Rating The IPO

Note: "Before IPO" and "After IPO" measure the use of the proceedings to enhance revenue growth. A small difference between the two Xs means funds from the proceedings probably will have little effect on the index..

Rating Scale

Prediction
Company fundamentals are strong. Porex has a track record of healthy net income. It has no long-term debt. It has an extensive and matured line of products with established distribution in an industry of few players. The small size of the industry, the wide range of niche products, and the technical barriers to entry suggest that the Company needn’t worry about new competitors. Finally, its parent company, Synetic, will hold 86% of the stock, which it claims to have no intentions of unloading in the foreseeable future. Since the Company doesn’t need the proceedings to pay down debt, and since no percentage of it is getting lost to selling stockholders, it can use the money to pursue acquisitions, accelerate its product development, and perhaps hasten its expansion into international markets.

The stock will open at $16.50 and could be in the low $30s by the end of Year 1.

Material On This Page Taken From Prospectus
"Porex is a leading developer, manufacturer and distributor of porous plastic products and has a 35-year history of innovation and market leadership in the field of porous plastics. The Company's porous and solid plastic components and products are used in a wide range of healthcare, consumer and industrial applications, primarily to filter, wick, diffuse, drain, vent or control the flow of fluids or gases….Porex has established a leading reputation in the porous plastics industry for developing innovative manufacturing technology and providing solutions to complex customer requirements. Porex has also developed significant expertise in combining porous plastic components with injection molded solid plastic products, which has broadened its range of product offerings. Porex believes its competitive strengths include technological leadership in the design and manufacture of porous plastic products; efficient manufacturing operations based on proprietary, technologically advanced equipment; and an ability to collaborate with customers to solve complex design and performance requirements.

"In addition, Porex has a technically skilled sales and marketing force and experienced management….Over the last three fiscal years, the Company's net sales and net income have grown at a compounded annual rate of 16.9% and 56.6%, respectively."

Comments
Porex Corp is a company which knows how to make products and sell them at a profit. Last year it generated $52.9 million in revenues, and against that amount it made $8.1 million in net income, or 15.3%. Furthermore, it’s shown similar results for previous years—13.4% in ’96 and 9.6% in ’95. A company with a track record of making money at those percentages should be of interest to the investor. Currently, 15 million shares are outstanding and held by the parent company. For ’97 Porex can claim $0.54 in earnings per share on $45 million in stockholders’ equity and no long-term debt. As it enters the IPO this position is very strong.

The Company will join the Nasdaq National Market seeking $47.4 million on 2.9 million shares at $16.50 per share. Its performance over the last number of years suggests that an opening price in the mid teens is not unreasonable.

The Parent Company, Synetic, Inc.
Porex is a wholly owned subsidiary of Synetic, Inc. Synetic is a puzzling combination of Porex, a manufacturer of porous plastics, and Avicienna, another subsidiary attempting to develop healthcare communications using the Internet. Although Synetic’s stock on the Nasdaq is trading around $36, with a 52-week high of nearly $56, it took a whopping loss of $27.5 million in ’97. Porex seems to be its only, or at least its main, source of income. After the offering Synetic will still hold 86% of the shares, or 15 million of the 17.5 million shares outstanding. This consolidation of stock under one entity is not necessarily bad for the investor. Synetic claims that it intends to hold onto its shares for an indefinite period of time. If so, such restraint would have a highly positive impact on stock price through the avoidance of additional new stock flowing into the market. As it is, Synetic is constrained from registering any new stock for the first 180 days, thus 6 months of stability at least. During this period of time the stock price should reflect the Company’s performance and the enthusiasm of the market without getting overly burdened by dilution. Even afterwards, Synetic will have to proceed cautiously in the registration and sale of its stock if it attempts to reduce its position. Too much stock drifting into the market will serve only to hurt the stock price and, consequently, Synetic itself.

The Porex Board Of Directors has authorized 50 million shares. This is an encouraging sign. Typically companies, which are disposed to sell stock for every little thing, usually begin with 100 million shares. Synetic itself has only 19.4 million shares outstanding. It would suggest that the Board, most of whom are deeply tied to Synetic, will follow a similar pattern of limiting the release of stock into the market. If the Company can sustain its earnings and avoid dilution, stock price will respond.

The Market
Porex Corp has a wide range of odd, rather limited but important applications from blood serum filters to the tips of the common writing pen, to vents used in auto batteries, and to deodorant applicators. This range becomes a powerful asset for the Company, because it reduces vulnerability to competitors. They depend neither on any one product nor on any one customer, nor indeed on any one industry. The end result is an extensive line of small products addressing limited niches the sum of which adds up to nearly $53 million in sales from a base of 600 customers. It’s a very difficult position for a competitor to attack.

The technology bounding all of these products together is porous plastic. Porous plastic is used to "filter, wick, diffuse, drain, vent or control the flow of fluids or gases," and to that end it’s an enabling technology, that is, one which uniquely solves a problem and makes an application feasible. Half the company’s sales, 51% specifically, comes from the healthcare sector with its reasonably good profit margins. Another 28% come from the consumer sector, and the final 21% from industrial. Any company with products already serving so many important and different industries, especially healthcare, can have a measure of confidence in its future sales.

The world market for applications using porous plastic is not extensive, certainly not amounting to billions of dollars. But even its small size devolves to the advantage of the Company. The industry doesn’t lend itself to any single blockbuster product. Thus, new competitors to the market would face a significant cost of entry against a modest return, until they had established themselves with a product line as extensive as the Company’s. Not only would this be a technical challenge, it would be a marketing and distribution challenge as well. New competitors either would have to exceed dramatically the Company’s products in their performance while selling at a comparable price, or they would have to match the performance and sell at a substantially lower price. Neither case is likely. Anything short of superior performance or significant price reductions will not be enough to motivate users or distributors to change from Porex to a new, unknown, and untested company.

