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Small caps boosting IPOs
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March 9, 1998: 1:51 p.m. ET
Reltec, already 20 times oversubscribed, is expected to be week's hottest issue
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NEW YORK (CNNfn) - Intel's warning last week hardly rattled market confidence, a response that revealed as much about investors' optimism as their rising tolerance to ever-ascending stock valuations. In fact, the historically high 20-plus forward P/E multiples for the bigger cap names are giving small cap strategists reason to make their case that small cap stocks are beginning to look attractive.
That's good news for IPOs, which historically post better annual returns when small caps are in favor. Since 1990 -- with the exception of 1994, when long-term interest rates rose from 6.35 percent to 7.89 percent, resulting in the worst year for treasury bonds this decade -- IPOs outperformed small and big cap stocks only in the years the Russell 2000 index beat out the S&P 500.
And while the Russell 2000 is up 6 percent year-to-date versus an 8-1/2 percent return for the S&P 500, experts say the performance gap is likely to close up as small cap stocks take off.
"You should begin to see a fairly significant slowdown in profitability in companies that rely on demand from Asia and those that have to defend their market share from companies in the Far East," notes Keith Mullins, small cap strategist at Salomon Smith Barney.
"This is uniformly a large cap problem, but small cap stocks don't have that exposure and risk. It's part of the key reason to want to own these stocks, and they're benefiting from it now."
Underwriters hope this week's 18 IPOs will also be benefit from shifting money flows, as $900 million of new stock is expected to float this week.
This week's second-biggest deal is one of the largest telecom equipment companies to go public since Lucent Technologies. Given the success of Lucent's IPO, Reltec is expected to be one of this week's more sought-after deals. Morgan Stanley will take Reltec shares public this Friday, and early indications are the offering already is 20-times oversubscribed.
Leveraged buyout firm KKR led a management buyout of Reltec from Rockwell in August 1995. KKR hopes to raise $127 million by selling roughly 10 percent of the company to the public, after which KKR will retain 84 percent. After the expected $25.50 offering, Reltec's market capitalization will be $1.3 billion. Not a bad 2-1/2 year return for KKR.
A third of Reltec's business is in digital loop carrier systems, the company's fastest- growing segment. Its 25 to 30 percent annual growth rate also is solidly outpacing the overall growth rate of the telecom equipment market, which currently is growing at 15 percent.
The digital loop carrier market allows service providers to deploy such value-added services to their customers as high-speed Internet access, which currently is the demand driver.
Reltec's earnings more than doubled in 1997 to $26 million and are expected to grow nearly as much this year. Should Reltec double its earnings to $52 million, that would give it a price-to-earnings multiple of 25, which is right in line with the average telecom equipment company.
CSK Auto, a do-it-yourself automobile supply retailer, isn't expected to garner much attention. The $150 million offering is being led by Donaldson, Lufkin & Jenrette. According to IPO Value Monitor, the expected IPO of between $19 and $21 dollars a share would give CSK a forward multiple of 20 times, considered aggressively priced compared with 16-times multiples for its nearest competitors.
But even some critics maintain that the company's plans to open nearly 300 additional stores over the next two years may yield operational efficiencies that could help boost its bottom line.
A smaller deal but one that's expected to generate some demand is Exodus Communications, an Internet data center company that essentially manages Internet-servers from their headquarters for a client list of small to medium-sized companies. Exodus is expected to price at a midpoint of $10, raising $40 million. Goldman Sachs is the lead underwriter.
Another deal expected to be well received is Championship Auto Racing Team. It's expected to raise nearly $70 million with an IPO between $14 and $16 dollars. 
-- by Bambi Francisco for CNNfn Interactive
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