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Sarbanes who? The burdens of being a publicly held company in the post-Enron era are well known, but with U.S. equity markets showing strength—as witnessed by the record highs reached by the Dow Jones industrial average—lots of outfits are still diving into the public pool. Certainly not all the recent offerings have been great successes (the Vonage (VON) debacle is still recent enough to send a chill down investors' spines) but the market has seen, of late, some impressive debuts. The tech hardware company Riverbed Technology (RVBD) and cosmetics outfit Bare Escentuals (BARE) both posted handsome gains in their first day of public trading.
These strong performances have investors prowling for the next big deal. But among the dozens of names in the IPO hopper, which ones should investors be checking out? This week, Five for the Money takes a look at some of the more attractive IPO prospects on the horizon with a focus on companies that could deliver results long after they start trading. Even with the markets booming, IPOs remain some of the riskier deals out there. As ever, investors should do their homework and be aware of the potential pitfalls.
1. eHealth Through its Web site, eHealth markets health insurance from a broad spectrum of providers. The company focuses on plans for families, individuals, and small businesses, a sector that could soar, given the growing ranks of people who lack insurance or pursue independent career paths where a corporate-sponsored plan simply isn't an option. On the Mountain View (Calif.)-based company's site, customers can browse health plans from different insurers to find one that best suits their needs and budget.
The company's revenues have increased from $9.3 million in 2001 to $41.8 million in 2005 as the net loss shrank from $19.8 million to $0.4 million. For the six months ending in June the company's results bounded into the black, as it reported net income of $2.7 million on revenue of more than $27 million.
The company's commissions from insurers generally continue for as long as a policy is active. Tom Taulli, founder of InvestorOffering.com and an author who has written on IPOs, sees eHealth as a growth story. Since insurance prices are heavily regulated, eHealth faces virtually "no price competition" and he says its business relationships and technology leave it well positioned in this expanding market. The company expects the offer to price between $10 and $12 per share in a deal led by Morgan Stanley (MS) and Merrill Lynch (MER).
2. AeroVironment "Drone" is usually considered a pejorative term, but not at Monrovia (Calif.)-based AeroVironment. The company designs and sells small unmanned aircraft for use in military reconnaissance and civilian operations like monitoring wild fires. With craft capable of using infrared and electro-optical scanners, the company believes it is well positioned to benefit from the Defense Dept.'s push to transform the military into a more agile force.
Paul Bard, of IPOHome.com, says the company stands to benefit from an extended war in Iraq. And with the defense industry's acquisitive nature, AeroVironment may be a company "that some of the big guys would be keeping an eye on."
The company filed for an IPO in late September and plans to use the proceeds of the Goldman Sachs–led deal for purposes including research and development as well as "opportunistic" acquisitions. Already it has ramped up, boosting revenues from $47.7 million for the year ended April, 2004, to $139.4 million for 2006. During that period, net income increased from $2.2 million to $11.4 million.
3. Animal Health International Westlake (Tex.)-based Animal Health says it is the largest U.S. distributor of animal health-care products. It sells upwards of 35,000 products running the gamut from pharmaceuticals to sanitizers. Including supplies for farm animals and pets, the company says the market for animal health products has climbed from $4.8 billion in 2003 to $5.3 billion in 2005. With more than 62,000 customers ranging from retailers to veterinarians, the company could capitalize on further sector expansion.
Animal Health plans to use proceeds from the JPMorgan (JPM)-led offering to pay off debt and perhaps make some acquisitions. For the year ending June, 2006, the company reported sales of $571.1 million, up more than 26% since 2003. As with AeroVironment, estimated terms for the deal are not yet available. But at the right price it could be a strong proposition.
4. Acme Packet No it's not part of a dastardly scheme cooked up by Wile E. Coyote. Burlington (Mass.)-based Acme Packet's Net to Net product line helps traffic between different Internet protocol networks flow more smoothly to ensure quality performance in real-time communications, like voice. It's an area with room to grow, as an increasing amount of telephone traffic travels over the Internet instead of through traditional land lines. The company's customers include Korea Telecom (KTC) and Brasil Telecom (BRP).
IPOHome's Paul Bard says that as the company is growing, "the numbers are pretty impressive." For the six months ending in June the company reported net income of $11.3 million on revenues of $38.1 million. For calendar year 2005 it had a net loss of $35,000 on revenues of $36.1 million. With lead underwriters Goldman Sachs (GS) and Credit Suisse (CSGKF), Acme anticipates pricing the shares between $6.50 and $7.50.
Bard sees parallels in Acme with tech outfit Riverbed's recent offering. That company, which makes devices to accelerate data transmission across wide area networks, or WANs, saw shares rise about 57% on their first trading day, Sept. 21. And the stock has marked up further gains even though Riverbed isn't profitable.
5. SAIC This is the biggest and best-known name in the bunch. With revenues of almost $7.8 billion for the year ended Jan. 31, SAIC is not your typical IPO. The San Diego–based outfit offers an array of engineering, scientific, and logistic products and services, primarily to the U.S. Government. With product groups including transport and software, its clients include the Defense Dept. and other agencies. Led by Morgan Stanley and Bear Stearns (BSC), the company expects shares to price between $13 and $15.
Because the company is already well established, InvestorOffering's Taulli sees the company as more of a long-term play than a chance for quick cash (see BusinessWeek.com, 8/17/06, "Stocks to Sock Away"). Despite the headlines that accompany big debuts, he doesn't see a "barn burner." So investors shouldn't fret if they can't get in on day 1. "These types of businesses will be needed for a long time."
Halperin is a reporter for BusinessWeek.com in New York
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