IPO Preview: Stewart & Stevenson

| About: Stewart & (SNS)
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Based in Houston, Texas Stewart & Stevenson (SNS) is scheduling a $240 million IPO with a market capitalization of $1 billion at the price range mid-point of $15 for Wednesday, June 22 2011. The full IPO calendar includes five IPOs.

SUMMARY -- SNS provides specialized equipment and parts and service primarily for the oil and gas industry. SNS is a 100 year old company that was bought by private equity funds in 2006 and has made some acquisitions since.

VALUATION -- SNS is an a cyclical industry driven by capital expenditure budgets.

SNS has weak financials and even in a good year only makes 3% after taxes with an EBITDA of 8%. Only 40% of sales are based on manufacturing, while 60% is based on distribution. Distribution is a low P/E multiple business.

April was a very good quarter. Even annualizing the April 2011 quarter the P/E is 28, which seems high. The price to tangible-book-value is 3.5, which is not low (lower is better) for a cyclical business basically dependent on distribuiton.

SNS Valuation Metrics

BUSINESS -- SNS is a leading designer, manufacturer and provider of specialized equipment and aftermarket parts and service for the oil and gas industry and other industries. SNS is over 100 years old

Demand for SNS's products has been driven primarily by capital spending in the oil and gas industry, which accounted for 72% and 78% of total revenues in Fiscal 2009 and Fiscal 2010, respectively.


Manufacturing represented 40% of revenues for Fiscal 2010.

  • SNS designs, manufacture and markets equipment for U.S. and international oilfield service providers and drilling and workover contractors, as well as national oil companies that require integrated and customized product solutions.
  • SNS has five main manufacturing facilities across North America, comprising more than 600,000 square feet of space, that are strategically located to effectively service customers' needs.

Distribution represented 60% of revenues for Fiscal 2010

  • SNS provides stand-alone products and aftermarket parts and service for products manufactured by SNS and it ssix key OEMs and other manufacturers.
  • In addition, SNS provides rental equipment including generator sets, air compressors, rail car movers and material handling equipment to customers.

BACKLOG -- As of April 30, 2011, SNS' equipment order backlog was $412.2 million, compared to $259.9 million as of May 1, 2010.

RECENT EVENTS -- On March 23, 2011, SNS acquired 100% of the stock of EMDSI-Hunt Power, L.L.C., from ITOCHU Corporation of Japan for $25.7 million, subject to final closing adjustments. The acquisition was funded from available cash and through borrowings under revolving credit facility.

EMDSI, which is based in Harvey, Louisiana, specializes in the marketing and distribution of medium-speed diesel engines for marine propulsion, drilling and power generation applications and is a provider of after market parts and service.

THE CORPORATE CONVERSION -- SNS is currently operating as a Delaware limited liability company and, prior to the consummation of this offering and will convert into a corporation and change its name from Stewart & Stevenson LLC to Stewart & Stevenson Inc.

DUAL STOCK CLASSES -- Post-IPO SNS will have 42.3 shares of million class stock with one vote each. SNS will also have 24.7 million shares of class B stock with 10 votes each.

LEVERAGED BUYOUT -- Stewart & Stevenson LLC was formed in November 2005 for the purpose of acquiring from Stewart & Stevenson Services, Inc., or SSSI and its affiliates on January 23, 2006, substantially all of their equipment, aftermarket parts and service and rental businesses.

On February 26, 2007, SNS acquired substantially all of the operating assets and assumed certain liabilities of Crown Energy Technologies, Inc. Crown, which was headquartered in Calgary, Alberta, had multiple U.S. operations. Crown manufactured drilling, well servicing and workover rigs, stimulation equipment and provided related parts and services.

PRE-IPO OWNERSHIP -- Pre-IPO SNS is 92% owned by private equity investors Parman Capital Group (52%) controlled by Hushang Ansary, SNS's chairman and EC Investments (40%).

USE OF PROCEEDS -- Five million shares to be sold by shareholders. SNS expects to sell 11 million shares to net $152 million, allocated to general corporate purposes, which may include the repayment of debt.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.