Although the equity markets boomed in the first quarter of
2013, IPO investors played it safe with a modest number of deals
heavy on dividend-paying stocks. But analysts say things should
get more interesting as the year goes on.
A total of 31 IPOs came out in the quarter, down from 42 in
the first quarter of last year, according to IPO investment firm
Renaissance Capital. Proceeds rose 29% to $7.6 billion, however,
largely due toPfizer 's (
) $2.2 billion spinoff of its veterinary unitZoetis (
Zoetis was also one of the better-performing IPOs in the
aftermarket. As of Monday, it was up about 27% from its Jan. 31
pricing at 26, despite the fact that it came to market without a
whole lot of revenue growth. It was a similar story for two other
large companies that debuted in the quarter,Norwegian Cruise Line
) (up 57%) andBright Horizons Family Solutions (
) (up 52%). Both companies were not only large and slow-growing,
but backed by private-equity firms who'd acquired them through
leveraged buyouts. Those sorts of deals usually aren't that
popular among IPO investors because they come with a debt
James Krapfel, IPO analyst at Morningstar, thinks investors
saw them as bargains.
"There was arguably not as much excitement about the IPOs at
the time, but that probably led to some underpricing, resulting
in strong performance (in the aftermarket)," Krapfel told IBD.
"These companies that may be not as appealing from a
growth-investor standpoint have been better received by the
Still, the top return came from a classic
venture-capital-backed growth IPO,ExOne (
), now up more than 80% from its Feb. 6 IPO price of 18. ExOne is
a nascent player in the red-hot 3D printing industry, and debuted
as its peers3D Systems (DDD) andStratasys (SSYS) were riding high
on media attention. Another VC-backed stock, online
money-transfer serviceXoom (XOOM), is also doing well with a 35%
return so far.
Yet those two deals didn't have a lot of company. In fact,
according to research released Monday by the National Venture
Capital Association, the number of VC-backed deals hit a
three-year low in Q1 with just eight deals raising a total of
$672 million. Research by Ernst & Young notes that the
downtrend has been going on for a few years, despite the fact
that the JOBS Act, which marks its one-year anniversary on
Friday, was supposed to help bring more emerging companies to
Jackie Kelley, Americas IPO Leader at Ernst & Young,
believes that the equity markets are still a bit volatile for
smaller companies' comfort.
"There's a lot of challenges in getting out in this market,"
Kelley told IBD. "If there's any sort of global macroeconomic
issue, it impacts our U.S. capital markets. If we have hurricanes
or natural disasters, it seems to impact our markets, along with
tax issues, fiscal cliffs and all that. The market can get on a
roll and then it takes a halt."
However, Krapfel notes that one possible effect of the JOBS
Act may be seen in how early some of these companies chose to go
public. ExOne came out with just $29 million in revenue in all of
2012 and no profits, though it did report a profit in Q1 last
week. Xoom and enterprise software firmModel N (MODN), which also
has done well in the aftermarket, reported 2012 sales of around
$80 million but were unprofitable when they came out. Between
these and the large private-equity deals, practically no IPOs in
the quarter met IBD's CAN SLIM criteria of being both profitable
Analysts agree that one cause of this was the relative lack of
IPOs from the technology sector, which usually leads the way in
growth offerings. Instead, the really hot plays were finance and
real estate, playing on the strength of the financial markets and
the housing recovery. A total of six REITs came out in the
quarter, and excitement about construction also probably drove
the 54% return on building-products makerBoise Cascade Company
(BCC), despite the fact that it was both unprofitable and
Health care, led by the Zoetis juggernaut, also brought some
strong deals to the table.Enanta Pharmaceuticals (ENTA), which is
collaborating with some leading pharmas to create hepatitis C
drugs, has racked up a 45% return just since it priced on March
20. Model N drew interest partly from the fact that most of its
customers are in the life-sciences industry, and the
top-returning REIT,Aviv (AVIV), specializes in nursing homes.
The average return for all the IPOs in the quarter was a
strong 18%, leading observers to expect that the deal pace will
pick up as the year goes on.
The pipeline isn't entirely visible at this point, as Kelley
notes that one aspect of the JOBS Act that her clients have
embraced is the ability of smaller companies to file
confidentially until they set their IPO terms.
Companies with more than $1 billion in annual revenue still go
through the usual process, however, and those in the pipeline
include some prominent names. Among them are contact-lens giant
Bausch & Lomb, amusement-park chain Sea World, clinical
research organization Quintiles, perfume maker Coty and Empire
State Realty, owner of the Empire State Building.
On Monday, major homebuilder Taylor Morrison Homes filed to go
public, which Krapfel expects to do well given the excitement
about real estate.
"There seem to be more high-profile companies in the backlog,"
Krapfel said. "Activity should pick up the rest of the year."