Referenced Stocks:
BAC,
CS,
DV,
GNRC,
GRM,
IRWD,
JKS,
JPM,
PDM,
PMG,
QNST
Renaissance Capital IPO Research
submits:
Diverse Group to Test the Markets
This week is slated to see a diverse group of companies test the
IPO market. Four
companies were scheduled
to list on the NYSE yesterday:
Graham Packaging (
GRM
)
, a supplier of plastic consumer products;
Piedmont Office Realty (
PDM
)
, an office REIT;
JinkoSolar (
JKS
)
, a Chinese solar company; and
Patriot Risk Management (
PMG
)
, a workers' compensation risk insurer that had originally planned
to price last week. Two additional companies are scheduled to begin
trading on Thursday, Feb. 11:
Generac Holdings (
GNRC
)
, which manufactures standby generators, and
QuinStreet (
QNST
),
which provides online lead generation. Of this group, QuinStreet's
unique business model and track record of growth may make it the
most interesting to IPO investors. QuinStreet plans to raise $180
million by offering 10 million shares at a range of $17-$19 with
Credit Suisse (
CS
), BofA Merrill Lynch (
BAC
) and J.P. Morgan (
JPM
) as the joint bookrunners on the deal.
The Business
QuinStreet is an Internet marketing company that generates
revenue by connecting its clients, which are primarily companies in
the education and financial services verticals, with new customers,
who typically submit requests for information on client products
while browsing sites that are owned by QuinStreet (30%) or
third-parties (70%). Under its unique business model, it provides
measurable results to clients in the form of qualified leads or
clicks while being paid on a negotiated per-click basis. With an
increasing shift from traditional to online advertising and a $25
billion market opportunity, QuinStreet believes it can continue to
develop its top line, which has grown at a 33% CAGR over the past 5
years, at a 15-20% clip. The company generated $156 million in
sales and $33 million in EBITDA (21% margin) through the six months
ended December 2009, an improvement from the year-ago period, which
saw $123 million in sales and $23 million in EBITDA (19%
margin).
Key Issues
Our biggest concern is that despite compelling growth prospects,
the company is heavily reliant on acquisitions and has made over
100 since 2007, clouding its organic growth profile. Though
QuinStreet has attempted to diversify into other verticals such as
home services and healthcare, this expansion has yet to scale.
Additionally, clients within already existing verticals are
consolidated with the top three constituting 32% of sales, and its
top client, DeVry University (
DV
), has recently scaled back its purchases.
Looking Ahead
With the recent setback in the general markets, investors have
curbed their risk appetite, resulting in a shaky start to the 2010
IPO market: only one out of four companies scheduled to go public
last week,
Ironwood Pharmaceuticals (
IRWD
)
, successfully completed its deal. However, as a growing pure-play
lead generation company backed by VC firms such as Split Rock
Partners (13%) and Sutter Hill (8%), QuinStreet has been touted as
a company that has the potential to buck this trend. Adding to
media interest is the involvement of Frank Quattrone, whose
technology-focused banking boutique is acting as financial advisor
on the deal. Overall, though we expect to see some sensitivity
toward the price given the volatile environment and the key issues
described above, we believe QuinStreet's growth strategy and
impressive financials should help drive interest in the deal.
See also
What's the Current Upside Risk?
on seekingalpha.com