The past 18 months have been a great time for investors to pursue IPOs. Many companies have seen strong demand for their newly issued shares, and in many instances, their valuations are now two or three times higher than what bankers envisioned.
But investors haven't responded quite so warmly to all IPOs. And when a new issue stumbles out of the gate, fleeing investors can send shares much lower.
That's surely been the case for concert promoter SFX Entertainment (Nasdaq: SFXE), which priced shares at $13 back in October (and I profiled briefly last July). They fell 56% to a low of $5.70 in late March, and are currently trading around $6.50.
It was a regrettable IPO experience, to be sure -- but there are no do-overs.
What's the remedy for this broken IPO? Proof that the company, recently loaded up with a series of acquisitions, will ultimately become the cash-producing machine that management promised investors.
SFXE produces roughly 30 major outdoor music festivals and another 700 to 800 smaller events every year. A focus on electronic dance music (EDM) has been a sweet spot, as it is one of the fastest growing music genres in the world. For example, attendance at the five largest EDM festivals in the U.S. increased 41% from 2007 through 2012, compared with a 2% increase in overall ticket sales in the North American concert market.
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SFXE is the global leader in the space but still has less than 10% market share. The company is looking to execute a roll-up strategy in this highly fragmented industry. For example, in early 2014, it bought a 50% stake in a holding company that controls "Rock in Rio." This is one of the biggest festival franchises in the world, drawing in 7 million attendees over the years at its concerts held in South America and Europe. There are plans to launch a similar festival in Las Vegas in 2015.
By controlling more events and venues, management can gain better overhead leverage with equipment and corporate staffing, while also pursuing better terms with sponsors. A December deal with Anheuser-Busch InBev (NYSE: BUD), for example, is a "multi-year, multi-event deal that goes beyond traditional event-level sponsorships," according to analysts at UBS (NYSE: UBS). (That firm has since dropped coverage of all media stocks due to an analyst departure.)
So why is this IPO in a funk? Because a series of upfront investments ahead of planned growth means that margins on EBITDA (earnings before interest, taxes, depreciation and amortization) hover around 5% to 6%. SFXE has acquired a dozen smaller rivals in the past 18 months, accounting for minimal revenues thus far, and management is in the process of streamlining overhead. They said they believe this business can generate 20% EBITDA margins once the acquisition strategy has ripened, but investors are taking a wait-and-see approach.
Investors would like management to cease its active pace of acquisitions so the core business' metrics can shine through, but management remains quite busy:
-- In February, SFXE acquired React Presents, a Midwest-based concert promoter that stages two major concerts every year and promotes 200 other events.
-- In March, it bought Flavorus, a leading ticket supplier for EDM events.
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-- In April, SFXE announced plans to buy three talent management agencies that can help the company enhance its marketing and social media capabilities.
-- Later in the month, SFXE acquired Perryscope Productions, which focuses on licensing and merchandising strategies.
All of these deals appear to fit well with the core concert promotion business. Management needed to wait until the company went public to smooth the process of doling out shares in exchange for ownership. The trouble with such a strategy is that it can lead to a higher and harder-to-measure share count. And when cash is part of the deal, it can deplete bank balances. (SFX had $53 million in cash at the end of 2013.)
Still, all eyes are on what kind of money this business can make. In March, management projected 2014 EBITDA of around $40 million with hints that two broad marketing partnerships under discussion could push that number higher. To get to the 20% EBITDA margin targets noted earlier, EBITDA would need to move closer to $100 million. So it's incumbent upon management to land those yet-to-be-inked deals.
This is clearly a messy debut for the concert promoter, yet investors will have a fresh chance to gauge the health of this business when first-quarter results are released in coming weeks. A clear path to higher EBITDA margins will be a key catalyst for a share price rebound.
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Before the IPO, and all the messiness that has ensued, this company was worth at least $13 a share. That's the price that bankers derived using a peer group analysis. It's unclear if shares are worth any more than that, though Jefferies carries a $17 price target on the stock.
Simply looking for shares to return back to the $13 IPO level would be a good start, and would mean a doubling in price from current levels. And that looks likely to happen when the post-IPO noise starts to abate and investors can again focus on the long-term fundamentals of the business.
Action to Take -->
-- Buy SFXE up to $9
-- Set stop-loss 15% below entry price
-- Set initial price target at $13 for a potential gain of 44% to 100% in 12 months
This article was originally published at ProfitableTrading.com:
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