April Archive Updates

by landshark on May 6, 2013

We are in the middle of making the May Candygram but wanted to update our archive to reflect April pricing results. There were 13 deals priced in April as shown in the exhibit below. Overall pricing and subsequent trading were fairly good. The average of the gains was 13% and the median gain was 11%. Only to deals ended up “under water.”

April IPO Prices

A number of roadshow slide decks have been recently added to the archive including: (the link will download the PDF if you are signed in)

Roadshow Archive Additions

SeaWorld Entertainment (SEAS) is a theme park and entertainment company that operates 10 theme parks including SeaWorld, Busch Gardens, Aquatica, Sesame Place and Discovery Cove.

Blackhawk Network Holdings (HAWK) is a big player in prepaid purchase cards and payment services. Their business also includes prepaid handsets and a range of prepaid wireless or cellular cards that are used to load airtime onto the prepaid handsets.

Intelsat S.A. (I) provides satellite communications services worldwide. This includes services which combine satellite capacity, teleport facilities, satellite communications hardware, and fiber optic cable and other ground facilities to provide managed and monitored broadband, Internet, video, and private network services; channel services primarily used for point-to-point bilateral services to telecommunications providers; and mobile satellite services.

Taminco Corporation (TAM) is a specialty chemical maker whose products are used in the manufacture of products primarily for the agriculture, water treatment, personal and home care, animal nutrition, and oil and gas end markets. Based in Allentown, Pennsylvania. (Go Hornets!)

Hannon Armstrong (HASI) provides financing services for solar, wind, geothermal, biomass, natural gas, water, communications infrastructure, and energy efficiency projects. It caters to U.S. federal, state and local governments, and high credit quality institutions and utilities. Based in Annapolis, Maryland.

Fairway Group (FWM)) operates food retail stores. The company’s stores provide perishable products, including fresh produce, natural and organic, deli, specialty, cheese, butcher, seafood, bakery, coffee, and kosher foods; non-perishable products comprising conventional groceries; and specialty foods, as well as wines and spirits. Based in New York, NY. See our note on the Fairway Market IPO here.

Evertec (EVTC) provides transaction processing services in Latin America and the Caribbean. It’s basically a version of First Data Corporation in the US in the Latin American market. The Merchant Acquiring segment offers various merchant acquiring services that enable merchants to accept and process electronic methods of payment. The Payment Processing segment provides authorization, processing, management, and recording of automated teller machine (ATM) and POS transactions. In terms of scale Evertec processes1.8 billion transactions annually; and manages the electronic payment network for 4,100 automated teller machines and 104,000 point-of-sale payment terminals. The company is based in in San Juan, Puerto Rico.

Rally Software Development (RALY) is a management platform for software development teams practicing so-called “agile” methods. The results are generally a closer alignment of software development and strategic business objectives, more collaboration, greater visibility and efficiency. Based in Boulder, Colorado.

Chimerix (CMRX) is a biopharma working on oral antiviral therapeutics for various medical needs. The company has a few lead compounds in Phase II and Phase I clinical trails for treatment of infections, herpes viruses and HIV. They have collaboration and license agreements with Merck, and Sharp & Dohme Corp.

Omthera Pharma (OMTH) has a slightly improved prescription Omega-3 compound (Epanova). Omega-3 therapies are used to bring down high Triglyceride levels which can lead a number of serious health problems. The money raised is expected to fund a scale up of manufacturing operations, marketing promotions and direct selling and general corporate build-out. In other words a heavy investment up front with unknown revenues and margins from a “me too” drug. The shares were priced below the $13 mid-point of the range at $8 and have traded down slightly from there. Based in Princeton, New Jersey.

Taylor Morrison Home Corporation (TMHC) operates as a public homebuilder. It builds single-family detached and attached homes, and high-rise communities; and develops land, which includes lifestyle and master planned communities. The company operates under the Taylor Morrison brand in Houston, Austin, north Florida, west Florida, Phoenix, northern California, southern California, and Denver, the United States; and under the Monarch brand in the Greater Toronto Area, Ottawa, and Kitchener-Waterloo in the province of Ontario, Canada. It also provides mortgage lending and title services. The company was founded in 1936 and is headquartered in Scottsdale, Arizona.

KNOT Offshore Partners (KNOP) focuses on owning, acquiring, and operating shuttle tankers. It intends to transport crude oil through its vessels. KNOT Offshore Partners GP LLC operates as a general partner of the company. The company was founded in 2013 and is based in Aberdeen, the United Kingdom.

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Fairway Market FWM IPO

by landshark on April 18, 2013

Overview

For a grocery store, Fairway created a surprising amount of enthusiasm for their IPO which priced their $177M deal above the $10 to $12 filing range at $13. Post pricing the shares traded up over 30% to $17.50.

Fairway is NY area-based store chain that feels like Trader Joe’s meets Whole Foods. It’s a solid positioning with substantial if measured growth prospects.

Most would agree that Fairway presents a favorable experience much like Whole Foods (but cheaper) and Trader Joe’s (with more selection.)

FWM_Venn_Diagram

Fairway did $646M in annual sales for the period ended December 2012 out of a dozen locations. The company estimates they have the opportunity to develop another 40 stores in the NY Metro region and nearly 100 total store locations if they consider the Boston to Washington DC corridor. In the very long term there is a national opportunity that could create a multi-hundred store chain. Coming from the current base of 12 locations this national aspiration probably seems a little distant. It’s reasonable to expect that Fairway can grow to 5x their current size based on their existing formula over the next ten years.

