Two New IPOs Hit Wall Street

Ancestry.com and Hyatt Go Public

November 4, 2009

The market for initial public offerings is going to get a big test this week with two new issues; both Hyatt Hotels and Ancestry.com plan to debut on the exchanges. With the stock market being in such a sour mood for the past two years, the demand for initial offerings has understandably dried up, so a lot of eyes will be watching these IPOs.

Hyatt will be the fourth-largest IPO this year. In fact, the company is having the rare honor of getting a single-letter ticker symbol–H. This is especially interesting for the hotel sector since Hilton Hotels left the exchanges two years ago when it was taken over in a private equity deal. Going by number of rooms, Hyatt is the tenth-largest hotelier in the world.

The company is planning to raise nearly $1 billion by issuing 38 million shares that will be priced in a range between $23 and $26 a share. I should stress that investment banks merely use that range for their prospectus, but once those shares hit the market, anything can happen. Goldman Sachs (GS) is the lead underwriter. The shares are currently scheduled to be priced on Wednesday and hit the market on Thursday.

Ten years ago, you could launch an IPO for any company that had a website and nothing more than a sock puppet for a mascot. The simple fact that a new ticker symbol was on the market would be enough to cause buyers to frantically bid it up. I'm oversimplifying, but this is just not the world we live in anymore. Buyers have become very skeptical. Just recently, Enron's former international energy business tried to go public. But as they were about to float the shares, public interest waned, and the company had to pull the offering. That's why there's so much attention on Hyatt this week–is this a stock that investors want to own?

If you're looking to pick up shares of Hyatt, my advice is to hold off for now. The market environment is pretty dicey. The economy is still not out of the woods, and the hotel sector has been battered this year. A key metric to follow is revenue per available room, and that's down 22% this year for Hyatt. Plus, as Warren Buffett recently demonstrated with his Burlington Northern (BNI) bid, there's lots of interest in stocks that are already on the market.

Let's keep an eye on how well the company delivers on its earnings reports. If the company can prove to me that it has what it takes to grow in the coming months, then I'll raise it to a buy.

A Dot-Com IPO

The other IPO coming out this week comes from the genealogy website Ancestry.com. If you're into searching for your roots, then Ancestry is the place for you. The company has put online 3,000 databases and 25,000 titles, which works out to 4 billion records with 8 billion names.

With the offering, they're looking to raising $100 million. The company will trade on the NASDAQ with the ticker symbol ACOM. I think Ancestry has an interesting niche business model–they have steadily rising revenue, little debt and almost no competition.

The underwriters are planning to price the shares on Wednesday somewhere between $12.50 and $14.50. Since this is a small company that a lot of folks like to follow, I wouldn't be surprised to see Ancestry's price at the high-end of its range.

What I like about Ancestry is that it's not one of those IPOs that hopes to be profitable someday. They already are profitable. For the first three quarters of this year, Ancestry has made $12.2 million or 30 cents a share. That compares with just nine cents for the same period last year.

You can see that this is a classic recession-resistant industry. No matter what happens in the broader economy, that recurring revenue will tend to flow to Ancestry. The company plans to use the proceeds from the offering to fund corporate operations and pay down debt.

As with Hyatt Hotels, I urge investors to hold off buying ACOM right now. Lots of companies look great all shiny and new heading into an IPO, but then have trouble keeping the cash flowing once they're public. Let's see how well Ancestry.com performs over the next few quarters.

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