Hot Housing, Food Services IPOs Shed Light On Economy’s State

You may have heard by now that the initial public offering market got a boost last week, with several solid companies bringing their deals to the market. Let’s look at two of them that are considered to be staples of the food and housing spaces as their performance can shed some light on how much confidence investors have in the economy.

We’ll begin by reviewing how the IPO market ran cold in recent years and what’s behind it starting to look appealing again. Then we’ll look at how US Foods (NYSE: USFD) and Gypsom Management & Supply (NYSE: GMS) positioned themselves to go public and the challenges they face moving forward.
 

 · Why the IPO market slowed

 
Overall, the companies did well, trading above their offering prices. An estimated $1.5 billion was raised by the companies that went public last year.

To get an idea of how unappealing the IPO market had been this year before last week’s flurry of activity, consider this. Thirty one deals priced during the first quarter of this year, raising roughly $5.4 billion, which is a decrease of about 55% from last year.

So far this year, there have been just 10 IPOs. That includes the five from last week, and another five in February. The lack of the deals has shaped up for 2016, so far, being the slowest year for IPOs since 2009.

There is a laundry list of reasons why the IPO market stalled. Market volatility is a problem. The volatility index, or VIX, which measures the amount of investor fear in the market, was as high as 30 in February. It has since come down to about 13.12 as of Friday.

Then there are the concerns about the global economy. Just as China remains a thorn in the side of the global economy, it is having an effect on how investors see a company’s valuation. Bob Blee, head of corporate finance at Silicon Valley Bank, told U.S. News that the value of a company’s equity is related to the cash it can generate now and into the future. Furthermore, he noted that changes in the world’s economic outlook create uncertainties in a company’s future cash flows and add another layer of complexity to the valuation analysis.

Investors are also looking at the performance of companies that went public last year. Not too many are doing well. It is estimated that almost three-fourths of them are trading at prices below their IPO price and their overall return was a meager 2%.

If you are interested in investing in a newly publicly listed stock, be cognizant of the risks, which are typically higher than that of established public companies.
 

 · Last week’s IPOers

 
The companies that made headlines last week for their IPOs ran the gamut, indicating that companies from all spaces may be comfortable enough with the economics of the market to go public. All together, they raised $1.5 billion. That means this was the market’s biggest day in terms of the number of the amount of money raised.

US Foods raised the most; $1.02 billion with the sale of 44.4 million shares. It debuted with a share price of $23 on Thursday. By the market’s close, it was trading at $24.91 a share. That gives it a valuation of just over $5 billion.

Its net sales for the fiscal year ended Jan. 2 were $23 billion. It’s carved out about 9% of the food services market.

Those numbers are impressive, but there is a blemish that investors must keep in mind. US Foods has a ton of debt, to the tune of roughly $5 billion. The company can use the proceeds to help pay down this debt, but it will clearly still have some ways to go.

On an enterprise value to EBITDA basis, US Foods is cheap compared to its main competitor, Sysco. It trades at a “justifiable” discount to fast-growing Sysco, notes TheStreet.com.

I wouldn’t consider US Foods to be a growth stock, especially considering they were operating at a loss just one year ago, and have struggled to profit in other years, including this one. I’d wait to see how its finances shake out over the long-term before jumping in to US Foods. If you decide to get in, watch carefully in future earnings reports how the company plans to pay down its debt.

GMS is a distributor of wallboard and suspended ceiling systems. These systems provide a comprehensive solution for its core customer, the interior contractor who installs these products in commercial and residential buildings. A boost in its revenues indicates a pick up in the housing industry.

GMS opened at $22.50 a share, which was 7.1% above the IPO price of $21. It raised $147 million, and has the potential to raise another $22 million if the underwriters of the deal buy additional shares.

The company’s chief executive officer told The Street that its company is thriving due to the surge in housing starts. He noted that there is a shortage in housing, with homes being listed and sold above the asking price. He also told The Street that GMS’s business is 40% residential and 60% commercial.

Investors should take note that U.S. housing starts are rising, and are expected to grow further this year. With a network of vendors that distribute more than 10,000 unique products from the manufacturers across the nation, GMS is well positioned to benefit from the uptick in housing starts. I would consider it to be a growth stock that would make a sound long-term investment.





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