Looking to get in on the NYMEX IPO

[DesertCat]

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I know very little about this. Can someone explain to me...

1. How people are able to buy IPO's like this? (is it as easy as going on etrade and putting in an order or is it more difficult?)

2. and why it would be a bad idea to buy the IPO because of pure speculation of the price rapidly increasing? (as it almost certainly will)

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Shares in hot IPOs are allocated to premium clients by their brokers. Generate tons of commissions for your full service broker, and you will be on the list for the next one.

As for the wiseness of buying IPOs. If you are a premium client who actually participates in the IPO, theoretically you are getting shares at a discount to what the market price will be. The underwriters deliberately underprice in order to ensure they can unload all of the IPO shares, and that their favored clients will be happy. The company accepts this as a price of going public.

The problems are, sometimes underwriter estimats of the market price are way off. See Vonage IPO for example where the stock immediately tanked. And usually you will be subject to a lockup agreement not to resell your shares for something like 90 days. During the internet bubble IPOs were like minting money for preferred clients. The stocks went up the first day, they went up over the next 90 days, and continued to go up for a while afterwards. But the last group of IPOs didn't go up much, and many were down substantially in 90 days, and in the end many of the companies went out of business.

If you aren't a premium client, and decide to buy when the shares start trading, you may be stuck paying a very big premium. Your strategy is therefore "the greater fool theory". You are going to pay a ridiculous price because you expect a bigger fool than yourself to pay an even more ridiculous price. In this case NMX opened at 2x the IPO price ($52 ish?) and quickly ran to $150, it then fell to $130, then ran to $145, and finally closed at $133. Are you planning to be the genius that payed $150 thinking it was going to close at $200? Or will you have some magical ability to time your purchase at $130 and sale at $145?

[dazraf69]

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If you look at some of the other exchanges, they never went down. They all for the most part have done very very well.

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Were they trading in the rarified air of 70x earnings?

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- Nymex is trading at 73 times its annualized earnings.
- Chicago Merc, which trades about 49 times its annual earnings
- IntercontinentalExchange trades at 85 times its anual earnings

I am starting to lean towards Desernt on this one. If NYNEX pulls back enough then I think it's worth a buy but right now and most likely in the near future, I see it as a losing investmnet. What assumptions can someone make based on these P/E ratios?

[DesertCat]

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What price do you think I should wait for this stock to drop? And will it drop? IICR most stocks tend to dip a bit after the IPO for the reasoning I just stated, is it going to be the case with this one too? This is my first foray into equities, so some advice will be appreciated.

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My advice is to think about what it's really worth, and buy it when it's at a discount to that value. A 70x PE ratio implies that it will grow 30%+ for the next 7-10 years, to put that in perspective, it's earnings have to grow roughly 8x in 7 years. Right now it's earning $150M-ish per year, so you need it to earn $1.2 Billion in 7 years for todays stock price to be reasonable. That's also increasing revenues from $650Mish to $5B, all in 7 years.

As I said, I don't know much about NYMEX. It's last 10Q describes it's business like this "The Company exists principally to provide facilities to buy, sell and clear energy and precious and base metals commodities for future delivery under rules intended to protect the interests of market participants.". It's a trading platform for commodities contracts.

Commodities are very hot nowadays, and that's helped NYMEX grow almost 100% year over year. How long will this growth continue? Remember the 1970s, where oil, gold and other commodities skyrocketed. During the 80s they all tanked. Are we due for another bust after this boom? Even if we don't have a bust, can their business continue to grow so strongly?

Also remember that it's easier to grow a small amount of revenues fast than it is a large amount. NYMEX looks to be adding $240M in revenue this year. If they add the same amount next year, their growth rate drops from 100% to 40%. If they add the same amount the following year their growth rate drops below 25%. If they continue for 7 years, they'll have a revenue base of about $2.5B, not the $5B they need.

By buying NYMEX at these prices you have to be confident that there will be no bust, and that NYMEX's growth will continue at high rates for many years. Otherwise you've overpaid substantially.

At $50 I'd be more interested. That's what I'd wait for. You don't have to play every hand dealt you, wait for a no-brainer.

[DesertCat]

Closed at $130 today, down $2 and the low for the day, so if you were a buyer today you are already down.

