U.S. IPO Recap: Zoe's Kitchen Excites While Ally And La Quinta Fizzle Amid Downturn

by: Renaissance Capital IPO Research

Last week was set to have the most IPO pricings (16) in over seven years, but only 10 were completed as the market’s downturn continued. Plagued by a sell-off in tech stocks as the NASDAQ experienced its largest one-day drop since 2011, six IPOs ended the week below their issue price. Aftermarket returns for 2014 IPOs ended the week at -2%, down from a peak of around 25% in early March. Total returns for the year average 15%, propped up by the (now-corrected) striking first-day performance of several tech and biotech IPOs. However, if at least one of the 11 IPOs on the calendar for this week prices, this month will still be the most active April for IPOs since 2000, just as January and March were earlier this year. Last week's most anticipated IPO was Ally Financial (NYSE:ALLY), the US Treasury-backed auto loan lender, which sputtered and fell 3%. It was the year's largest offering, ahead of another auto loan lender, Santander Consumer USA (NYSE:SC). Even as the market hits a speed bump, IPO activity could stay strong based on the success of Zoe's Kitchen (NYSE:ZOES), which surged 65% on Friday.

Only 10 of 16 scheduled IPOs price but Zoe's Kitchen serves high returns

Investors' flight from growth stocks did not stop Zoe's Kitchen from having a fantastic debut. It was the third high-flying restaurant IPO in a row after last year's Potbelly (PBPB; 120% first-day gain) and Noodles (NDLS; 104%). Zoe’s, a fast-casual Mediterranean chain, attracted interest with high same-store sales growth (7% in 2013) and a small footprint (113 stores) that it thought could expand widely from a southeastern US base.

Ally Financial had a disappointing debut last week, pricing at the low end of the range and falling 4% on its first day. The offering was entirely composed of stock owned by the US Treasury, which bailed the company out in 2008 with TARP funds and still retains a 17% stake. La Quinta (NYSE:LQ) is the third and final hotel operator in Blackstone's portfolio to go public, following last year's IPOs of Extended Stay (NYSE:STAY) and Hilton Worldwide (NYSE:HLT). The select service hotel chain priced below its range and hovered around that price, finishing the week down 1%. It is generally abnormal for deals as large as Ally and La Quinta to break their issue price.

Enable Midstream Partners (NYSE:ENBL), which owns, operates and develops crude oil and natural gas assets, priced at its midpoint and traded up 11% on Friday. iKang Healthcare Group (NASDAQ:KANG) is the second Chinese IPO this year, after Tarena International (TEDU; -14% IPO return). iKang priced at the high end of the range and jumped 9% in first day trading, only to fall back down to its opening price by week-end. Phibro Animal Health (NASDAQ:PAHC), a producer of medicine for farm animals and peer to 2013 IPO Zoetis (NYSE:ZTS), priced below its range and finished at its original midpoint price. The year's first REIT, Farmland Partners (NYSE:FPI), raised $53 million before it fell 7% below. On the other hand, the urban property owner City Office REIT (NYSE:CIO) felt the timing was not yet ripe and pushed its $100 million IPO back to this week. Both biotechs faced a cautious market, with Cerulean (CERU) pricing 42% below its midpoint and Adamas (NASDAQ:ADMS) dropping 19%.

IPO pricings (week of April 7, 2014)
Company (Ticker) Business Deal Size ($mm) IPO Price vs. Midpoint Return as of 4/11
Zoe's Kitchen (ZOES) Fast-casual Mediterranean restaurants $87 25% 65%
Phibro Animal Health (PAHC) Supplements for farm animals $176 -12% 13%
Enable Midstream Partners LP (ENBL) Oil and gas infrastructure assets $500 0% 11%
iKang Healthcare Group (KANG) Private medical centers in China $153 8% 0%
La Quinta Holdings (LQ) Blackstone-backed hotel chain $650 -13% -1%
Sysorex Global Holdings (SYRX) IT infrastructure solutions $20 20% -2%
Cerulean Pharma (CERU) Biotech: targeted cancer therapy $60 -42% -2%
Ally Financial (ALLY) Global auto finance company $2,375 -6% -3%
Farmland Partners (FPI) North American farmland REIT $53 -7% -7%
Adamas Pharmaceuticals (ADMS) Biotech: treatments for CNS diseases $48 -6% -19%

One company sets terms ahead of an 11-IPO week

Sportsman's Warehouse (NASDAQ:SPWH), the largest outdoor sporting goods retailer in the western US, was last week's only company to set terms for an upcoming IPO. Taken out of bankruptcy by private equity firm Seilder in 2009, Sportsman’s Warehouse has been regrowing its footprint (currently 49 stores) and has seen volatile comps because of 2012 surge in gun sales. The scarcity of companies setting terms last week, especially compared to the 15 doing so in the prior week, likely reflected both the recent downturn and the shortened upcoming holiday week.

