matisse capital management

Visa and Other Upcoming IPOs

There are three IPOs scheduled for this week, March 17.   There is only one which I find interesting: Visa Inc. (Ticker: V).  The shares will supposedly be priced between $37 and $42.  Exactly how this IPO will fare in the current bearish environment is an unknown.  But given rising defaults on credit cards and home mortgages, I will be surprised if the shares take off.  Of the 24 new filings in January and February, the following companies, which are not REITs or pharma caught my attention:

CVE, CVR Partners, LP - agricultural chemicals

INTL, Intelius, Inc., - information and records management services

CFX, Colfax Corporation - fluid control, pump seal and valve manufacturing   

IPOs Worth A Second Look

The big IPO winners of the last few months were VMW (VM Ware) and MELI (Mercado Libre).  Both have seen their shares soar.  But the following companies also went public and they may hold some long-term promise.  Most generate positive net income and they are not tech or pharma.   They are definitely worth a second look:

OESX, Orion Energy Systems, currently $18.80 per share

SHOR, ShoreTel, currently at $14.00 per share

EDN, Edenor SA, currently trading at $22.00 per share

OESX manufactures energy efficient lighting.  The company may use some of the IPO proceeds for acquisitions.  SHOR, ShoreTel, provides internet protocol telecommunications.  It has no long-term debt, and its cash flow has exceeded net income by a wide margin in the last two years.  EDN, Edenor SA, is the largest electric utility in Argentina, providing electric service in Buenos Aires ad other urban markets.  The company does not pay a dividend at present, and may not do so this year.  And while it had large increases in revenue and net operating income, the bottom line was impacted by the company's debt, as discussed here.  Upcoming IPOs that look interesting include DTWO, Digital Domain, Intrepid Potash, and Visa Inc.  Visa, of course, should be a success, but the date has not yet been set.   

Analysis Brief: SLT - Sterlite Industries India

A non-ferrous metals and mining company with aluminum, copper and zinc operations in India and Australia.

P/E = 9.9 x; PEG = Undetermined.  This is a recent IPO that began trading in June at an opening price of $15 per share.  At the current price of $23.50, the stock appears to be undervalued. Value = $28.65 using estimated 2007 EPS of $2.50 in a discounted cash flow valuation with a 20% increase in earnings each of the next three years, 3% reversion growth and a 15% discount rate.  Last year the company's net income growth was 152%, and the year before, 120%. Sterlite does not pay a dividend.  Long term debt = 7% of total assets.   Sterlite is the Indian subsidiary of London-based mining company Vedanta Resources.  It is India's number one metals and mining company by sales with refining, smelting, and chemical operations.  The company owns a large share of two aluminum and zinc mines in India and 100% of a copper mine in Tasmania that will be played out in four years.  Sterlite also has a 100% owned subsidiary, Sterlite Energy, that generates electric power at seven locations in India.  Demand for electricity in India consistently lags the available supply.  Above left, share price over the last six months.  Sterlite financial information is available here: Sterlite's audited report.

Bottom line?   While the prospect of a mining and smelting company in high growth India may seem appealing, copper prices recently hit a two month low (Reuters) and zinc is also down.  Another concern is Sterlite's ongoing attempt to delist its shares in India, by repurchasing them below book value, as reported in Hindu Business Line.  Less demand = lower price. 

More Intriguing IPOs

Here are two more upcoming IPO's culled from a list full of tech and pharma.  Both are established companies with positive net income that is growing rapidly.  The LL, Lumber Liquidators IPO is particularly interesting;  if you have hardwood floors, you are no doubt familiar with the company, as the are the leading US retailer in that market.

• CISG - CN Insure, a Chinese insurance agency and brokerage company with 171 outlets. The compny had 2006 net income of $12.1 million.  Price $11-$13.  Issue date: 10/31.
• LL - Lumber Liquidators, offers pre-finished and unfinished hardwood flooring in over 100 locations, in 44 states. In 2006, the company had revenues of $332 million and net income of $13 million.  Share price $12 - $14.  Issue date: 11/14.

Intriguing IPOs, Recent and Upcoming

After weeding out the pharma companies without a drug and the software companies without positive earnings, the following new IPOs stand out:

CVI - CVR Energy Inc., +26%, issued at $19 and now at $23.85.  CVI refines and transports fuel and produces nitrogen-based fertilizer. The company had $3 billion in sales in 2006.

