Two months after the market's bottom, the IPO market is showing precious little signs of life.
Absent a red-hot IPO market, we are down to niche plays, and there is an interesting one today: SiteOne Landscape Supply priced 10 million shares at $21 last night, the midpoint of the $20 to $22 price talk, and will begin trading this morning at the NYSE.
SiteOne, which came out of Deere, is the largest distributor of landscape products in the United States. Fertilizer may not sound like a hot business, but it's right in the middle of the home DIY thing that Home Depot and Lowe's plays off of. Their customers are primarily residential and commercial landscape professionals. They do the design and maintenance for lawns, gardens, golf courses and other outdoor spaces.
Don't laugh. It's a $16 billion business. SiteOne has $1.5 billion in revenue, so they own almost 10 percent of the business and are growing through acquisitions and organically (7 percent a year).
And it's a recurring business. You have to put down fertilizer every year, after all. They are also expanding into peripheral businesses like LED lights.
OK, fertilizer is not going to attract screaming crowds of buyers, but this company fits the criteria for what IPO investors are looking for: niche player with a clearly defined product, profitable, growing, modest debt levels and reasonable valuation.
Elsewhere, I have been waiting for the IPO market to open up for a month. There are more than 100 companies waiting to go public.
It didn't help that a smallish deal, tobacco seller Turning Point Brands priced yesterday at $10, well below the price talk of $13 to $15
It doesn't help that the Renaissance IPO ETF, a basket of roughly 60 recent IPOs, is underperforming, down over 6 percent for the year.
It doesn't help that we have all these tech startups waiting to go public but since Square went public in November 2015, we have not seen an IPO from the state of California.
What's the problem?
- There's clearly concern about high valuations. This is making companies reluctant to go public because they know they may have to cut prices.
- Investors are showing a clear preference for companies that are profitable, that have growth, and are not highly leveraged. This creates a problem for highly leveraged companies waiting to go public like Albertsons, Nieman Marcus, and US Foods. US Foods is at least growing, however slim.
- On a longer-term level, there seems to be less retail investor enthusiasm in general. True, an Alibaba or Twitter is a fairly rare phenomenon, but there does not seem to be a lot of enthusiasm for many IPOs. Blame it on the state of the market, on less exciting products, or maybe the valuations don't work. It's certainly true unique companies are hard to find, which is why you get a flurry of interest around the few that generate a passionate user base, like SoulCycle.