IPO: It’s Probably Overpriced

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That’s not my observation, that’s what Graham, the value investing guru, said in his book “Intelligent Investor”. I think this is especially true in the current IPO market. Two large recent IPOs, Shanda Games (Nasdaq:GAME) and Banco Santander Brasil S.A. (BSBR, SANB11.BR), showed exactly that. Both traded lower the first day it went public. I don’t have comprehensive statistics, but from my limited experience trading IPO stocks, most stocks traded lower the first day turned out to be a dog (lagger).

(Video at MarketWatch about IPO market)

I talked about Shanda Games spin-off IPO shortly after its IPO, so I would not repeat the same stuff here. The main problem in Shanda Games IPO, is not only its size and price, but the IPO concept itself. Because 95% of business of the parent company Shanda Entertainment (Nasdaq:SNDA) is about games, why do they do spinoff? Have you heard a US company try to spin off its main business as a another company?

Banco Santander Brasil S.A. main problem lies in its IPO size. Quote WSJ: Banco Santander Brasil, the world’s largest initial public offering so far in 2009, closed down 3% on the New York Stock Exchange. At $8.04 billion, the deal eclipses the $7.34 billion raised by China State Construction Engineering Corp. in an IPO earlier this year, according to data from Dealogic. Banco Santander Brasil’s is the largest-ever IPO in Brazil.

PS, just as I close this post (and think I am going to stay away from IPOs from a while), I saw another IPO today Mistras (NYSE:MG) (WSJ article “Mistras Shares Have Bumpy Debut”; Reuters article here). Mistras? Interesting name and from its Prospectus of IPO, a quite strong company. I am gonna take a deeper look. One risk as decribed in Prospectus (and I agree) is:

Due to our dependency on customers in the oil and gas industry, we are susceptible to prolonged negative trends relating to this industry that could adversely affect our operating results.

Our customers in the oil and gas industry (including the petrochemical market) have accounted for a substantial portion of our historical revenues. Specifically, they accounted for approximately 58%, 50% and 52% of our revenues for fiscal 2009, 2008 and 2007, respectively. We continue to diversify our customer base into industries other than the oil and gas industry, but we may not be successful in doing so. If the oil and gas industry were to suffer a prolonged or significant downturn, our operating performance may be significantly harmed.

Appendix: WSJ article “Mistras Shares Have Bumpy Debut”
Infrastructure safety specialist Mistras Group Inc.’s initial public offering teetered toward stability Thursday morning after a poor opening.

The company’s stock opened at $12.30 a share on the New York Stock Exchange, down 1.6% from its IPO price of $12.50, but then quickly rebounded, trading recently at $12.60, up 10 cents. A total of 8.7 million shares were sold at a price below its expected $14-to-$16 price range.

The company focuses on assessing the safety of large infrastructure, from nuclear power plants to food-processing equipment. Its clients span a range of industries, from energy companies such as BP PLC to auto makers like Rolls Royce Group PLC; it also tests the safety of public infrastructure, such as bridges, for federal, state and local governments.

It’s a growing industry, thanks to increased outsourcing, more refined testing procedures and the publicity surrounding major infrastructure failures, such as the rush-hour collapse of a bridge in Minneapolis in 2007.

Mistras plans to expand into new markets, including wind turbines, other alternative energy, and natural gas transportation, as well as in public infrastructure, including highways and bridges.

The company, which ends its fiscal year May 31, has demonstrated fast annual revenue growth, increasing 37% to $209 million in 2009. But its operating income declined 9% due to a legal settlement with former workers claiming California labor code violations, and an increase in allowances for doubtful accounts after a large customer filed for bankruptcy.

The lower operating income, combined with higher interest expense from increased borrowing the company undertook for acquisitions it made and equipment purchases, dragged net income down 27% to $5.5 million compared to fiscal 2008.

Mistras estimates that revenue in its first quarter of fiscal 2010 will increase between 16% and 22% from $47 million a year earlier, but its operating income will decline to $2 million to $3 million, compared to $3.7 million in the year-earlier period. The company said the expected decline in operating income would occur due to a lower-margin revenue mix as a result of the economic downturn, a shift that is expected to continue in the near term.

The company, of Princeton Junction, N.J., was founded by a group of former AT&T Bell Labs researchers in 1978, and operated as Physical Acoustics Corp. until it reorganized into Mistras in 1994.

Of the total shares sold, two million came from private owners and won’t benefit the company; sellers include Chairman and Chief Executive Sotirios J. Vahaviolos; several other executives; and private equity funds affiliated with Altus Capital Partners Inc. and Thayer Hidden Creek.

The company plans to use its proceeds for working capital and possible acquisitions and to pay down some debt. The debt it pays off will also benefit its underwriters; two of them, J.P. Morgan Chase & Co. and Bank of America Corp., are party to the credit agreement it plans to pay off completely.

Besides J.P. Morgan Chase and Bank of America Merrill Lynch, Mistras’ deal was managed by Credit Suisse Group.

Also expected to trade Thursday are shares of pharmaceutical company Omeros Corp. Its stock will trade on the Nasdaq under the symbol OMER.

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