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TheStreet Open House

2 IPOs to Skip: American Capital Mortgage, WageWorks

NEW YORK (TheStreet -- This week's IPO calendar is relatively thin, both in volume and quality.

American Capital Mortgage (MTGE) is a real estate investment trust investing in mortgages and mortgage-backed securities. It's looking to raise $350 million through the sale of 17.5 million shares at $20 each.

WageWorks (WAGE) is also coming to market, targeting $75 million. It's offering 5.8 million with an anticipated pricing range of $12 to $14. The company provides employee expense tracking software.

American Capital Mortgage wants to follow in the footsteps of AG Mortgage Trust (MITT) and Apollo Residential (AMTG). It will be managed by an affiliate of American Capital Ltd. (ACAS).

Both of those names have fallen since going public, and are currently selling at a discount to book value. American Capital Mortgage is looking to price itself at book value. Other more established REITs in this asset class like Annaly Capital (NLY) and Hatteras Financial (HTS) have yields in the high teens, but still only trade at 1.15 x book value.

Investors should also be aware that American Capital Mortgage has no employees, that everyone that works for the REIT is actually employed by the parent company American Capital. The CEO for American Capital Mortgage is also CEO of American Capital Agency Corp. (AGNC), a sister company.

American Capital Mortgage warned in its Form S-1 filing that there could be conflicts of interest among these different entities, and investors should be aware of how difficult it can be when companies share employees and also transact amongst each other.

WageWorks has a much cleaner ownership structure but Francis Gaskins, president of IPO Desktop, has an issue with the lack of internal growth. He cites a sentence from the filing that points out the growth the company has achieved is from portfolio purchases, not organic growth. He also points out that the company originally filed to go public on April 25 and he thinks the three-month delay is a negative indicator.

WageWorks provides tax-advantaged programs like flexible spending plans and health savings accounts or commuter benefit plans for employees. The company currently has 1.8 million employee participants and more than 4,700 employer clients. For the three months ended in March, WageWorks posted net income of $261,000 on revenue of $35.3 million, an improvement from a year-ago loss of $10.6 million on revenue of $29.7 million.

This market is very competitive with payroll providers like ADP (ADP) and Ceridian jumping in as well as health insurance companies like Aetna (AET). The proposed offering also implies a valuation of 40X current earnings, which is pretty pricey.

--Written by Debra Borchardt in New York.



>To contact the writer of this article, click here: Debra Borchardt.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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