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Wednesday, November 08, 2006

Eagerly Awaiting the KBW IPO Tonight

KBW, Inc., the parent of Keefe, Bruyette, & Woods and a stellar investment bank that tends to focus on the financial sector, is set to price its IPO tonight. It was planning to offer 6.5 million shares at a range of $19.00-$21.00, but that share count has reportedly been bumped to 6.8 million shares. There will now be 2.9 million shares from insiders instead of 2.7 million shares.

At the high-end of the IPO range company is going to have an implied market cap of about $650 million. Keep in mind that is a personally calculated hypothetical number. The underwriters of the deal include KBW itself and Merrrill Lynch as lead underwriters; and co-managers are Banc of America, Fox-Pitt Kelton, JMP Securities, Thomas Weisel, BNY Capital, and FTN Midwest.

It employed 430 people as of June 30, 2006, including 101 in investment banking, 151 in sales and trading and 82 in research; it covers 489 companies under research. Here is the breakdown of the company:

-U.S. registered broker-dealer, Keefe, Bruyette & Woods, Inc.;
-U.S. registered investment advisor, KBW Asset Management, Inc.;
-Keefe, Bruyette & Woods Limited, an investment firm authorized and regulated by the U.K. Financial Services Authority.

It provides research, sales & trading, investment banking, and fixed income services. The firm specialized in the bank and thrift sector; and expanded the financial services sector: insurance companies, broker-dealers, mortgage banks, asset management companies, mortgage REITs, consumer and specialty finance firms, financial processing companies and securities exchanges. It also expanded from the United States into Europe with a European-focused team in the London office.

KBW posted 2005 revenues combined at $307.8 million and net income was listed at $17.4 Million on an after-tax basis. For the first 6 months of 2006 the company posted revenues of $193.1 million and after-tax net income of $14.8 Million. As of June 30, 2006 it carried Assets of $622 million and total operating liabilities of $340 million.

The company has the traditional range of risks listed in the prospectus for the company, including the equivalent comments that its real assets walk out the front door and go home every night. In truth, unless they have hidden and buried ghosts that aren't known this IPO is one that long-term investors will want to own. We didn’t go out with any formal endorsements ahead of the pricing, but everything looks right here.

There are some hidden risks. In a democratic environment could impact some of the super-mergers, but there are literally hundreds of smaller deals the company can participate in over the next few years. That sounds lofty and you should be skeptical of what I say there, but if you look at what the company does and how it has situated itself it is more truth than speculation.

The deal looks pricey if you use backward metrics on paper, but forget about using a paper analogy. This company is perhaps in the biggest sweet spot in investment banking and research coverage for the coming decade. Yes that is an aggressive statement, and history will prove this right or wrong. There is absolutely no way to know if there can ever be any hidden ghosts in the closet, but outside of this the deal looks great. If you look out to 2007 and beyond it starts to look like a far better deal. Even though the pricing seems aggressive, it is priced better than it really looks. While it is coming out at roughly two-times its trailing book value, I expect that book value to grow substantially in the next 24 months.

The company lost essentially one-third of its workforce back in 2001 in the World Trade Center as a result of the 9/11 attacks. This company would have already been public if it was not for 9/11. They are back, and they are stronger than ever.

While this looks great on a longer-term basis, there is no way to know what the exact street reaction will be in the immediate after-market. Right now all looks good ahead of it and the low float should make for a larger IPO demand than there is supply of shares. We wish the company luck, and would certainly expect the company's shares to gravitate higher over a long-term basis.

Jon C. Ogg
November 8, 2006
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