HOT IPO Trader for July 31, 2007

The Hot IPO Trader
Tuesday, July 31, 2007
by Louis Basenese

Email – #149

All seven IPOs this week are slated for a Thursday debut. But only one warrants our attention…

Featured IPO: Genpact Limited (NYSE: G)

Globalization is by far one of the biggest trends in our lifetime. And Genpact plays into this perfectly.

As an India-based provider of business improvement services, the company essentially helps other companies function more efficiently, and profitability, in an increasingly competitive market.

It does this by combining Six Sigma, Lean principles, technology and cheaper, highly-skilled labor to improve such business functions as finance and accounting, collections and customer services, insurance, supply chain and procurement, analytics, enterprise application and IT infrastructure.

The company got its start inside GE, the perfect place to hone its skills. And the early results were so impressive, GE decided to set up Genpact as an independent company in 2005 so it could begin taking on additional clients.

Since that time, it’s quickly added marquee clients including AON, Honeywell, Penske, Nissan and Wachovia. Expect this list to keep growing, as the value of Genpact’s services is both tangible and dramatic.

For instance, Genpact helped Penske cut its direct costs in half and lower its delinquent receivables by 60%.

As will all IPOs, we favor those with sustainable long-term growth opportunities. And Genpact fits the bill here, too.

Profits in the last year more than doubled. And research from NASSCOM-McKinsey estimates the total addressable market for Genpact’s services is about $300 billion, of which only 10% has been penetrated. This lends credence to Genpact’s projections for at least 25% annual growth into the foreseeable future.

Yes, GE accounts for a sizeable amount of revenues. But I don’t think this is a big concern.

A long-term contract with GE through 2013 ensures revenues won’t suddenly dry up. And Genpact is aggressively working on reducing its reliance on GE. In just one year, GE’s contribution to Genpact’s revenues went from 91.4% to 73.9%. Results through the first quarter of this year confirm this trend is continuing.

Other items worth noting include management’s wise decision to hedge currency exposure (currently at 2.5 years out), GE’s 23% stake post-IPO, and Genpact’s global reach with operations in nine countries including India, China, Hungary, Mexico, the Philippines, Romania, and Spain.

All told, the company’s strong pedigree, quickly expanding client list and bottom line, and early leadership in a severely under-penetrated market makes this a deal worth participating in.

Shares are expected to price Wednesday night between $16 and $18. Barring a pricing below the expected range or an obscene run-up at the open, we’ll look to enter shares on a pullback come Thursday morning.

Expect a follow-up alert shortly after trading begins.

** IPOs We’re Passing On… And Why

Amedica (AMCA): Uses advanced ceramics technology to develop orthopedic spine and joint implants. Unprofitable and too small an offering.

Concho Resources (CXO): Oil and natural gas company with operations in New Mexico and West Texas. Speculative energy plays have not been hot performers lately. Last week’s lackluster debut of REXX further proved this. None of the fundamentals suggest CXO will defy the prevailing trend.

Dolan Media (DM): Publishes print and online media intended for professional customers and provides appellate and processing services to the legal profession. Revenue growth is modest, at roughly 10%, with no compelling research to suggest a dramatic increase in the near future. Plus, a large portion of revenues are cyclical.

NanoDynamics (NDMX): Develops and markets products, advanced materials and technologies for clean energy and infrastructure solutions. Unprofitable, too small an offering, and my institutional contacts indicate demand is weak.

Sucampo Pharmaceuticals (SCMP): Developer of proprietary drugs based on prostones. Only one marketable drug, no indications of blockbuster in the pipeline and too small an offering.

Virtusa (VRTU): Provider of offshore information technology services. The offering size is below our $100 million minimum. Plus, the company focuses solely on IT outsourcing. This is a highly competitive market and one we can tap into without the concentrated risk with Genpact (26% of its revenues come for IT outsourcing).

**IPO Pipeline Report

Current Stats: 141 companies with IPO plans filed w/ SEC.

Next Week: 10 deals. Frontrunners are E-House, HireRight and WuXi PharmaTech.

Deals of Interest Further Out: VMWare.

**Portfolio Update

comScore, Inc. (Nasdaq: SCOR): We get earnings Thursday after the close, and the quiet period expires on Sunday night. Strong results and favorable analyst opinions should give shares a boost.

Airvana (Nasdaq: AIRV): BusinessWeek had an interesting article about the explosion in interest in femtocells. It’s worth a read, considering Airvana will aggressively compete in this market. You can check out the article here.

**Trader’s Edge

Fred S. writes, “What is your current position on ARAY?”

Recall this is an IPO we played earlier in the year that did not work out for us. That being said, I still firmly believe it’s a long-term buy and hold investment.

The company’s CyberKnife system is one of kind. There is no direct competition right now. Plus, it holds the potential to treat a wide-variety of medical conditions beyond its current uses.

Insurance rates have already been approved for treatment, making break-even analysis for hospitals considering a purchase very easy.

The backlog is steadily growing. And early adopters are already signing up to purchase additional machines. All of these are positives, which makes the stock’s weak performance all the more puzzling.

I think the problem here is that Wall Street analysts are not sold on the company’s long-term potential. Perhaps the earnings call on August 16 will begin to the turn the tide.

In the end, this is an IPO I’ve been closely monitoring since we hit our protective stop. And I’ll continue to do so, looking for a turning point before recommending a re-entry. 

Good investing,

Louis Basenese

Stock
Rec
Date
Rec
Price
Current Price
Comments

Airvana(Nasdaq: AIRV)
7/25/07
$7.20
$7.01
Buy. Sell stop is $5.75.

comScore, Inc (Nasdaq: SCOR)
7/2/2007
$22/$20
$23.40
Buy. Sell stop is $21.50.

Investor Bulletin