So far this month, Wall Street’s equities syndicate desks have priced 23 secondary/follow offerings and 12 IPOs, according to the U.S. Securities and Exchange Commission’s filing window. Investors have been coining money in playing the secondary/follow-on calendar. There is a simple reason: The deals are priced to sell.
Consider this: A deal-by-deal survey of October’s secondary offerings shows 20 of the 23 deals were priced below their previous closes –- or “in the hole,” in Wall Street’s jargon. And those 20 deals “worked” — more Wall Street jargon -– all traded the following day above their offering prices.
But not all of the 23 deals worked.
Flight to Nowhere
The secondary for UAL Corp. (NASDAQ: UAUA), the parent of United Airlines, did not work. On Thursday evening, Oct. 1, bankers priced 19 million shares of UAUA at $7.24 each -– its closing price. The stock opened the following morning at $7.03, traded as high as $7.35 and closed on Friday, Oct. 3, at $7.21.
You could say it worked. But for those playing the calendar, most were out on the opening or shortly thereafter.
In contrast, let’s take the secondary for UQM Technologies (NYSE-AMEX: UQM), which makes electric motors, generators and other power-train components for all-electric and hybrid vehicles. On Thursday evening, Oct. 22, bankers priced 7.5 million shares at $4 each, DOWN 21.6 percent from $5.10, its previous close. That’s really in the hole, but it worked. The stock opened the following morning at $4.40, UP 10 percent from its offering price and traded as high as $5.05. It closed on Friday, Oct. 23, at $4.30.
Now that’s merchandising.
If you hold a one-day sale (like Wall Street’s equities calendars), discount the merchandise and people will buy it. Can you imagine Macy’s advertising: “One-day sale –- all merchandise marked UP 20 percent.” The aisles would be empty. Wall Street’s calendars are no different. They, too, are one-day sales.
Scorecard for October’s IPOs
October’s new-issues sector has been a laggard. By last Friday’s close, six of the 12 IPOs priced during the month were in the winner’s circle. The other six were not.
For October’s IPOs, the average aftermarket gain was 5.57 percent as of Friday’s close. Compare and contrast that with this handy statistic: For the 30 IPOs priced this year before Oct. 1, the average aftermarket gain was 21 percent.
In bankers’ defense, pricing an IPO can be tricky.
To start with, they have no previous closing price to work with as they do with the secondary offerings. But they do have a guideline. They are dealing with a “one-day sale” and discounting is necessary.
The source of the discount comes from similar publicly traded companies. In past years, that discount ranged between 15 percent and 20 percent, depending upon stock market conditions. Of course, there are exceptions, but no guarantee the bankers will get the right price. In the end, the tape tells the tale when the deal starts trading.
Jumping the Tracks
Let’s look at one of October’s poorest IPO aftermarket performers. It is RailAmerica (NYSE: RA), a short-line railroad. It closed on Friday at $13.67, DOWN 8.87 percent from $15, its initial offering price.
Here’s the background.
On Sept. 28, RailAmerica filed to offer 21 million shares at $16 to $18 each. It priced 22 million shares at $15 each on Oct. 13. The company sold 10.5 million shares and insiders sold 11.5 million shares, an increase from 10.5 million originally planned.
The IPO flopped.
RailAmerica started trading at $14.35 and closed its opening day at $13.75 — DOWN 8.3 percent from its initial offering price.
Check Out Other Railroad IPOs
For a comparison with similar publicly traded short-line railroad companies, let’s take a look at the following:
- RailAmerica is trading at about 19.1 times earnings, according to Yahoo! Finance’s page.
- Genesee & Wyoming (NYSE: GWR) is trading at about 16.8 times earnings.
- Providence & Worcester Railroad (NYSE: PWX) is trading at about 15.1 times earnings.
- Kansas City Southern (NYSE: KSU) is trading at about 28.3 times earnings.
In terms of price-to-earnings ratios, there was no discount in RailAmerica’s offering price.
Power to the People
Now let’s take a look at this week’s IPO Calendar. It has three deals looking to raise about $946 million.
The largest offering is AEI (NYSE: AEI – proposed), based in George Town on Grand Cayman. The company’s energy infrastructure assets include power lines, oil and gas pipelines and gas stations in emerging markets in 19 countries in Latin America, Central and Eastern Europe and Asia. The company plans to price 50 million shares at $14 to $16 each on Wednesday evening, Oct. 28, to trade on Thursday.
Note: AEI plans to offer 16.7 million shares and selling shareholders plan to offer 33.3 million shares.
For a comparison with similar publicly traded energy companies, let’s take a look at the following:
- AEI’s offering price would put it at about 13.4 times earnings.
- The AES Corporation (NYSE: AES) is trading at about 15.3 times earnings.
- Duke Energy (NYSE: DUK) is trading at about 17.6 times earnings.
- TransAltra (NYSE: TAC) is trading at about 21.9 times earnings.
If the above is accurate, then AEI’s offering price appears to be at a discount. We will have to wait until the deal starts trading on Thursday morning to see if the bankers get the IPO pricing right.