IPO terms filings (week of April 7, 2014)
Company (Ticker) Business Deal Size ($mm) LTM Sales ($mm)
Sportsman's Warehouse (SPWH) Outdoor sporting goods retailer $150 $643

11 new filers are a bright spot in a down market

Even though only one company formalized its IPO plans, the 11 filers last week suggested that there is still a strong faith in the ability to raise capital from the public markets this year. Three new biotech filings continued the steady flow of the year's most active industry. Despite the weakness in technology stocks, last week saw two high-growth tech companies file to go public. With a 112% 2-year sales CAGR, Zendesk (ZEN) provides its customer service SaaS platform to over 40,000 registered client accounts. Mobile Iron (MOBL;175% 2-year sales CAGR) specializes in mobile security solutions for enterprises, which is similar to the product offered by recent IPO filer and Chinese spin-off, Cheetah Mobile. With CRM provider Marketo down over 30% and FireEye down 50% since their first quarter peaks, Zendesk and Mobile Iron may sit on the sidelines until tech stocks see more optimistic valuations.

Jumei.com (NYSE:JMEI), expected to raise up to $400 million, is China's largest online beauty products retailer and the eighth Chinese company to file for a US IPO this year. 2013 had only eight Chinese IPOs, mostly in the second half of the year, as investors warmed up after avoiding Chinese companies due to a wave of accounting scandals in 2011. Just as Facebook's IPO created a drought in its wake, Alibaba's leviathan IPO could encourage more Chinese companies, online retailers in particular, to go public beforehand. Two shipping companies also filed for IPOs last week - Principal Maritime Tankers (PMAR) and GasLog Partners (NYSE:GLOP). The number of shipping company IPOs is surprising given their lukewarm reception. GasLog Partners is a limited partnership formed out of GasLog (NYSE:GLOG), which went public in 2012. Parsley Energy (NYSE:PE), an oil and gas E&P in the Permian Basin, filed for a $400 million IPO. A close peer, RSP Permian (NYSE:RSPP), raised $390 million in January and has traded up 37% in the aftermarket.

IPO initial filings (week of April 7, 2014)
Company (Ticker) Business Deal Size ($mm) LTM Sales ($mm)
Jumei.com (JMEI) Chinese online cosmetics retailer $400 $483
Parsley Energy (PE) Oil and gas E&P in the Permian Basin $400 $121
Zendesk (ZEN) Customer service SaaS provider $150 $72
GasLog Partners (GLOP) GasLog-backed LP that owns LNG carriers $150 $64
Goodman Networks (NASDAQ:GNET) Wireless telecom network services $100 $1,135
Mobile Iron (MOBL) Mobile SaaS security platform $100 $106
Principal Maritime Tankers (PMAR) Owner of 12 crude oil tankers $100 $85
Dance Biopharm (DNCE) Biotech: insulin inhaler for type 2 diabetes $75 $0
Minerva Neurosciences (NASDAQ:NERV) Biotech: treatments for CNS diseases $69 $0
SD Company (NYSEMKT:SDPI) Drill bits for oil and gas mining $35 $12
CymaBay Therapeutics (NASDAQ:CBAY) Biotech: treatments for gout $30 $0

IPO market snapshot

So far this year, 81 IPOs have raised $16.7 billion and produced an average first day return of 18%. The Renaissance IPO ETF (symbol: IPO), a cap-weighted basket of newly public companies and indicator of post-IPO performance, has fallen 5% compared with -2% for the S&P 500. Over the last 30 days, the IPO ETF has fallen 11% compared with 3% for the S&P 500, as major tech stocks continue to plummet from first quarter peaks. This relative decline suggests that IPO investors could demand more conservative valuations or fundamentally stronger companies going forward. The active IPO pipeline includes 125 companies looking to raise a total of $29.3 billion.