IPO Watch: Colfax Corporation

Ann C. Logue | May 06, 2008 6:20am EDT | Comment

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www.colfaxcorp.com
(NYSE:CFX)
Scheduled for the week of May 5
$300.8 million estimated proceeds
$659.7 million estimated post-money valuation

Many investors favor boring industries over whatever is the sexy, go-go sector at the moment. They’ll trade scintillating cocktail-party conversation for predictable returns in an industry that is easy to understand, which makes it easy to track a company’s progress. If you’re one of these folks who prefers mundane to modern, then Colfax Corporation — a manufacturer of pumps for industrial applications — might be for you.

Colfax specializes in big pumps for big uses, such as in oil wells, ships and chemical manufacturing facilities. Many of its customers, including the U.S. Department of Defense, aren’t affected by economic cycles. Other customers are economically sensitive, and right now, the global economy is in their favor. Colfax does two-thirds of its business outside of the United States, and demand for pumps is growing. India and China are building infrastructure, and just about every nation is demanding more oil and gas. Although pumps seem basic, they are critical to the operations that they are used in. That gives the company some pricing power, and it has an opportunity to grow revenues in the future by designing pumps that are more powerful and efficient.

It’s a profitable business. In 2007, Colfax posted $64.8 million in net income on $506.3 million in revenue. That’s with $19.2 million in interest expense, and that will go away after the IPO because a key use of proceeds is debt repayment. Some proceeds will be used to pay preferred dividends in arrears and a special dividend to the current shareholders. There won’t be much, if anything, left over after the financiers take their cuts. In addition to the primary shares offered, the private equity group that owns Colfax now is selling most of its stake.

The greatest risk to the company is probably the U.S. dollar; if it ever strengthens, Colfax’s reported revenues will fall in U.S. dollar terms. If you have more than enough excitement in your portfolio, Colfax might be an interesting addition.

Upcoming IPOs:

American Capital Agency (Nasdaq:AGNC); (scheduled for week of May 12; $315.1 million post-money valuation): American Capital Agency is a real estate investment trust that invests in mortgage-backed securities issued by Ginnie Mae, Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). These mortgages are prime loans, by definition, so they are less likely to have trouble than other types of mortgages. However, concerns about the mortgage market as a whole may be creating buying opportunities for high-end loans. This REIT is a new one, but the manager, American Capital Agency Management, manages other mortgage-security REITs.

Verso Paper (NYSE:VRS); (scheduled for week of May 12; $965.5 million post-money valuation): Verso is a paper mill that produces high-quality coated sheets used for magazines, catalogues, special inserts, and the like. It’s a nice business with steady demand and the opportunity to grow profits through operating efficiencies. The IPO is not as simple as the business. Verso is controlled by Apollo Global Management, a private equity firm that bought the business from International Paper (NYSE:IP) and needs to merge different parts of the business together at the time of the IPO. Apollo will control two-thirds of the company after the deal closes.

Recently Priced:

Hatteras Financial (NYSE:HTF); (priced Apr. 24; $608.6 million post-money valuation; $642.8 million current market cap): It’s a good time to buy high-quality mortgage securities, it would seem. Hatteras Financial is a real estate investment trust specializing in loans that are securitized by Ginnie Mae, Fannie Mae and Freddie Mac. These conforming securities look mighty attractive next to the sub-prime deals that are blowing up. Hatteras Financial is managed by Atlantic Capital Advisors, which operates other agency mortgage REITs.

Pioneer Southwest Energy Partners (NYSE:PSE); (priced Apr. 30; $157.7 million post-money valuation): This is an energy-limited partnership formed to hold oil and gas properties in Texas and New Mexico that sit in the Spraberry Field of the Permian Basin. Oil prices are high and the billions of people in China and India want cars, so revenues are likely to be strong. Quarterly distributions will be made at a rate of $0.50 per unit per quarter and $2 per year, almost all of its net income. In 2007, Pioneer Southwest generated $55.2 million in net income on $104.6 million in revenue.