It's hard to find a bright spot in this year's stock market. But Thomas A. Frank, lead manager of the $360 million Dreyfus New Leaders Fund, has a surprising one: initial public offerings. The market slide has let the air out of IPOs. The size of deals has been scaled back--and so have the prices. "We're seeing good companies coming out 30% lower than what was first indicated," says Frank.
Individual investors are getting a shot at new deals, too, since far fewer of the stocks are soaring after their offering. "The flippers [traders who buy hot IPOs to sell for a quick profit] are out," says Frank. "Today's buyers are investors who have done their homework."
Among recent IPOs bought by Frank are Executive Risk, a niche insurer; Cole National, a specialty retailer; and U.S. Delivery Systems, which moves documents and goods for businesses within a local area. All three trade on the Big Board.
What's attractive about Executive Risk, says Frank, is that it's the only pure play in underwriting liability insurance for corporate directors and officers. The insurer was founded by Aetna in the mid-1980s after many other companies fled the field. The company went public on Mar. 15 at 12 and now trades at 125/8--a mere 7.6 times expected 1994 earnings of $1.65 per share and a 16% premium to book value. By Frank's estimation, the stock should be around 17 in year.
BETTER VISION. Unlike Executive Risk, Cole National faces highly competitive markets in its two businesses--selling gifts and eyewear. Cole, a 1984 leveraged buyout, struggled with debt and bad ventures before reshaping itself for its Apr. 11 offering. The stock still trades at its IPO price of 12.
Even after the offering, Cole has $185 million in long-term debt. But Frank believes the improvements in operating cash flow and the benefits from substantial tax-loss carryforwards will help shore up the balance sheet. Frank says Cole's Things Remembered gift shops, which yield 52% of revenue and 56% of income, should increase their sales as more high-priced items are stocked. Eyewear is tougher, he adds, but renovation of its leased Sears Roebuck optical departments is helping, as will the expansion of freestanding Sears Optical stores. Frank says Cole could reach 20 in 12 months.
Frank thinks U.S. Delivery, which is still trading at its May 12 IPO price of 10, is the most interesting of the three. The company provides same-day delivery for some 8,700 customers in 22 markets, including 8 of the 10 largest metropolitan areas. The company, which had 1993 sales of $108 million, is the largest single player in a $15 billion-a-year market served by 10,000 small, private companies.
U.S. Delivery's strategy is to buy local operators in much the same way Waste Management turned trash hauling into a nationwide business. The IPO gives the company the means to make acquisitions. Frank estimates that the company will earn 80 cents a share in 1994 and believes the stock could double by next May.