The formula at Fairway is kind of a “specialty markets within one market” approach. As an approach, this is probably a few hundred years old given that many old marketplaces work the same way today. In the case of Fairway these include specialties like Cheese, Butcher, Produce and specialty organic foods.

Going forward, Fairway will expand mostly by adding new stores. Two are planned in FY2014, three for FY2015 with a target of three to four each year thereafter. There are some natural margin improvements that come from greater scale which ultimately generate positive operating margins.

Probably the biggest risk facing the company is that other market players, including the major chains, will become more competitive and rivalrous with Fairway. This probably won’t impact their existing business but it might make it harder to grow the store base with same high returns they have enjoyed in the past.

For the complete company presentation refer to the archived FWM IPO slide deck PDF.

Some Strange Things

We don’t expect too many surprises looking at a grocer but in the roadshow presentation one number stuck out as being very odd. Under “Use of Proceeds” a full $30M of the offering amount was set aside for “fees & expenses.” That’s at least double the normal amount for a transaction like this one.

Referring to the S-1 for more detail we see that among other things the executive team has specific “IPO bonuses” payable in cash for a successful offering. Overall the management team will receive over $7M in cash just for the IPO being priced!

There are a few other items to consider. For example Mr. Glickberg has economic interests in things related to how the company has done and continues to do business. These include loans, lease agreements, and a power generation facility serving their Red Hook store. Mr. Glickberg’s son and sister both occupy senior management positions in the company.

The majority equity owner, Sterling Advisors, has been regulary taking substantial cash fees out of the company which seem excessive. According to the S-1 Fairway has paid out just over $20M to Sterling in the past few years. If we are reading it properly Sterling Advisors will get paid an additional $9.2M fee on the completion of the IPO.

Although there is nothing illegal in the way the firm is conducting their business, outside investors should take this and other matters described in the S-1 under advisement.

Valuation

The only real question regarding FWM is what price to put on it. There are some fairly good public comparable companies like Natural Grocers (NGVC) and The Fresh Market (TFM). We filled out a comparable list with other names including Whole Foods Market (WFM) and some conventional supermarkets as well. It should be noted that even “regular” supermarkets have taken some pages of the Whole Foods and Fairway playbook and implemented improvements in their customer offerings.

This isn’t a high margin business. On average gross margins are 32% and operating margins between 2% and 6%. Conventional markets trade at about 0.5x sales while the “growth” markets are valued at 1.2x to 1.5x sales.

At the current price FWM is trading at the high end of the range at 1.5x sales. As long as management executes this multiple should hold as the company grows and offer long-term investors price appreciation from this level.

I’d consider selling above $20 if the shares reach that level. At this price they are discounting a doubling of revenue and industry-leading 5% operating margins using a 20x multiple on earnings.

FWM_Peer_Group

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The Crafty Silver Spring IPO

March 12, 2013

TLDR – A reasonable value for Silver Spring (SSNI) is $21/share which compares well to the $17 mid-point of the filing range. It’s a high quality company with the deal being led by Goldman. SSNI has done a crafty job positioning their story to avoid having to show that their revenues were flat in 2012 [...]

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Why you might want to own Artisan Partners

March 7, 2013

Artisan Partners (APAM $27-$29) is a fund manager with $75B of funds under management. Of course they have a story and a strategy and some good performance but they are still a fairly conventional fund manager. Having said that they have proposed a transaction that has some attractive features: First and foremost is the quarterly [...]

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IPO Market Update The Kinder Surprise

March 4, 2013

We chose the candy this month carefully because it conveys an important change in how the IPO market works. The one provision of the JOBS act that companies have embraced is the ability to file secretly and avoid public visibility until shortly before reaching out to investors. According to a recent study by Ernst and [...]

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A Time for Caution

February 20, 2013

We are not market strategists so take this with a grain of salt if you must but after 30 years in the market it might be worth a thought. There are two reasons that prompted this post: 1. Everyone we respect and pay attention to is basically of the opinion that we’ve nothing to worry [...]

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XOOM IPO could go BOOM

February 14, 2013

XOOM, scheduled to price this week, looks like another IPO poised to do very well as a public company. The last one that looked this promising was ExOne (XONE) which priced above the range at $18 and quickly traded up to a high of $32. ExOne has benefited well from the hype around 3D printing. [...]

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Norwegian Cruise Lines IPO Roadshow

January 11, 2013

One the household names in cruises is on the road now. The company is fairly large with revenues of $2.3B and $540M in EBITDA for the 12 months ended September 2012. The company is substantially remade in terms of management starting with the CEO Kevin Sheehan in 2007. All but three of the top dozen [...]

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CVR Refining Needs No Distillation

January 10, 2013

CVR Refining kicked off their roadshow and in contrast to many that seek to provide some context around their market and company CVR jumps right into the depths of their refining business in way that only an oil man (or oil woman) could love. There’s noting obviously wrong with the story and the deal is [...]

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December IPO Candygram

January 9, 2013

December didn’t bring many presents this year. Typically, things stay active for a few weeks before the holidays but in this case 2012 was an early wrap. There were 6 IPO deals priced but one was a just a “blank check” company. The others were Sprott Physical Platinum (commodity fund), Silver Bay Realty (Real Estate), [...]

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