Vanguard Gets IPO Parade Off to Weak Start

Tickers in this article: KIOR SNS SZYM THC UHS VHS

NEW YORK (TheStreet) -- Vanguard Health Systems got knocked down a peg on Tuesday, reportedly lowering both the size of its initial public offering and pricing below its projected range.

According to a Reuters report, Vanguard, which will trade on the New York Stock Exchange under the ticker "VHS," has priced its IPO of 25 million shares at $18 each, raising roughly $450 million. Reuters, which cited one of the offering's underwriters as the source for its article, said the stock is now expected to debut on Wednesday.

The hospital company is mostly owned by Blackstone (66%) and Morgan Stanley (17%), and it was originally expected to debut on Thursday with pricing seen between $21 and $23 per share.

Prior to this news, Francis Gaskins, president of IPO Desktop, told TheStreet that Vanguard was looking pricey at its higher range. His analysis found the company would have an eye-popping price-to-earnings ratio of 169, much higher than peers Tenet Healthcare at 24.4X, and Universal Health at 18.5X.

Another strike against Vanguard for new investors is the lack of yield. The only people getting dividends so far are the equity holders, who received $444 million in January and have received a total of $775 million since 2010.

In addition to the high PE, Vanguard has purchased the assets of the Detroit Medical Center for $368 million and committed to spending $350 million during the first five years on the hospital for routine needs, plus an additional $500 million in capital expenditures during those same five years.

That's $850 million on a center that brings in $2 billion in revenue per year. Detroit isn't exactly a growing city with a population that is spending money on elective surgical procedures -- where hospitals really make their money. This figure has dropped for Vanguard, whose revenue growth has slipped as a result of fewer people coughing up the dough for surgery, instead of opting to get by without it. Vanguard only had 0.2% profit margin in its March 2011 quarter with interest soaking up 86% of the operating profits. No wonder Blackstone is looking to cash out some of its stake.

Another company with relatively weak financials that is also scheduled to go public this week is century-old Stewart & Stevenson , based in Houston Texas.

The company provides specialized equipment and parts for the oil and gas industry, and it's looking to raise $240 million on Wednesday with shares expected to price between $14-$16.

Demand for Stewart & Stevenson's products goes up when the price of gas goes up because the oil companies stay busy. But when the price of gas falls, they pull back. Revenue has seesawed in the past few years, going as high as $1.2 billion in 2008, then down to $689 million in 2009, before bouncing up to $861 million in 2010.

So far in 2011, revenue is tracking ahead of 2010 levels with the total for the three months ended in April coming in at $271 million vs. $162 million in the same period a year earlier, so revenue looks good going into the IPO.

On another positive note, the company has a backlog of $412.2 million, up from a backlog of $259.9 million a year earlier. Prior to the IPO, the company is 52% owned by private equity firm Parman Capital Group and 40% owned by Hushang Ansary, its chairman.

Another energy company, albeit an alternative energy company, KiOR is slated for a Friday IPO launch.

Unlike Stewart which has earnings, KiOR expects to post losses at least into 2013. The company makes oil out of wood products, and is based in Pasadena, Texas, where many major oil companies have their refineries.

IPO Desktop's Gaskins likes to compare KiOR to Solazyme , which also recently went public. Solazyme makes its oil from algae products and it too expects to lose money in the initial stages.

KiOR hopes to raise $200 million in its IPO, expecting to price shares between $19 and $21 each with a market cap of $2 billion at the high end of the range. Like Solazyme, KiOR has found a big name partner, FedEx , that has agreed to buy a portion of the output from its first full-on commercial plant. KiOR has also gotten Hunt Refining Co. to commit to a purchase as well.

IPO Desktop's Gaskins believes KiOR will sell for the highest price-to-book value when compared to Solazyme, Amyris and Gevo .

Written by Debra Borchardt in New York.

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Tickers in this article: KIOR SNS SZYM THC UHS VHS