3 Recent IPOs Worth Considering for the Long-Term

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since 1975, there have been over 9,500 companies that have gone public with an initial public offering (IPO).  So what are the pros and cons of investing in IPOs, or at least relatively ‘new’ companies on the stock market?  The data shows that the percentage of returns on IPOs from 2000-2010 during the first five years after the IPO have a mean of 8.1% annual returns.  The data also shows that it is better to buy and hold IPOs as the mean returns after the 1st year is a disappointing -8.9%, versus waiting until the 4th year to see year-four returns of 29.2%.  Despite these positives, there are 2 facts to consider.  First, for better (mergers or acquisitions) or worse (bankruptcy), many IPOs wind up vanishing within 5 years.  Second, IPOs generally have underperformed other established firms of the same size by an average of 3.3% per year during the five years after the IPO.

Carlyle Group

If you are thinking about investing in food services, waste management, aerospace and defense, finance and insurance, health care and social assistance, manufacturing, technical services, retail trade, energy and power, telecommunications, media, or other industries, you might want to consider letting Carlyle Group (NASDAQ: CG) take care of that for you instead.  Carlyle is one of the world’s largest global asset management firms that originates, structures, and acts as lead equity investor in management-led buyouts, strategic minority equity investments, consolidations and buildups, bank loans, high-yield debt, and many other investment opportunities.  In short, Carlyle makes money by investing money into companies with growth potential and gains control with the end goal of making much more back in ‘leveraged buy outs’ (LBO), interest, and management fees.

Since its IPO last May, Carlyle has seen over 43% returns in share price, including its 2% dividend.  Based on the most recent earnings report, net revenues were $858.5 million for the three months ended Sept. 30, 2012, which was an increase out of the red by $918.1 million from the same period in 2011.  What is important to realize is that while revenues has been going up primarily due to performance fees, profit margins from quarter to quarter fluctuate a lot more than your typically traded company.  It isn’t uncommon based on their history for Carlyle to see net profit margins over 50%.  However, due to the business model, the company relies heavily on making the correct investments each and every time and making sure the companies they invest in are able to produce a return for Carlyle’s bottom line.

Carlyle is currently behind TPG Capital and Goldman Sachs Capital Partners for title of world’s largest private equity firm in terms of capital raised.  Keep in mind the word ‘private’ isn’t there by mistake.  Many of the equity securities within Carlyle’s portfolio consist of companies you may never have heard of and they are not publicly traded.  With little information for the average person to gain an understanding of what to expect in returns from owning Carlyle stock, this may be a drawback for information-hungry investors. 

CG Total Return Price data by YCharts

Phillips 66

A spin off of ConocoPhillips, Phillips 66 (NYSE: PSX) currently has seen over 86% share price returns that include its 1.6% dividend that has already increased 25% since its IPO last May.  The holding company operates in 3 segments: Refining and Marketing (R&M), Midstream, and Chemicals segments, which cover the transport of crude oil and petroleum products, power generation operations, natural gas transport, petrochemicals, and plastics. 

Earnings for 2012 were $4.1 billion, or $6.48/share, versus $4.8 billion, or $7.52/share in 2011.  While this may seem like a downfall, Phillips achieved 91% refining utilization (gross input divided by operable refining capacity of the unit), strengthened their balance sheet with $1 billion in debt reduction, returned over $400 million to shareholders through dividends and share repurchases, and announced intent to form a master limited partnership (MLP).  Additionally, Phillips has goals to increase US export capability by nearly 30% from 285,000 to 370,000 barrels per day by the end of 2013. 

In my opinion, Phillips 66 should definitely be on your watch list if you are considering an investment in an oil stock with some extra perks.  First, Phillip’s Midstream segment has a 50% interest in DCP Midstream, LLC, one of the largest natural gas gatherers and processors in the US, with 7.2 billion cubic feet per day of gross natural gas processing capacity.  In comparison, ExxonMobil, whose market cap is over 10x that of Phillips, had 4th quarter natural gas production of just 12.5 billion cubic feet per day.  Second, Phillip’s is in the process of heavily expanding its shale operation to 200,000 barrels per day domestically in 2013 versus only 112,000 barrels per day in 2012.

Lastly, the MLP announcement should have income investors interested.  Because of the advantages and purposes in place for MLPs, including income tax benefits and payouts similar to real estate investment trusts (REITs), many have dividend/distribution yields that exceed 5%.  Whether you wait for the IPO of the Phillips MLP during the second half of 2013 or you get in on the stock now, you really can’t lose when it comes to yield.  This is especially true since ConocoPhillips has returned over 220% the past decade to investors, including its dividend, which has over tripled in that same time frame. 

PSX Total Return Price data by YCharts

Five Below (NASDAQ: FIVE) is a specialty value retailer offering an assortment of products targeted towards teens and pre-teens priced at $5 and below.  Since its IPO last July, the stock has already gone up nearly 34%, and based on 4th quarter guidance, it looks like the company is on target to hit analyst estimates with net sales of $169-$172 million with adjusted EPS of $0.36-$0.38.  The company has been accelerating store openings with nearly 250 stores opened in 18 states, and it has been started to be one of the most important parts of their growth strategy.

I believe the company’s chase of growth alone will help levitate the stock on hopes and speculation in the coming years as they create more stores, expand into more states, and build the brand.  Because of their low-cost business model and who they target, they have built many stores in the vicinity of Target and Gap’s Old Navy stores.  Old Navy currently makes up about 47% of net sales in its 1,013 U.S. region Old Navy locations under Gap.  Being near Target looks more of a strategy of taking a percentage of food away from a big dog than the same percentage from a poodle.  Overall, this means there is a lot of potential expansion if Five Below has goals of taking away market share from these retailer powerhouses.   

A few alarms go off as Five Below, like many low-price retailers in history, has a major issue with profit margins.  Their most recent quarter was under 1%, and it fluctuates quarterly.  Their latest statement of operations show they had much higher net sales for 2012 over 2011 for the first 39 weeks, but net income took a huge hit, going from $3.6 million (2011) to just $819,000 (2012).  This was due to a jump in selling and administrative expenses, as well as cost of goods sold.  Five Below actually reminds me a lot of Steve & Barry’s, which was an American retail clothing chain famous for huge discounted merchandise.  Their business model was to undercut all competitors, including national chains like Wal-Mart and Target.  Target?  Could Five Below just be another Steve & Barry’s in the making?  Maybe that is why insiders and backers sold just over $400 million worth of stock a couple of weeks ago. 

FIVE Total Return Price data by YCharts

Takeaway

Business Insider ranks the best IPOs of all time by looking at which companies grew 1000% the fastest.  Carlyle, Phillips 66, and Five Below won’t make any list like that since the champ, eBay, did it in just 2 quarters, going from a market cap of $1.81 billion to $16.6 billion in less than a year.  However, while the 3 companies discussed in this article won’t set records, they can set your portfolio on the right track.  If I were to rank based on risk, Phillips would be least risky and most consistent, but carries with it the least reward.  Carlyle is more of a wild card, and you will never quite know or understand how they are making their money from quarter to quarter and have little to guide your predictions of where the stock price will go.  Five Below is most risky, but their industry is trendy and it could turn on a dime to go much higher.  However, they might need to change the store name in the future if they wish to improve profit margins.


mikecart1 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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