Soaring Debuts for Hot IPOs

That the interest in Burlington Coat Factory’s (NYSE: BURL) IPO was intense was obvious from its final IPO price. While the price band expected by the company in their regulatory filings was a $14-$16 range, the shares finally priced at $17 each on IPO. This is in stark contrast to the other IPO of the day – Empire State Real Estate Trust (NYSE: ESRT) that priced at the lowest end of its band at $13.

The fundamentals for retail clothing and accessories are not the best. Our retail sales projections based on consumer confidence and unemployment numbers show that even consensus estimates are too bullish. A quick look at sales for JC Penney (NYSE: JCP), which we wrote about yesterday, will confirm the fears. While the super luxury brands have kept up their margins as their buyers have not been significantly affected by the crisis, the discount brands did well too as consumers traded down. It is the mid-level retailers who faced the primary brunt of the sharp fall in spending and sales.

But Burlington is in a sweet spot in the retail world and may have a few great quarters. It sells brand names too but at a discounted price – allowing both consumers who are trading up and those who are trading down to walk into their stores. Winter is around the corner and we see BURL outperforming peers with their upmarket bargains. The stock was up 47%, or $8.01, and ended the day a $25.01. Burlington sold 13.3 million shares to raise $226.1 million. The firm was taken sold to Bain Capital in 2006 for $2.1 billion, but Bain is not exiting yet and has not sold its stake in the company. A smart move, given the surge in stock price.

Although it is a better known brand, Empire State not see the sharp rise that BURL did. Our estimates yesterday were that ESRT is fairly priced at the current market situation and we do not see a significant upside to it. The stock was up 10 cents or 0.77% and ended the day at $13.10.

On the other hand, the other IPO for the day also blazed a trail similar to BURL. This is a real estate play that we like much more than buying a piece of the Empire State Building. RE/Max Holdings (NYSE: RMAX), the residential real estate brokers, also held their IPO and started trading yesterday. Surging right from market open, RMAX ended the day up 22.73% or $5 per share, at $27.00. RMAX, like BURL, also had priced a dollar above its initial band.

We like RMAX because of the kick-start that we have seen in the housing market. Unlike home builders, who believe may not have the best quarter, due to the large existing inventories, RE/Max will earn even when existing homes are sold. Despite the surge in mortgage rates, we still see home sales continuing its run, especially in formerly depressed markets in the South-West and Mid-Atlantic. Not surprisingly, RE/Max has announced that they will acquire more regional capacity in these two areas of the United States. The rise in earnings for Re/Max since 2010 has been outstanding, as they made capitalized on the recovery. In 2010, the firm had a loss of $2.75 million but in 2011 they report a profit of $24.2 million. Last year the number moved up further and the company reports profits of $33.3 million. We can see annual trends in the same direction at least for 2013 and early 2014. Re/Max sold 10 million shares for $22 each, while founders David and Gail Liniger still own 61% of the company through their holding company.

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