both cases this was unknown during the IPO process, yet investors at the time were willing to ignore it.
August IPO Performance & New Filings
With the exception of Manchester United, all the deals priced in August have done well. They are all up between 14% and 33% since pricing. We'll publish previews of these as the roadshows begin, but here are our initial observations on the new filings:
Workday is expected to be a big deal. The company will be positioned as "the Salesforce.com" of enterprise HR and the back office, and will be compared to ServiceNow (NOW) which did very well but is smaller. The challenge on Workday will be valuation. For more background on Workday see our recent presentation on pre-IPO companies. We'll update our views during and post-roadshow.
LifeLock will probably be another strong deal, although recently security software names have been a little more mixed. Nevertheless, LifeLock is at a $250M revenue run rate and profitable. The company has used marketing well to build a leading position with consumers.
We like FleetMatics at first glance. The company is using SaaS to deliver automation in a niche vertical and is profitable at a $120M revenue run rate. We don't yet know the proposed valuation.
Trulia should be coming to the market at the right time as many investors want to "get in front of" a recovery in the U.S. real estate market. The company will be compared mostly to Zillow which has doubled since its above-the-range pricing at $20 in April 2011. [On a side note, we'd point to Ellie Mae who came public at the same time but with much less fanfare. Those shares have more than tripled during the same period. See our note on Ellie Mae here.
Zoetis is another big one - a $4B+ revenue company in animal health and medicine. Zoetis has grown consistently over the past few years but without increasing profits much. This is a spin-out from Pfizer (PFE) so there might be a case for better efficiency once it is on its own.
Lastly, one deal that looks sour while still in the wrapper is Taylor and Martin. The company provide "marketplaces and value-added solutions for the liquidation of pre-owned capital assets." This is a fancy way of saying it runs truck auctions. Worse still is that a similar firm, IronPlanet, had pretty solid fundamentals and better bankers yet had to withdraw its deal just last month.
IPO Candy Folio Update
The IPO Candy Folio gained 5.5% for the month of August which was right in line with the Russell 2000. Year to date we are up 10.7%; which also coincidentally matches the Russell index.
We're going through a full portfolio review this month and will be making some substantial changes with an eye towards year-end. We'll have one more set of quarterly reports in October going into Election Day.
The pipeline remains strong even though right now it's too early for deals to be in active marketing. A few had to pause for the August break and may be some of the first back out on the road. There are 15 deals of we rate "high" interest, 58 in "medium" and 56 are of "low" interest.
Coverage and the Calendar
We will see new coverage for 14 recent names in the coming weeks. At the same time we'll have 15 names potentially under pressure as share lockups come off during September.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.