GNC Shares Look Like a Weakling

Daily Finance recently examined the aftermarket returns (total return less first-day return) for the 116 IPOs that went public this year through Nov. 18. The average loss was 20%, which isn’t very good when you consider the Dow Jones Industrial Average is down 3% in the same period.

It’s just another reminder that early investing in IPOs is a bad idea. With that in mind, I’ll highlight why I believe investors in GNC Holdings (NYSE:GNC), the third-best performing US IPO in 2011 and up 65% this year, should sell their stock immediately.

GNC sells health and wellness products under its own brand names as well as other nationally recognized brands. With more than 7,500 retail locations worldwide, including 5,800 in the US alone, it dominates the sports nutrition business. Its recent history, however, is anything but impressive. In fact, it’s become a giant hot potato, changing hands several times in the span of 12 years — hardly the stuff of champions.

GNC’s was acquired in 1999 by a unit of Groupe Danone for $2.5 billion. At the time, GNC’s annual revenue was about $1.35 billion with operating income of $50.2 million. Paying almost two times sales and 25 times pretax earnings, the deal was doomed to fail.

GNC was sold in 2003 to Apollo Global (NYSE:APO) for $750 million, a price-to-sales ratio of 0.52 times. Apollo got a great deal, buying the same business at one-third the price.

Apollo tried twice to take GNC public but finally settled for selling the company to Ares Management and the Ontario Teachers’ Pension Plan for $1.65 billion in 2007. That’s a decent return for four year’s work.

Fast forward more than three years, and the two private equity firms took GNC public earlier this year at $16 a share. It’s now at about $27.50. At current prices, its enterprise value is $3.64 billion, more than double what Ares and the Ontario Teachers’ Pension Plan paid just four years earlier. Their investors have to be reasonably happy.

But here does all this paper shuffling leave GNC now? Unfortunately, not much farther along than where it was 12 years ago. Its trailing 12-month revenue is $2 billion, with operating income of $253 million.

Over the past 12 years, various owners have grown the company’s revenue and operating profit by 3.3% and 14.4% a year, respectively. That revenue figure isn’t very inspiring, but the growth in operating income provides a glimmer of hope — at least until you realize that the company’s debt has ballooned to $902 million from $760 million during that time.

GNC had a secondary offering on Oct. 31 at $24.75 a share. Its two private equity owners sold a combined 21 million shares in the offering, and as long as foolish investors keep bidding up the price, they’ll gladly keep selling them to you.

IPO shares have a way of reverting to the mean. I suspect GNC’s stock will be trading at or below $16 by the end of 2012. It’s just not a great company, despite its own stake in promoting in health and wellness. 

As of this writing, Will Ashworth did not own a position in any of the stocks named here.


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