IPO market activity advanced at a solid clip year over year in 3Q17, though on a quarter-by-quarter basis, the number of new companies listing on U.S. exchanges was lower. The story was the same for secondaries: up modestly year over year but down on a sequential quarter basis. But the quarter ended on a high note, with a flurry of activity and the successful IPO of another unicorn, ROKU.
Overall in 3Q17, 42 companies went public (including blank check and closed-end funds), up 14% from the same quarter a year earlier but down 37% from the 67 companies that were brought to market in 2Q17. Meanwhile, secondary issuance was up 3% quarter to quarter but down 16% year over year.
The U.S. equity markets experienced slightly higher volatility through most of the quarter compared to 2Q - particularly in late August, when geopolitical developments emerged while the markets were quiet already. By the end of 3Q, the S&P 500 was setting record highs and issuance was picking up. In the background, corporate earnings grew for the fourth quarter in a row and appear poised to expand at a double-digit pace in 2H17 and at a mid-to-high single-digit pace in 2018.
Investors able to purchase IPOs at the issue price generally fared well last quarter. We estimate that the ratio of IPOs that opened at prices above the issue price compared to IPOs that opened at or below the issue price was approximately 2:1. However, the ratio was lower for the second quarter in a row. In 2Q, the ratio was approximately 3:1, and in 1Q the ratio was approximately 4:1. We attribute this trend to the 3Q market environment, which in our view discouraged some of the more-promising IPO candidates from launching. As conditions improved in the final 10 days of the quarter, many of the strongest performers launched, including TDH Holdings, a Chinese pet food company that saw its stock jump 59% on the open; and RYB Education, a Chinese education company that saw its stock rise 30%.
From an industry perspective, IPO activity was consistent quarter over quarter. The top three sectors once again were Healthcare, Finance and Technology. From a performance perspective, the Healthcare sector stood out, including:
For the secondaries on a sector basis, the trend was similar. Healthcare led, followed by Financial and Technology. Real Estate dropped off the leaderboard.
Looking ahead, we think the market for IPOs is likely to remain bullish into 2018. On the positive side, economic growth, led by the employment environment, appears to be accelerating; volatility remains low on a historical basis; and corporate earnings growth is expected to hit a double-digit rate, as the dollar stabilizes and oil prices continue their recovery. The IPO pipeline remains robust, with about 180 companies having filed with the SEC and a number of interesting recent filings, such as Rhythm Pharmaceuticals; Vencore Holding Corp., a cybersecurity company; and two leading Argentinian companies that are benefiting from the economic recovery in Latin America (Molina Canuelas SACIFIA, a food production company; and Loma Negra Corp., a cement producer).
In the tables below, we highlight select companies that our team of analysts thinks may be poised to enter the IPO markets at potentially attractive prices.
John Eade, President, Argus Research
Jasper Hellweg, Security Analyst
Table 1 features the Argus Top 30 Promising Potential IPO candidates. This list has been selected from companies that have already filed S-1s with the SEC. The list is based on factors that Argus believes are important for success in an IPO, including sales and earnings growth, a clean balance sheet, brand names, attractive industries and current management/ownership. Three of the companies that were on the Argus Top 30 list last quarter (Venator Materials plc, Ranger Energy Services and Oasis Midstream Partners) completed IPOs in 3Q. Venator was the only stock with an opening gain, rising 4.5%.
Source: Triad Securities, US SEC, Argus Research
Table 2 is our Top 40 intriguing venture-backed private companies, including the so-called Unicorns such as Uber and Airbnb. This list includes companies in emerging industries such as cybersecurity and Big Data analytics, as well as companies whose investors include wellknown groups such as Kleiner Perkins and Adreessen Horowitz. On the second-to-last day of 3Q, a unicorn emerged in Roku Inc. The stock was well-priced and opened 12.7% above the issue. It then took off in the aftermarket, rising 49% on the first day of trading. This type of performance may well entice other Unicorns to move toward the IPO market in the quarters ahead.
Source: www.sharespost.com; The Billion Dollar Start-up Club; Argus Research.
Copyright Argus Research Company. This report has been prepared for Triad Securities by Argus, an independent investment research company. This report has no regard to specific investment objectives, financial situations or the particular needs of any recipient. It should not be considered an individualized recommendation. All investors are encouraged to use multiple sources of investment information and to actively monitor their holdings. The security or industry discussed may not be suitable for everyone.
THIS REPORT IS BASED ON INFORMATION FROM A VARIETY OF SOURCES AND STATISTICAL DATA BELIEVED TO BE RELIABLE, BUT IN NO WAY ARE WARRANTED AS TO ACCURACY, TIMELINESS, COMPLETENESS OR RELIABILITY.
Any opinions expressed are statements of judgment by Argus as of the published date of this report and are subject to change without notice. We do not undertake to advise you, nor are we under any obligation to advise you, as to any changes in our estimates or views. This report is published for informational purposes only and is not to be construed as a solicitation or an offer to buy or sell any security. Argus, its affiliates, officers, directors, employees, stockholders or members of their families may have long and/or short positions in and may purch ase or sell from time to time any of the above-mentioned or related securities