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IPO Update
The Hot IPO Trader
Wednesday, November 14, 2007
By Louis Basenese
Email – #188
** IPO Update
Underwriters expect another busy week, pitching 14 IPOs to investors. Only one looks worth a swing.
Featured IPO: Virtual Radiologic (Nasdaq: VRAD)
- Provider of radiology outsourcing services.
- Expected to price between $16 and $18. Trading begins Thursday.
- We’ll look to buy up to $24.
Virtual Radiologic is one of the leading providers of remote diagnostic interpretation, or teleradiology services. And boring old supply and demand make this deal anything but.
Put simply, a radiologist shortage exists and it’s only getting worse. Here’s why…
Demand for diagnostic images services will increase by 15% per year, according to Frost & Sullivan. Yet, the number of radiologists will only increase by 2% per year.
Thank an aging population for the demand increase… and retirement and a limited number of radiology residency programs for the supply constraints. Clearly, none of these factors will change overnight (if ever), making VRAD the perfect solution.
It allows radiology practices, hospitals, clinics and diagnostic imaging centers to outsource excess demand – 24 hours a day, seven days a week, 365 days a year. And the proliferation of broadband internet and VRAD’s proprietary software make it a simple, reliable and increasingly popular “transaction.”
Just look at the financials.
Revenues roughly doubled in each of the last three years. And the company’s on track for another 70% revenue bump this year.
Moving forward, expect VRAD to benefit from a debt-free, cash heavy balance sheet and an experienced management team. Another positive – insiders will retain a 58% ownership stake post-IPO, ensuring shareholder interests (namely appreciation) will be well served.
To be fair, two negatives exist: 1) VRAD just became profitable, and 2) the offering size is just below our minimum at $70 million.
However, I’m willing overlook both because an accurate proxy exists to play this from a purely valuation standpoint. And my sources indicate demand is brisk, ensuring ample liquidity in the aftermarket.
Based upon the competition (NightHawk Radiology Holdings), VRAD’s conservatively worth $28 to $30 per share. Accordingly, we’ll look to be buyers up to $24 to maintain our 20% upside potential.
I’ll be in touch with a final recommendation once trading begins tomorrow. So stay tuned.
** IPOs We’re Passing On… And Why
3Par Inc. (PAR): Provides utility storage solutions for large to medium enterprises. Unprofitable, small offering size and lackluster performance of Compellent does not bode well for deal. However, Dell’s recent acquisition of competitor EqualLogic suggests 3Par might make attractive acquisition so I’ll keep an eye on shares in the aftermarket for a possible entry.
Chimera Investment (CIM): Newly formed REIT that invests in residential mortgage loans, residential mortgage-backed securities, real estate-related securities and various other asset classes. Re-read the business description.
El Paso Pipeline Partners (EPB): Limited partnership that will own and operate natural gas transportation pipelines, storage and other midstream assets. Primarily an income play.
EnergySolutions (ES): Provides specialized nuclear services to government and commercial customers. Until our elected representatives starting saying “yes” to nuclear power, growth will be restricted. Unfortunately, politics not business will determine when ES is an attractive buy.
EnteroMedics (ETRM): Developing an implantable therapeutic device to treat obesity. Unprofitable, too small and no FDA approved products.
Global Ship Lease, Inc. (GSL): A spin off of CMA CGM that will own an initial fleet of 12 containerships. Expansion of fleet (and therefore earnings) relies too heavily on use of debt.
Heckmann Corporation (HEK): Blank check company founded by Richard Heckmann, the former CEO of K2 Inc. No track record, too speculative.
Ideation Acquisition Corp. (IDI.U): A newly formed blank check company. No track record, too speculative.
Internet Brands (INET): Operates a network of automotive, travel and home improvement web sites. Revenues declining because business is tied to slumping automotive industry. No signs of immediate improvement.
MSCI (MXB): Spin-off of Morgan Stanley’s index products and analytics business. Although I’m a fan of the products, the business relies too heavily on equity strategies and assets under management. When the bear finally comes out of hibernation, MSCI will suffer. Plus, the company only sports modest revenue growth rates (14% historically, 17% more recently).
Navios Maritime Partners LP (NMM): International owner and operator of drybulk carriers. Primarily an income play.
Och-Ziff Capital Management (OZM): A global hedge fund with over $30 billion in assets under management. Put simply, timing less than ideal for a hedge fund. Plus, deal size dramatically reduced (from $2 billion in July to $1.1 billion). Once we get some definitive visibility regarding subprime, might be worth considering an entry.
Reliant Technologies (RLNT): Sells laser systems for the treatment of skin conditions under the Fraxel brand. Unprofitable, highly competitive market and too reliant on one product.
Rubicon Technology (RBCN): Electronic materials provider that develops, manufactures, and sells monocrystalline sapphire and other innovative crystalline products. Despite the company’s ties with LED lights it’s still unprofitable. Plus the highly competitive industry and commoditized product significantly limits growth potential.
Stewart & Stevenson (SSC): A maker of specialized equipment for the oil and gas industries. Essentially a pick and shovel play. However, highly competitive industry and limited operating history dictates a wait and see approach here. If clear competitive advantages emerge and $100 oil becomes a reality, we might return to buy SSC.
**IPO Pipeline Report
Current Stats: 153 companies with IPO plans filed with SEC.
Next Week: 2 IPOs scheduled. Front-runner is CreditCards.com.
Deals of Interest Further Out: MedAssets, BlueArc and Visa.
**Portfolio Update
Duff & Phelps (NYSE: DUF): Take profits. Despite increasing revenues by 24% and earnings by 46%, shares sold off in early action yesterday, triggering our sell stop.
Agria Corporation (NYSE: GRO): Shares have been unfairly punished in wake of the broader Chinese selloff. And in early morning action, today they traded low enough to hit our sell-stop. Close out your position if you haven’t done so already.
**Trader’s Edge
As promised, here’s a timely update regarding Visa…
The credit card giant finally filed its prospectus the SEC on November 9. Expect the deal to price in the first quarter of 2008. I’m going to start my review now and will be in touch with a full report once the underwriters announce a definitive IPO date.
(Remember, if you have any questions, comments or successes you would like to share, feel free to drop us a line at editor@oxfordclub.com . We’ll do our best to address each one.)
Good investing,
Louis Basenese
Stock
Rec
Date
Rec
Price
Current Price
Comments
Agria (NYSE:GRO)
11/7/2007
$14.75
Sell
Stock hit sell stop.
Duff & Phelps (NYSE: DUF)
10/01/2007
$18.50
Sell
Stock hit sell stop.
Bi Louis Basenese is the Associate Investment Director for The Oxford Club . He began his career structuring asset protection programs for private business owners and later joined one of Wall Street’s leading investment firms as a top analyst and trading expert. Louis specializes in non-traditional investments such as hedge funds, managed futures, takeovers, IPOs and various other alternative investments. He has an MBA from the Crummer School of Business at Rollins College and draws upon both his academic and professional experiences to edit three elite trading services: The Takeover Trader , The Hot IPO Trader and The Long and Short Trader . Louis also is a regular contributor to the Oxford Club Communiqué and the Oxford Insight e-letter and is a top-rated speaker at financial conferences around the country.
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