Another point I forgot is that there is a very limited public supply of NYMEX shares trading right now, so demand has way outstripped supply. That will change fairly soon as more shares are unlocked, so there is a realistic risk that in 90 days or so the price will be down substantially.

[TNAchicago]

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Closed at $130 today, down $2 and the low for the day, so if you were a buyer today you are already down.

Another point I forgot is that there is a very limited public supply of NYMEX shares trading right now, so demand has way outstripped supply. That will change fairly soon as more shares are unlocked, so there is a realistic risk that in 90 days or so the price will be down substantially.

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Had to post once just b/c the topic was lol, by itself.

I think you're overestimating the liquidity effect from any near-term lockup. Regardless if NMX is a good investment at $130, it's one of the most heavily demanded IPO's of the year. Additional stock entering the open market, whether thru a structured distribution or even leaked into trading, in my opinion, won't create "substantial" pressure on the stock. Remember, it was demand in the open market that drove the stock to OPEN trading at $120.

[pig4bill]

Nah, it can happen. It depends on how much is being unlocked. Be wary of the unlock date, although it will probably be okay with Nymex being a very legit company. KKD caught a lot of people by surprise when they extended their unock date to a year.

[DesertCat]

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I think you're overestimating the liquidity effect from any near-term lockup. Regardless if NMX is a good investment at $130, it's one of the most heavily demanded IPO's of the year. Additional stock entering the open market, whether thru a structured distribution or even leaked into trading, in my opinion, won't create "substantial" pressure on the stock. Remember, it was demand in the open market that drove the stock to OPEN trading at $120.

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High demand met a small supply of shares, driving the open price to $120. BTW it's back down to $128 right now.

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Future sales of our common stock may have an adverse impact on its market price or dilute existing stockholders

Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that large sales could occur, could cause the market price of the common stock to decline. Either of these circumstances could also limit our future ability to raise capital through an offering of equity securities. After completion of this offering, there will be 86,990,000 shares of common stock issued and outstanding, or 87,965,000 shares if the underwriters exercise their over-allotment option in full (in each case, without giving effect to any shares issued as part of the COMEX Division transaction). All of the shares of common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act by persons other than our “affiliates” within the meaning of Rule 144 under the Securities Act.

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That implies 6.5M shares (the offering) out of 88M were tradable on the first day.

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Our currently issued and outstanding shares of common stock, including such shares to be issued upon the conversion of all of our outstanding shares of Series A Preferred Stock, immediately prior to this offering, are subject to significant transfer restrictions which prohibit sales or other dispositions of shares of our common stock, except in limited circumstances. The transfer restrictions will expire 180 days after the date of this prospectus for 27,167,000 shares of our common stock, 360 days after the date of this prospectus for 26,754,000 shares of our common stock, and 540 days after the date of this prospectus for 26,569,000 shares of our common stock. Upon expiration of these transfer restrictions, the common stock held by existing stockholders will be freely transferable unless held by our “affiliates” within the meaning of Rule 144 under the Securities Act. If stockholders of NYMEX Holdings sell a large number of shares of common stock upon the expiration of some or all of these restrictions, or if investors have the perception that such sales could occur, the market price for our common stock could decline significantly.

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I can't say with 100% accuracy that the price will decline as the lockups expire, but any holders of the stock should at least be concerned about the possibility. In 6 months, the shares available for sale go from 6.5M to 33.5M.

[TNAchicago]

I wasn't denying the facts. Yes, the float severely increases post-lockup. I didn't disagree that it's something to consider - just with your interpretation of the severity of its impact on the stock. Again, just my personal opinion based on past IPO's (both heavily bid for or not), and how they've traded in their first 12-24 months - especially when additional stock is coming. It's not always Econ 101 (more supply = lower price). Depending on fundamentals, size of the company, additional liquidity can sometimes be viewed as a positive. It may have removed an overhang - maybe reducing a lg insider ownership (recent example: CMG), or increased liquidity to the point where an entirely separate investor class (lg institutions can actually own the stock (this happens a lot).

NMX is a obviously different b/c it's so big - but I'd worry more about fundamentals and whether investors have drastically over-estimated (or under-estimated) the leverage and additonal opportunities NMX will have long-term - will determine what a fair price is right now.