ULTA - Ulta Cosmetic, +85%, issued at $18, now at $33.30.  Ulta operates 207 stores across the US that combine cosmetic stores and beauty salons.  It also has an extensive on-line catalogue of products.  Net income was 22.5% in 2006, up 41% over the prior year.  Chief competitor: Sephora, owned by LVMH.

And for the upcoming IPOs:

Top IPO Returns of the Last Six Months

Where can you get a 253% return in two months?  IPOs, where else?  The following IPOs have generated impressive returns since they were issued recently:

   MELI, +124% - MELI is Mercado Libre, a Latin American version of Ebay.

   SHOR, +71% - SHOR provides internet protocol phone service

   LULU, +222% - Lululemon the much-hyped athletic wear maker in Canada

   PWRD, +74% - Perfect World is an on line game developer in China

   VMW, +253% - VM Ware, Inc., a software company in Palo Alto, CA

   STV, +137% -  STV is a digital TV provider in China

Of these companies, MELI and STV may be the best long term bets, with defensible business models.  There are some other IPOs that have risen less dramatically, but are sound businesses that could provide long term growth.  These include APKT, Acme Packet, an interactive communications provider; PLTE, Claymont Steel Holdings, a steel plate producer in Delaware; and AIMC, Altra Holdings, an industrial manufacturer in Massachusetts.  Some of the top institutional investors already hold large stakes in these firms.  Above right, VMW shares since August. 

More IPO's Worth A Second Look

The following IPO's are, in my opinion, some of the best long-term prospects.  All are well-established businesses with a basic product for which there should be continuing demand:

• PLTE - Claymont Steel Holdings, $19.25
• USBE - US BioEnergy Corp., $7.14
• AIMC - Altra Holdings, Inc., $16.37
• APKT - Acme Packet, Inc., $15.43
• HMIN - Home Inns and Hotels, $35.96
• MBLX - Metabolix, Inc., $25.98
• ATN - Atlas Energy Resources, $30.84

Of these, the most interesting companies are PLTE, APKT, and HMIN.  PLTE is the ticker for Claymont Steel, a small steel plate producer in Delaware.  While the company has a high level of debt, it could be a takeover target.  APKT is a profitable technology company with no debt that counts T. Rowe Price and TIAA-CREF as major shareholders.  HMIN is a chain of discount hotels in China, with some 200 locations.  Last year net income more than doubled; need I say more?

Several IPO's Worth A Second Look

I routinely sort through IPO's a few months after they are issued.  The dust has settled and the excitement has burned off.  It is easier then to make a dispassionate decision about investing in them.  The following IPO's are, in my opinion, the most interesting of the last six months; the best long term prospects.  That doesn't mean they have gone up the most in price. None are software companies or pharma, and all are well established businesses:

• CZZ - Cosan Limited, SA, $13.24
• LIMC - Limco Piedmont, $15.15
• EBTX - Encore Bancshares, $21.50
• BWY - BWAY Holdings, $11.10
• CLNE - Clean Energy Fuels, $15.72
• EDN - Edenor, SA, $24.15
• DEP, Duncan Energy Partners, $24.30

Of these, the most interesting are CZZ, DEP, CLNE and EDN.  CZZ is the ticker for Cosan, a major global sugar and ethanol producer, headquartered in Brazil.  CLNE, Clean Energy, already has Deutsche Bank, Wells Fargo, TIAA-CREF and T Boone Pickens as major investors.  EDN, Edenor, is a major electric utility in Argentina, while DEP, Duncan Energy Partners, stores, transports and sells natural gas.  It has Deutsche Bank, Citigroup, and Goldman Sachs as major shareholders and pays a 6.5% dividend.

Oasis Hong Kong Air

Oasis Hong Kong is a new airline offering long haul discount flights from London and Vancouver to Hong Kong.  The company is currently running a special with business class seats for C$789 from YVR.  Coach seats from London Gatwick have been offered as low as 75 pounds each way. The airline was founded in February 2005 and plans to inaugurate flights from Sacramento to Hong Kong in the near future. http://www.oasishongkong.com/intro.aspx?p=111