Research 2.0

Thursday, September 14, 2006

Petrie Parkman IPO - just okay at $200M or below.

Another boutique investment bank has filed for an IPO. Petrie is in the energy sector so given the current market dynamics everyone will agree that "now is the time!"

Having worked at firms like this for years one can't resist having a look to see if they have an innovative business model that would actually suggest that outside equity holders could earn strong returns.

Petrie looks to be actually far worse than average. At first glance one is struck by their stunning growth - revenues were up 79% YoY for 1H06 to $62.3M. However expenses were up 81% to $62.2M wiped out any profit for the period. (We understand that typically this is a high period for compensation so overall profits will be better for the calendar year, as they were for the full year 2005, see below.)

Aside from the fact that the company revenues are all directly linked to the red-hot energy sector they are even more concentrated with a full third coming from just one client in 1H06.

For the full year 2005 the company generated a 5.6% net margin. Looking at 2006 we can use $125M as full year revenue and suggest a 10% margin target to guess at a $12.5M net. Putting a 10x multiple on what could be peak earnings for the company and adding the $60M in cash we get to about $200M.

There are plenty of expansion opportunities for the firm in related areas and geographically but they will all involve investment. Due to the compensation overhead ($1.2M/employee in 2H06) the outcome will depend on a sustained level of high activity in energy.

On the surface Petrie looks to be an excellent company in their niche and provides excellent value for their clients and employees. The risk/reward for outside equity holders doesn't look very good unless the stock is priced at a very reasonable valuation. Investors need to price in the likely case that revenue in a future year will be down and given the business model and compensation structure they are not likely to fare well then.

[UPDATE - Well the company was acquired by Merrill for what was reported to be $500M or so. Even though it's a rich valuation the deal is good for both sides. Merrill has the banking, trading and fixed income operations to make the $500M pay off quickly in what will always be a big sector and the company is spared from the misery of being a low-profit, low-multiple public company.]

Wednesday, September 13, 2006

Sun has the "dot" wrong again...

Jonathan Schwartz rang the bell to open NASDAQ today and is holding their customer day in NYC today.

After six years of losing money post the "putting the dot in .com" era Sun is talking about how well all parts of the business are doing and that "all signs are pointing to the right." Despite that the company is not yet sure they will be profitable this fiscal year.

Last year at this time Schwartz stated that the profit opportunties from utility-style service-oriented computing from arrays of servers would be vastly better than what they were experiencing selling discrete servers. The suggestion was that gross margins would be 30% or higher.

Did he have a price point in mind? Yes, just $1/CPU hour. Since it was pulled out of the air we shouldn't be surprised when the actual price being charged by companies like Amazon today is $0.10/CPU hour.

Imagine what that does to your gross and net operating margin assumptions!

The bottom line is that Sun probably will be successful driving more units into the market at much lower prices and take some market share but still seems to have their head in the clouds (or sand) with respect to a profitable business model.

Monday, September 04, 2006

Galbraith on meetings.

As an aside in his book The Great Crash, Galbraith writes a wonderful little riff on meetings before he discusses the tactics that President Hoover used to appear busy in the aftermath of the stock market crash of 1929.

"Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive and less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action.

The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending. Numerous formulas have been devised to prevent discomfort. Thus scholars, who are great devotees of the no-business meeting, rely heavily on the exchange-of-ideas justification. To them the exchange of ideas is an absolute good. Any meeting at which ideas are exchanged is, therefore, useful. This justification is nearly ironclad. It is very hard to have a meeting of which it can be said that no ideas were exchanged."

For me this is a little gem. If you haven't read the book you can buy The Great Crash at