While 2019 has been one of the most anticipated years for IPOs, the truth of the matter is that most public offerings over the past few months have under performed expectations.
Although a handful of unexpected companies surged on their public debuts, most have reacted otherwise, with companies like Uber (NYSE: UBER) falling below their initial public offering price.
However, one unexpected company has filed for an IPO and many are hopeful that the unique nature of this business can help it succeed whereas many other tech IPOs have failed.
The company in question is Grocery Outlet, a food chain that recently filed for an IPO. While the IPO scene is definitely crowded, Grocery Outlet’s niche in what has traditionally been a defensive sector – food – makes it quite different from the rest of its tech-based counterparts, which are far more cyclical.
While tech companies rise and fall in stock price relative to the economic cycle, defensive sectors are far more stable in this regard. Coupled with the fact that there have been many warnings of a potential bear market in the following 12-24 months, Grocery Outlet could capitalize on this bearishness and surge when it goes public.
While Grocery Outlet’s IPO is relatively small, seeking to raise only $100 million in its public offering, their national chain of independent stores would grow to over 4,000 as a result of that new funding.
Asides from the defensive nature of the food industry and how different it is to the more common tech-based IPOs we’ve seen so far; Grocery Outlet has a major advantage over its competition.
Unlike Uber and many other tech IPOs, Grocery Outlet is a profitable business, reporting a net income of $16 million in 2018, a figure that has grown significantly over the past few years. In contrast to a company like Lyft (NASDAQ: LYFT), which reported yearly losses of almost a billion dollars, investors will find it a refreshing change to potentially invest in a business that is actually generating positive returns.
While other retail stores have been struggling, two types of retail companies have been thriving in the current economic environment; dollar stores and discount-food retailers. The number of smaller markets and family own food shops has surged over 50 percent over the past 15 years, while discount grocers have also grown.
Food has been seen as one of the last safe bastions for brick-and-mortar retailers. While online shopping has decimated most physical retail sales, grocery stores have remained relatively undisturbed by this trend, not surprisingly.
There are a couple of downsides to Grocery Outlet, however. Firstly, the company has significantly more leverage than its peers. Secondly, after the IPO, the company is expected to be controlled by a private equity firm.
Even with this in mind, however, the company remains an attractive prospect for some investors looking for something different in the IPO market.
Assuming that Grocery Outlet will trade similarly to its competitors at a 4.3x EBITDA, the total value of the company would range between $500 to $700 million, with anything above this being somewhat expensive for the company.