Success of Arcor Dorados (NYSE: ARCO) and Zipcar (NYSE: ZIP) IPOs Indicate Silliness, Myopia

Success of Arcor Dorados (NYSE: ARCO) and Zipcar (NYSE: ZIP) IPOs Indicate Silliness, Myopia

Today's IPOs of Arcos Dorados and ZipCar were wildly successful, each trading at twice their originally indicated IPO prices. We haven't seen IPOs move like this on the first day of trading since 1999. What does this indicate about the market?

There is a lot of aimless capital afloat chasing really bad propositions in the hope of making a quick buck.  A lot of investors and others who feel left out who are taking on mindless risk in order to “catch up”.  This is the message of today’s wildly successful IPOs of Arcos Dorados and Zipcar. Both of these investments represent such poor business models and investment propositions that there is no other conclusion that can be drawn.   

First, let’s take Arcos Dorados.  Based in Buenos Aires, Argentina, this company is a licensee of McDonalds franchises in Latin America and the Caribbean.  The company was supposed to come public between $13 and $15, which would value it at $874 million.  After one day, it is currently trading $21 or a valuation over $1.50 billion.

I am trying to figure out what has happened in the last 24 hours to make the valuation of this company double, but somehow people’s perceptions changed.  All that I have seen is that CNBC and the other financial channels have been full of analysts speaking about what a great investment this is.  The unfortunate thing is that not one of these analysts really understands this company’s markets.  They just seem to love speaking about so-called “emerging markets” which for most of these people seems to mean anywhere in the world other than the US.   In any event, I doubt that one of them has analyzed whether a fast food business that sells cheap, processed meat in Argentina or Brazil is a good business (it isn’t).  Speaking of bad business propositions, I also doubt that any of them has spoken with a McDonalds franchisee recently about how what a wonderful business that is?  In fact, this business does nothing other than marry two dreadful business concepts in one instrument.  I am much more troubled by the idea that someone may be investing money that they cannot afford to lose in a business like this that has just doubled on the first day.   

The Zipcar IPO is perhaps even more of an enigma.  This company was also originally indicated to go public at $14, before going public this morning at $18 and closing today at $28. This car rental company has a fleet of fewer than 9000 cars (of which it owns fewer than 2000) and now trades at a market valuation of $1 billion (or $500,000 per car that it owns). 

The company is marketing itself as a social network and investors seem to be rushing in as if they are afraid of missing a chance to get some sort of a deal like the Winklevoss twins got on Facebook.

The unfortunate reality here is that this company is a car rental company that rents cars to city dwellers who need a car for a short period and a short trip (they generally rent by the hour and the day rates are prohibitively high).  The car rental business has never been a good one for any investor and this company’s own track record reflects the difficulties.  It has been around for 11 years, has never been profitable and almost failed last year.

As a customer and a New Yorker, I see how Zipcar could be an attractive proposition someone who needs to run lots of errands, and for the fact that they rent some neat cars like the Audi A3, a BMW 1 Series car or a convertible Mini.  But, I only need to go about 2 miles over the George Washington Bridge before I realize that a $60 per year membership fee (plus $25 application fee) for the right to rent a car by the hour that you can only drive a limited distance is a very lousy business proposition for everyone other than 2 million people who live in Manhattan.

The problem that I have with these two IPOs and many like them is that most of that money from the IPO is going to private-equity firms and other investors who are selling their shares, not the company itself.  Arcos Dorados itself is selling just 9.5 million of the 73.5 million shares offered on the IPO).  And, in these cases, the sellers have a lot more information than they buyers do.

Given the information margin, investors should think about whether there are much more rational things to do with their money, such as putting it in one of the Dow Jones dividend leaders (to try to grow it safely) or bank account (to try to preserve it). 

Full Disclosure: The author lives in New York and doesn’t rent from Zipcar.  He eats meat when he travels in Argentina but not at McDonalds.  He wouldn’t dream of shorting these stocks, but he frequently wishes that he ran for the hills in 1999 which was the last time that he saw IPOs doubling of their first day of trading.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • John

    April 15, 2011

    Ari, I agree with you on Zipcar but your comments on Arcos are frankly - DUMB. You infer that there is a problem with Arcos' business model ?? Are you joking? We are talking about McD's here. Nothing could be further from the truth. Not only is Arcos a Cash Cow, it is also nicely positioned in the emerging markets - Yes, emerging markets, covering 17 countries that are improving socio-economically and politically. Hence, we're talking Growth story here with an emerging middle-class with children who wants to go to McDs. Sure, there's plenty of great meat restaurants in Latin America, but we're talking QSR here, and McD offers a clear differentiation in convenience that people simply cannot stay away from at least once a month if not several times in a month. So no, Arcos would perform like McD - even during downturns, McD stock has risen in a tangent.

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