Bottom Fishing In Crashed IPOs

Includes: ENVI, FB, HLIT, PRSS, RM
by: Stanley Barton

With the May market decline, some recent IPOs have dropped from their origination price. Unusual opportunities exist in IPOs as the market struggles to find the real value of these stocks, and occasionally a company will be drastically undervalued until it becomes better known and appreciated. This article identifies three of the hardest hit IPOs that may actually deserve a higher stock price.

Of the 53 U.S. deals priced in the last three months, the average price increase was 14% on the first day of trading. But through May 25, the average increase over the offering price was 8% for IPOs this year. One out of every 10 IPOs is trading at least 20% below its offering price. We decided to look at the IPOs that have fallen at least 5% from their offering price since March 1, 2012.

Of course, in this category, there is one quite well-known company. We did take a hard look at Facebook (NASDAQ:FB) but it does not meet any value measure that we use, and we simply are not able to get past our doubts about how it will be able to monetize its popularity to justify its price.

Here are the three stocks that intrigue us the most among the crashed IPOs:

CafePress, Inc. (NASDAQ:PRSS) is down about 30% from its debut price of $19. CafePress Inc. operates an e-commerce platform enabling customers to create, buy, and sell various customized and personalized products worldwide. The company operates a portfolio of branded Websites, including,,, and It enables users to purchase a range of merchandise, customize products using online design tools, create and manage shops, and access design, sales, and support staff. The company, through its platform, offers approximately 600 stock keeping units of merchandise.

PRSS sells at about 17 times 2012 earnings estimates and has reasonable price to sales ratio of 1.24. Below is the Yahoo comparative table for PRSS with other popular on-line retailers:

Market Cap: 234.83M 98.05B 52.86B
Employees: 523 56,200 27,770
Qtrly Rev Growth (yoy): 24.50% 33.80% 28.70%
Revenue: 183.33M 51.40B 12.38B
Gross Margin : 43.07% 22.76% 70.01%
EBITDA : 17.05M 1.82B 3.49B
Operating Margin : 4.79% 1.42% 19.88%
Net Income : 3.89M 560.00M 3.32B
EPS : 0.26 1.21 2.54
P/E : 53.33 179.72 16.11
PEG (5 yr expected): 0.51 5.31 1.29
P/S : 1.24 1.87 4.15

Among this group, EBAY actually seems like the best investment; however, its 5-year growth is projected at 13% versus 35% for PRSS. Four analysts covering CafePress project a one-year target price of $23.50, a 70% pop. We do expect that the PE ratio for internet-related enterprises will be higher than most, but we also expect that there is plenty of competition, and more to come.

Envivio, Inc (NASDAQ:ENVI) has lost about 15% from its initial offering of $9 per share. Envivio, Inc. provides Internet protocol video processing and distribution solutions to mobile and broadband service providers, cable multiple system operators, and direct broadcast satellite service providers and content providers.

ENVI has $5.65 per share in the bank, and is expected to produce EPS of $.13 in January 2013 and $.52 in 2014. It has price to sales of 1.84. A thorough Seeking Alpha article by Spencer Grimes outlines the technology advantages and other important elements of this company, and it is worth reading. Following is the Yahoo comparison with others in its industry:

Market Cap: 99.91M 89.38B 516.15M
Employees: 146 71,825 1,151
Qtrly Rev Growth (yoy): 35.50% 6.60% -3.80%
Revenue : 54.16M 45.57B 544.22M
Gross Margin : 63.77% 61.42% 45.26%
EBITDA : 1.30M 12.84B 48.57M
Operating Margin : -0.60% 22.69% 0.68%
Net Income : -1.08M 7.36B 735.00K
EPS : -0.08 1.36 0.01
P/E : N/A 12.29 731.67
PEG (5 yr expected): 3.17 1.01 1.35
P/S : 1.84 1.90 0.94

From a strict value perspective, Cisco seems a better buy, although not exactly a peer company; however, the superior growth prospects of ENVI are more compelling. Three analysts peg the target for ENVI at $12.67, about a 70% improvement from the current stock price. After the big drop and the large cash horde, we do not see huge downside risk with this stock, and its leading-edge technology has room for market growth. The company EPS could turn into the black next quarter.

While Regional Management Corp. (NYSE:RM) is only 7% off its initial offering, it is more than 25% off its original filing price. RM provides loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders. The company offers small installment loans, large installment loans, automobile purchase loans, furniture and appliance purchase loans.

The company announced a first quarter revenue jump of 27% which would have yielded a 33% earnings increase after taking out the IPO costs. RM has excellent value measures with a stock price of twice sales and twice book, and a PE of 7. Attached is the Yahoo comparison chart for RM and some competitors:

Market Cap: 173.81M 96.24M 930.00M
Employees: 670 2,500 4,272
Qtrly Rev Growth (yoy): 23.60% -4.20% 8.70%
Revenue: 79.16M 178.97M 540.16M
Gross Margin : 100.00% 52.69% 80.43%
EBITDA : N/A 14.17M 181.96M
Operating Margin : 50.36% 2.40% 32.17%
Net Income : 25.19M -5.96M 100.69M
EPS : 2.01 -0.35 6.59
P/E : 6.94 N/A 10.18
PEG (5 yr expected): N/A N/A 0.75
P/S : 2.21 0.54 1.70

Regional Management appears to compare favorably with World Acceptance in every category. Three analysts have projected the stock price to reach $22, a 60% rise from its current $13.92. RM is not a payday lender, but it may be being held back by the perception of stricter government regulations. Cash Store Financial Services is a stock we own in this sector that operates in Canada, and it has struggled through the regulatory issues and other obstacles. It may be ripe for appreciation now with the worse behind it. In some ways it has better value metrics (Price/Book, Price/Sales) than RM, including a 4.3% dividend. However, RM has the advantage of a new stock without the baggage of CSFS, and, as such, can generate better momentum once recognized as undervalued.

Conclusion. The combination of the Facebook fiasco and the recent general market decline in stocks has taken the shine off of the IPO market. Some of the recent issues may be undervalued as a result. Our opinion is that the three in this article have potential for gain.

CafePress has dropped with suspicion about everything internet, partially as a result of Facebook. Nonetheless, EBAY and Amazon are popular and PRSS could easily ride on their coat tails. My article about the end of the bubble discusses that the internet binge is not likely to resurface, partly due to the fact that Apple's value and growth metrics make other tech ventures look expensive. We think that short-term PRSS can see a bounce on healthy growth numbers, but it is not clear that it can differentiate its service substantially from the competition for the long term.

Envivio is more interesting to us long-term partly because it does have a lot of cash in the bank. Usually for a development company, an ample cash balance is necessary to finance the development of the business until it reaches profitability. In the case of ENVI, it will probably reach profitability this year, and maybe this quarter. That allows the huge cash balance to be plowed into further R & D, marketing, acquisitions or other growth drivers.

Regional Management simply seems cheaper than its counterparts in its industry. This is especially interesting because nearly half of its branches have less than 5 years, in a business that sees high-growth in revenue during the first 5 years after branch opening. The company aggressively markets loans to people that have paid off their previous loans, giving it a good default ratio. RM appears to be systematically expanding in new territories also and acquiring outlets from smaller competitors.

Of course, the danger in investing in recent IPOs is that they have a shorter history than their established peers. On the other hand, if you think that they will write a history of growth and success, it is better to get in early.

Disclosure: I am long CSFS.

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