Tops In! La Quinta And Ditech Are Back

This Wall Street Journal headline surely speaks of a market top:

U.S. IPO Market Expects Busiest Week Since 2007

The next sentence virtually identifies the current IPO craze as right in line with the last top in November 2007:

A total of 14 U.S.-listed IPOs are scheduled to price through Thursday night. If they all get done, that would mark the biggest weekly tally since the week ended Nov. 16, 2007, according to Dealogic.

But that’s not all. We then find out what’s in the pending pipeline, and the story becomes really clear:

The initial public offering engine looks to continue running on overdrive this week, with lender Ally Financial Inc and hotel chain La Quinta Holdings Inc. headlining the busiest week for listed debuts since 2007.

Ally Financial used to be the disaster known as GMAC—dual fountain of sub-prime housing (e.g. Ditech!) and auto loans—which went down in flames during the financial crisis and lived to tell aboutit only due to upwards of $30 billion in wholly unjustified taxpayer subsidies and guarantees. So now its all cleaned-up and ready for retail shareholders to embark on a prosperous ride. Right!

And then there’s La Quinta, which is an uninspired mish-mash of about 800 hotels that are impaled in the still vastly over-built mid-market lodging sector. More importantly, the company has been owned by Blackstone since 2006—most of which time it has tottered on the verge of bankruptcy after being battered by the financial crisis and Great Recession.

Now just in time for interest rates to wend their way toward normalization, La Quinta presents itself as a “growth” story. Yet the reported growth happened only because of Blackstone’s ingenuity in getting “investors”— gorging on cheap debt from the Fed— to build new hotel rooms, and then sign up for stiff front-end fees and long-term franchising arrangements.

So now the public is being invited to purchase shares at nosebleed multiples for a financial engineering operation that will surely suffer a sharp diminution in net income next time the US economy hits the skids. Indeed, at the indicated IPO range, the enterprise value would be in the range of $5 billion compared to LTM EBITDA of about $260 million.

So there you have it—nearly 19X cash flow for a company that has been floundering for years; which had LTM revenues of $850 million or just barely above the level of 2008; which incurred a net loss of $70 million in its most recent LTM reporting; and which has no obvious competitive advantage—just another big flashing hotel marque among the dozens built along the leveraged corridors of suburbia.

Yes, when they trot out La Quinta and the Son of Ditech it might be safely assumed that the top is in.