The Company’s products are designed for highly specific tasks usually as components in larger applications. The cost-effective manufacture of these products depends on proprietary molds and techniques and specialized equipment put together inhouse, in other words, on a lengthy manufacturing learning curve during which the processes are matured and made efficient. Under these circumstances new companies would be at a severe disadvantage to those which already are established. Their only likely way of entering the industry and surviving against the existing players would be to bring to the market something new and important or to enter an unexploited niche. Even here it would require of them high technical, marketing, and distribution sophistication, which new companies usually don’t have.

Yet another barrier for entry by new companies is the general difficulty of getting approval through the FDA for healthcare products. Many of the Company’s components are classified as Class III devices, that is, they’re implanted into the body. Such devices endure severe scrutiny by the FDA, which is costly and time consuming. Few new companies will be able to tolerate the cost, unless they have a product of high potential. Porex has 3 major competitors in the U.S. and 2 in Europe. For all the reasons mentioned above it will be unlikely that any others will surface in the near future.

Competitors
Among the companies manufacturing products with porous plastic in the U.S., Porex appears to be the most dominant. To give a sense of its size the Company has 600 employees and operates out of facilities in Georgia and New York, and abroad in England and Germany. Its combined manufacturing space amounts to 357,000 square feet.

Genpore, a company operating since 1969, is a direct competitor, perhaps its largest. Genpore’s product line, which it sells globally, tracks that of the Company’s almost area for area including absorbent wicking, applicators, battery vents, blood serum filters, liquid reservoirs, pipette tip filters, and water filters. This company touts its "state-of-the-art equipment" and its ability to design components to meet a customer’s specific requirements. It operates in a manufacturing facility of 115,000 square feet. Genpore is not a public company.

Millipore is a much larger company of $619 million and on the NYSE; however, it appears to overlap with Porex only slightly, possibly in the areas of filtration and flow.

Porvair, a public company in the UK, is another direct competitor. It appears to have little market share in the U.S. among any of Porex’s product categories.

Strategy For Growth
Except to make a public market for the stock, and thereby improve its value, the Company has no compelling reason to seek funds through an IPO. In fact, it’s not at all sure how it intends to use the proceedings. Management is offering no bold changes in its approach toward growth. One cannot easily argue with success. A company with 15% net income is likely to follow its old strategy but just do more of it.

For the years ’95 to ’97 the Company’s R&D budget ranged between 3.8% and 4.4%, which indicates an active effort at product generation. It spent $12 million on capital equipment, another good sign. Porex will be adding new products in the life science area specifically for clinical and surgical applications. No doubt it will continue exploiting niches as it has in the past. Disposable plastic products happens to be one such niche with some potential. However, when it comes to productization the Company’s strategy for growth going forward can hardly be much different from what it’s been in the past.

Porex will continue its acquisitions. In February 1997 it purchased a small company called Interflo, which had $3.6 million in revenue. At the same time it intends to move into the porous non-plastic side of the market by acquiring a company already established in the field and with the expertise. Acquisitions of this sort will continue.

Management probably will be emphasizing the international markets more. For the last number of years exports have accounted for about 28% of total sales. This percentage is poised to grow as East European and Asian markets continue to mature. They should have success with those products already shown to be effective in the U.S. Recently Porex picked up a couple of small companies in England to improve its presence in Europe, and it maintains an office in Malaysia to cover the Asian countries.

Mammary Claims
Porex got itself into a legal mess back in ’91 when it was swept up in class action suits involving silicone mammary implants. From ’88 to ’90 it distributed this kind of product from a Japanese manufacturer to the U.S. market. Although the product, along with all the other brands, was recalled during the scare about their danger of leakage, it was too late to avoid liability. About 2500 women already had become recipients. To date, 61 claims have been settled either by the Japanese manufacturer or by the insurance carriers of Porex, and so far, there’s been no material cost to the Company. As of November ‘97 there were still 228 actions and 32 out-of-court claims pending against the Company.

The most significant result has been that its primary insurance carrier in ’94 refused to renew its then-existing insurance coverage. Porex still has coverage from other carriers, which it considers to be adequate. The Company feels it’s dodged the bullet. Perhaps it has, but the story isn’t over.

These claims remain the only serious litigation against the Company.

The Financials
Currently, Porex has a net tangible book value of $34.7 million or $2.31 per share. Gross profit margins have improved over the last 3 consecutive years, from 61.3% in ’95 to 65.1% in ’97. At the same time net income has gone up from 9.6% to 15.3%. Over the last 4 years revenue has increased from $30.1 million to $52.9 million. The acquisition of Interflo and other businesses accounted for $4.1 million of the increase for ’97. The remainder can be attributed to improved sales in writing instrument nibs and medical OEM components.

As it enters the IPO the Company has income and no outstanding long-term debt. With the proceedings, along with its unexploited debt capacity, the Company could if it chose be very aggressive in its acquisitions. Debt totaling $50 million at 8% would amount roughly to $4 million in interest expense, which they could accommodate given their net income of $8.1 million.

The Underwriters

• Merrill Lynch & Co.
• Prudential Securities Inc.

The Management
The CEO, Mr. Ray Hannah, will receive an annual salary of $163,461 with a bonus of $100,000. A company stock option plan has been adopted, but the number of shares to be assigned to the plan remains to be determined, and to date no options have been issued.