Area Companies’ Initial Offerings Pay Off for the Daring Investor : Stocks: Many regional companies are bucking the usual IPO scenario as their shares post double-digit gains.
Initial public stock offerings, or IPOs, aren’t for the fainthearted. But for investors who swallowed hard and bought shares of several local companies that went public over the past 18 months, their risk was rewarded because many of the new stocks have posted double-digit gains from their initial offering prices.
Most of the new regional stocks are for small companies. With the exception of Pinkerton’s, a Van Nuys security services company, none had annual sales of more than $70 million last year. Regardless, most are bucking the typical IPO scenario in which prices rise in the first few weeks, then taper off and, not uncommonly, sink below even their initial price.
Two stocks--Rexhall Industries Inc., a Santa Clarita maker of motor homes, and Benton Oil & Gas Co., a Ventura energy concern--remain more than 60% above their offering prices more than a year after going public.
Many of the new stocks have done well in part because the companies themselves continued posting gains in sales and profits, the same fundamental factors that support more established stocks.
After six to nine months new issues “trade like any other stock, and it depends on how the company is doing” whether its price rises or falls, said Robert Natale, editor of Standard & Poor’s Emerging & Special Situations newsletter, which follows the IPO industry.
Companies such as Rexhall, Pinkerton’s, which went public in April, and CII Financial Inc., a Burbank provider of workers’ compensation insurance, have all reported strong gains in operating profits since their stocks came to market.
There are exceptions. Benton Oil’s stock, adjusted for a 2-for-1 split earlier this month, has jumped the highest among local IPOs, up about fivefold from an initial price of $2.50 a share to $13 as of Friday. But the gains do not reflect the company’s financial showing. Benton lost $513,352 last year and an additional $227,826 in this year’s first quarter.
Investors are betting that Benton’s executives, who had years of experience with major oil companies, will eventually strike it big. Benton is hunting for oil and gas on leased land in California and several other states, and earlier this month it acquired an interest in an established oil field off the coast of Louisiana.
CII Chairman Joseph G. Havlick said the stock market’s overall strength in recent months also helped push up his company’s stock, and no doubt the new regional stocks drew support from investors’ renewed interest in IPOs generally.
“The tenor of the market is substantially more conducive” to IPOs, said Thomas McChesney, who runs the underwriting department at Paulson Investment Co., a Portland, Ore., securities firm that handled Benton Oil’s sale in early 1989. “As companies come forward and perform well, it makes it easier for other companies to go public.”
As of last week, 118 companies--excluding mutual funds that invest in other securities--had gone public in 1990, up 23% from 96 in the same period of 1989, according to Securities Data Co., a research firm in Newark, N.J. The sales this year have garnered proceeds for the companies and stockholders who sold shares totaling $3.86 billion, up 26% from $3.07 billion a year ago.
Some of the new local stocks have been disappointing. CM Communications Inc., a Panorama City distributor of cellular telephone equipment, closed Friday at $3.375 a share, below the $5 a share its IPO reaped in January. New Image Industries Inc., a Canoga Park maker of computerized imaging products, went public at $6.50 a share a year ago, and the stock quickly rocketed as high as $16. But it has since fallen back to earth, closing Friday at $5.875 a share.
Others never got out of the chute. PrizeMasters Inc., a North Hollywood maker of puzzle contests, announced IPO plans last October but has since scrapped the idea. The initial underwriter that was supposed to sell PrizeMasters’ stock to the public was acquired by another securities firm, which could not agree with PrizeMasters on terms of the deal, said PrizeMasters President Steven D. Faber.
Also, PrizeMaster’s own internal growth minimized the company’s need for the $2 million that it originally hoped to raise through its stock sale, he said. “Right now we’re examining our options” concerning a revised offering, Faber said.
Overall, the stock market’s sharp decline last week--the Dow Jones average of 30 industrials dropped nearly 63 points--also could “temporarily cool off demand for new issues, and particularly for technology stocks, where most of the big gains were coming,” said S&P;’s Natale.
Regardless, several other regional companies already have announced plans to go public. They include Black Box Inc., a Simi Valley high-technology company; California Commuter Shuttle Inc., a tiny airline in Oxnard; Cherokee Inc., a Sunland apparel maker that went private in a leveraged buyout only a year ago; and Leslie’s Poolmart in Chatsworth, which operates a chain of pool supply stores.
All would like the success enjoyed by K-Swiss Inc., a Pacoima maker of athletic shoes and other footwear. In early June, only days after Wall Street had pummeled the stock of rival shoemaker L.A. Gear, K-Swiss went public at $17.50 a share and the stock climbed to $22.50 that day alone. It has since traded as high as $30 and closed Friday at $25.
K-Swiss Chairman Steven Nichols said he “had no preconceived notions” as to where the stock might trade after it went public. But its quick ascent probably stems in large part from the fact that K-Swiss has been around since 1966, and has a 24-year track record that investors could use as a gauge, he said.
Despite its track record, K-Swiss remains a pipsqueak next to such giant competitors as Reebok, Nike and L.A. Gear. Still, Nichols said investors also have taken to K-Swiss’ strategy of not competing only with those rivals’ latest athletic or stylish sneaker--shoes that often get unstylish quickly and become duds. K-Swiss also has long sold “classic” sneakers “that don’t have the same risk factors” as the faddish shoes, he said.
Another big gainer is Ventura Motion Picture Group (VMPG), a television movie-making concern that is still 65%-owned by Ventura Entertainment Group Ltd. in North Hollywood. VMPG went public last December by selling units--consisting of stock and warrants--for $1.75 apiece. The warrants have since been converted to common stock, and on Friday the stock alone closed at $6.75 a share.
VMPG’s stock has surged even though the company is a start-up that has yet to sell one of the two dozen TV shows it has in development. But Harvey Bibicoff, chairman of both Ventura enterprises, suggested the stock has risen because investors like the company’s strategy of making lost-cost productions that can turn a profit quickly and of focusing on foreign distribution of its programs. “We will not take serious long-term deficits in our projects,” he said.
The future of VMPG’s stock price will depend on whether Bibicoff’s plan turns into reality, and the same holds for all new issues once the novelty of the initial public offering wears off.
As Paulson’s McChesney put it: “When you eventually get done with all the sizzle, you better have something left.”
REGIONAL INITIAL PUBLIC STOCK OFFERINGS
Listed below are eight local companies that in the past year and a half have sold their first stock to the public. Many of the new stocks have performed well since they came to market, helped by the companies’ own strong earnings growth.
IPO Price 7/27 Stock Industry IPO Date Per Share Price K-Swiss (class A) Footwear 6/4/90 $17.50 $25.00 Pinkerton’s Security services 4/4/90 $14.00 $22.38 CII Financial Insurance 3/7/90 $11.50 $15.13 CM Communications Cellular phones 1/11/90 $5.00 $ 3.38 Ventura Motion Movies 12/5/89 $1.75 $ 6.75 Picture Group* New Image Indus. Imaging equipment 8/24/89 $6.50 $5.88 Rexhall Indus. Motorhomes 6/22/89 $6.00 $10.13 Benton Oil & Gas* ** Energy 3/29/89 $2.50 $13.00
Stock %Change K-Swiss (class A) +43% Pinkerton’s +60% CII Financial +32% CM Communications -32% Ventura Motion +286% Picture Group* New Image Indus. -10% Rexhall Indus. +69% Benton Oil & Gas* ** +420%
* These companies sold units that consisted of common stock and warrants. The prices listed refer only to the common stock.
** Adjusted for 2-for-1 stock split earlier this month.
