The IPO Buzz: Building Momentum

As every student of initial public offerings knows, IPO traffic is driven by stock market conditions, and the calendar is influenced by industrial sectors. Since last summer, the stock market has looked anemic after taking some big spills – and the most dominant IPO sector has been healthcare. Now a new sector is on the horizon. Construction-related companies are coming into play.

Basically, when you have a good stock market, you have a decent IPO calendar. When U.S. stocks sell off, the calendar dries up. It is as simple as that. Don’t overthink the problem.

The U.S. stock market’s performance since last July has been sideways – much like the summer dance of the blue crabs on the beach at Nags Head. “The Locomotion” worked well for Little Eva in the summer of ’62, but Wall Street knows that the stock market needs a healthy upward swing to fill the IPO dance floor.

The Good Times

The stock market, as measured by the NASDAQ Composite Index (the barometer of the IPO market), racked up a gain of 30.6 percent from its closing low of 3,996.96 on Feb. 3, 2014, to its closing high of 5,218.86 on July 20, 2015. During that 18-month run, the calendar generated 360 IPOs, according to the U.S. Securities and Exchange Commission.

That works out to a monthly average of 20 IPOs.

Note: These figures exclude unit offerings, bank conversions, “best efforts” offerings, blank checks, closed-end funds, companies trading on the OTC markets moving over to the NASDAQ and foreign-traded securities making their debuts in the U.S. capital markets. The latter are public offerings. Investors can buy the underlying shares on foreign exchanges before their U.S. pricing dates.

The Not-So-Good Times

Since last July, the NASDAQ Composite Index has struggled. It closed on Friday, June 3, 2016, at 4,942.52, DOWN 1.3 percent for the year and DOWN 5.3 percent from its July 20, 2015, high.

From January through May 2016, the IPO calendar generated 27 IPOs. That works out to a monthly average of 5.4 IPOs.

From Healthcare to Construction

Now let’s look at the industrial sectors. From January 2015 through May 2016, the calendar generated 76 healthcare IPOs. That represents 42 percent of 181 IPOs priced over that time.

Two weeks ago, IPOs from the construction-related sector started surfacing.

What it takes to launch a new sector is for a sector leader to go public and its IPO must be successful in the aftermarket. Oh yes, the sector has to be outperforming the stock market. This is the GMS (GMS) story.

GMS, the leading North American distributor of wallboard and suspended ceiling systems, priced its IPO of 7 million shares at $21 each on May 25, 2016. GMS closed its opening day at $21.91. On Friday, June 3, GMS closed at $22.75, UP 8.33 percent from its IPO price.

That’s not exactly a moonshot.

Nevertheless, GMS has the magic needed to launch a new sector. The company is a leader in its industry. It’s been around since 1971. For the 12 months ending Jan. 31, 2016, GMS reported net income of $4.6 million on revenue of $1.7 billion. And there’s more. Its industrial sector is in demand.

The Dow Jones U.S. Building Materials & Fixtures Index (DJUSBD) closed Friday at 787.79, UP 15.5 percent for the year.

Note: The NASDAQ Composite was DOWN 1.3 percent for the year.

None of the above was missed by Wall Street’s bankers. They started coming up with names to follow GMS.

On Tuesday, May 30, Atkore International Group (ATKR – proposed), a leading producer of electrical raceway products, filed pricing terms and jumped onto this week’s IPO calendar.

On Wednesday, June 1, JELD-WEN Holding, one of the world’s largest door and window manufacturers, filed for an IPO to raise $100 million.

On Friday, June 3, At Home Group (HOME – proposed), a leading home décor superstore, filed an amendment updating its original prospectus. This is usually a sign that a company is moving forward with its IPO plans. At Home originally filed to go public on Sept. 4, 2015.

Electricity and Education

And this brings us to the current week. The calendar has three IPOs – two new faces plus a small-cap carryover from previous weeks. The new additions are Atkore International and China Online Education Group (COE – proposed).

Atkore International, based in Harvey, Illinois, makes metal products, including electrical raceway solutions, steel tubes and pipes, electrical conduit, armored wire and cable, cable trays, metal framing systems and building components. Formed in 2010, the company has about 3,200 employees. For the 12 months ending March 25, 2016, Atkore reported net income of $14.6 million on revenue of $1.6 billion.

Bankers plan to price 12 million shares at $20 to $22 each on Thursday evening, June 9, to trade Friday morning, June 10. The IPO is expected to raise about $252 million.

China Online Education Group, based in Beijing, offers an online English education platform in China. Formed in 2011, the company has about 1,489 employees. For the 12 months ending March 31, 2016, the company reported a net loss of US$56.2 million on revenue of US$30.5 million.

Bankers plan to price 2.4 million American Depositary Shares at $18 to $20 each on Thursday evening, June 9, to trade Friday morning, June 10. The IPO is expected to raise about $252 million.

Looking into the week of June 13, the IPO calendar has a small-cap deal whose stock is currently trading on the OTCQB. But that could change. Things can happen quickly on Monday mornings in the IPO Valley.

Stay tuned.

Disclosure: Neither the author nor anyone else on the staff has a position in any stocks mentioned, nor do we trade or invest in IPOs. The author and staff do not issue advice, recommendations or opinion.