Nobel Winner Sharpe’s Firm Advances 44% After IPO (Update3)
March 16, 2010, 6:43 PM EDT(Updates first-day gain from first paragraph, adds comparisons with U.S. IPOs in second paragraph.)
By Michael Tsang and Craig Trudell
March 16 (Bloomberg) -- Financial Engines Inc. surged 44 percent in its first day of trading after the investment adviser co-founded by Nobel laureate William Sharpe became the first U.S. company this year to price an initial public offering above its forecast range.
The provider of portfolio-management services to people with employer-sponsored retirement plans jumped $5.25 to $17.25 after selling 10.6 million shares at $12 each yesterday. Today’s advance gave Financial Engines, which offered a 27 percent stake for $9 to $11 a share, a market value of $681 million. The first-day gain was also the biggest for a U.S. initial offering in almost six months, data compiled by Bloomberg show.
Financial Engines’s $127 million IPO commanded a higher price than its underwriters estimated after the Standard & Poor’s 500 Index rallied to its highest level this year. While the previous 14 sales of 2010 were cut an average of 25 percent, the IPO by Financial Engines showed buyers were willing to pay up for a company that increased revenue by 19 percent last year as the earnings and sales of its biggest competitors fell.
“It’s a great sign,” said Darren Fabric, managing director at Chicago-based IPOX Capital Management LLC, which started the Direxion Long/Short Global IPO Fund this month. “It’s definitely encouraging. There’s appetite for companies with growth prospects.”
The Dealmakers
Sharpe, 75, established Palo Alto, California-based Financial Engines in 1996, six years after winning the Nobel Prize for Economics with Harry Markowitz and Merton Miller for their work in the theory of financial economics. Now a director emeritus, he also developed the Sharpe ratio, a formula to analyze if investments return enough to offset their risks.
Goldman Sachs Group Inc. of New York led the initial sale, while Financial Engines turned to Pillsbury Winthrop Shaw Pittman LLP in Palo Alto for legal counsel.
The last time a U.S. company persuaded buyers to pay a higher price than its forecast range was when Fortinet Inc. raised $180 million in its initial sale in November. The Sunnyvale, California-based maker of all-in-one network-security equipment sold shares at $12.50 after offering $9 to $11 each. The stock jumped 33 percent in its first day of trading.
Financial Engines’ first-day gain of 44 percent was also the biggest for a U.S. IPO since A123 Systems Inc., the Watertown, Massachusetts-based maker of batteries for electric vehicles, jumped 50 percent after its sale in September.
Relative Value
At the original midpoint price of $10, Financial Engines was valued at 6.21 times tangible net assets, a discount to its largest rivals.
Morningstar Inc. and T. Rowe Price Group Inc., which Financial Engines listed among its competitors for investment advice and retirement savings, trade at 6.80 times and 6.28 times the value of their shareholders’ equity, excluding assets that can’t be sold in liquidation, Bloomberg data show.
Financial Engines, which has about $26 billion in assets under management, generated 62 percent of its revenue last year from overseeing accounts for individuals. Sales from that part of the business rose by 35 percent, according to its filing.
Monte Carlo Simulations
The company runs Monte Carlo simulations for each investor to choose blends of stocks, bonds and mutual funds tailored to their tolerance for risk and financial goals. The analysis is based on the work of Sharpe, now a professor emeritus of finance at Stanford University’s Graduate School of Business.
Financial Engines competes with target-date funds offered by T. Rowe Price of Baltimore, which oversees $391.3 billion, and BlackRock Inc., the New York-based manager that oversees $3.35 trillion. Target-date funds move from riskier investments such as stocks to more conservative alternatives like bonds as an investor approaches retirement.
T. Rowe’s revenue slid 10 percent last year, while BlackRock posted an 8.1 percent drop. Sales at Chicago-based Morningstar, which Financial Engines cites as a direct competitor for investment-advisory services, fell 4.7 percent.
The IPO price valued Financial Engines at about 5.58 times its 2009 sales of $84.98 million, its filing and data compiled by Bloomberg show. While that’s higher than Morningstar’s 4.91 price-sales ratio, the valuation is a 25 percent discount to T. Rowe and 9.9 percent less than BlackRock, Bloomberg data show.
Growth Potential
“It’s a reasonably established business model that’s shown good growth, and the valuation was reasonable relative to its competitors,” said Sean Kraus, who oversees $2 billion as chief investment officer at Citizens Business Bank in Pasadena, California. “It’s definitely something in the IPO market that you haven’t seen much of.”
The sale came after Baltic Trading Ltd. and Sensata Technologies Holding NV priced at the low end of the range set by underwriters last week. The two companies had joined Bellevue, Washington-based Symetra Financial Corp., the insurer backed by Warren Buffett’s Berkshire Hathaway Inc. that raised $420 million in January, as the only IPOs to sell within the forecast range this year, data compiled by Bloomberg show.
Baltic Trading, the New York-based company that will operate dry-bulk vessels, raised $228 million. Sensata, the Almelo, Netherlands-based maker of sensors for Ford Motor Co. of Dearborn, Michigan, sold $569 million in the biggest U.S. offering this year.
--With assistance from Damiano Sasso in New York. Editors: Daniel Hauck, Chris Nagi.
To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Craig Trudell in New York at ctrudell1@bloomberg.net.
To contact the editor responsible for this story: Daniel Hauck at dhauck1@bloomberg.net.
