The IPO market is sizzling hot. Yesterday steakhouse operator Texas Roadhouse (NASDAQ:TXRH) and biopharmaceutical Theravance (NASDAQ:THRX) priced at more than their offering prices and closed with large percentage gains. (And, trivia buffs, when was the last time two new offerings shared the same ticker letters?)
In July, restaurant IPOs stunk. Domino's Pizza (NASDAQ:DPZ) arrived cold and stale, with the stock closing down from its IPO price. McCormick & Schmick's (NASDAQ:MSSR) had to trim 4 million shares from its offering and sell the shares at $12 (after indicating $14 to $16 a share).
Roadhouse's 30% gain over the IPO price was as big as the company's portion sizes.
While Roadhouse's 11.5% operating margin exceeds the 9.2% at Outback Steakhouse (NYSE:OSI), the company's IPO shows 26-week earnings of a mere $0.23 a share. Outback is selling for 19 times earnings and producing $100 million a year in free cash flow. Why pay a high earnings premium for an IPO, especially one with 3.6 million option shares waiting to dilute earnings even more?
Theravance, with four potential products in clinical trials and seven others in preclinical studies, opened at $19 a share -- $3 more than the IPO price. Telavancin, an injectable antibiotic, is the only potential product in phase 3 trails and is targeting a market with $730 million in sales in 2003.
What is potentially limiting is an agreement with 18% owner GlaxoSmithKline (NYSE:GSK). The deal gives Glaxo "an exclusive option to license potential new medicines from all current and future programs through August 2007 on a worldwide basis." Glaxo can also increase its ownership to 60% in 2007.
The relationship is complex and may limit Theravance's ability to bring in other partners because Glaxo can decide to opt in at any time prior to a successful phase 2 proof-of-concept trial.
Also disheartening is the 8.7 million options outstanding. That is a lot of dilution for a company with only 35.8 million shares.
These IPOs had grand welcomes. Roadhouse, a purveyor of food, is hardly revolutionary. Theravance, with revolutionary technology, is years away from having a product, assuming it can get one through the FDA maze and beat other competitors to market. Both, at this point, are priced to perfection.
Discuss Outback Steakhouse and GlaxoSmithKline -- and thousands of other stocks -- on The Motley Fool discussion boards.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned, although McCormick & Schmick is his favorite place for seafood.
