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An Unforgiving Market Finds a Prize IPO


Lately the IPO market has been very difficult to impress. Apparently a Nobel Prize helps do the trick.

For months, investors in the initial public offering market have complained about the quality of the new equities making their debut. Against that backdrop, today’s successful IPO for Financial Engines (FNGN) stands out.

Financial Engines was founded in 1996, by William Sharpe, a co-winner of the 1990 Nobel Prize in Economic Sciences for “pioneering work in the theory of financial economics.” (Sharpe developed the “Sharpe ratio,” a measure how much investors are compensated for taking on risk in investments.) His company provides low-cost, online financial advice and manages retirement funds in employer-sponsored plans.

On Mar. 16, Financial Engines became the first IPO of 2010 to price above its initial offering range — out of 26 U.S. IPOs since the beginning of the year. The stock was initially estimated to sell for $9 to $11 per share, but premiered at $12. Then, when it began trading, the stock climbed higher all morning, eventually closing at 17.16, a 43% one-day return.

Of course, Sharpe’s prize isn’t the only thing that caught investors’ attention. Financial Engines is profitable and growing rapidly.

For example, the company:

Saw revenues grow 19% in 2009, to $85 million.

Reported net income of $5.7 million in 2009, its first profitable year.

Saw its assets under management jump from $1 billion in 2004 to $25.7 billion last year.

Provides services or runs retirement plans at 760 plan sponsors, including 116 Fortune 500 companies, for about 7.4 million plan participants.

Executives believe much more growth is possible. Financial Engines’ prospectus reads:

As the burden of retirement investing shifts to the individual, we believe that there is an increasing need for assistance and guidance on how to maximize retirement wealth.

If Financial Engines stands out so much, it’s probably because so many other IPOs in the last four months have fallen short.

Scott Sweet, managing director of IPO Boutique, tallies up the complaints: Private equity firms going public “with enormous debt loads.” Unlike the profitable Financial Engines, companies “not making any money.” IPOs that are inferior alternatives to competitors already on the market with long track records.

Over and over again, companies have been roundly rejected by investors. To take one example, Crude Carriers (CRU) — a transporter of crude and fuel oil by ship — went public on Mar. 11 priced at $19 per share, the low end of its predicted range. It closed on Mar. 16 at 18.07, offering its initial investors a 4.9% loss in four trading days.

Maybe the brokers that bring IPOs to market have learned a lesson. Sweet notes that several promising IPOs have filed recently. He says:

Underwriters are tired of having to slash virtually every deal below the original filing range to garner any interest. [They] have retooled and said, ‘We’re going to bring better-quality companies’ [to market].

Among those promising IPOs that could be heading to market, Sweet mentions video game renter Gamefly, prepaid debit card provider Green Dot, Tesla Motors and CBOE Holdings. Financial Engines proves that investors aren’t out to reject all IPOs — just those that don’t meet their high standards.


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