The first weeks of the new year have proved difficult for brokerage and investment banking stocks - notably for Friedman Billings Ramsey Group, which went public just before a sectorwide downturn.
The firm, based in Arlington, Va., specializes in initial public offerings, took itself public Dec. 23. In the intervening month, its shares have tumbled to $16 from their $20 offer price.
At least for now, that is bad news for investors in Friedman Billings, including PNC Bank Corp., which acquired a 4.9% stake and agreed to refer clients to the firm.
And Friedman Billings may face a tough road rebuilding its business if investors have seriously lost their appetite for the firm's bread-and- butter business - taking specialty finance companies and real estate investment trusts, or REITs, public. Such initial public offerings constituted more than 60% of Friedman Billings' revenues last year, according to company management.
But the IPO market has nearly evaporated. Because of low investor demand, Friedman Billings on Jan. 9 cut the size of a public offering for Resource Asset Investment Trust to $42.5 million from the planned $181 million, according to filings with the Securities and Exchange Commission.
The fall of its stock price and the troubled Resource Asset public offering have raised doubts among investment bankers and analysts about such niche investment banking. Skeptics point out that Friedman Billings racked up nearly half its $256 million in revenues for 1997 in the fourth quarter, and they say a repeat performance is improbable.
But other market watchers consider such suggestions premature.
"Friedman Billings' own IPO was sold more on potential than historical results, and I believe the firm is capable of maintaining revenue momentum, even though there's a distinct softness in the market now," said Michael A. Flanagan, an independent securities analyst based in Philadelphia. "The alliance with PNC will change their stream of revenues, and that's a plus going down the road."
Friedman Billings executives say they know they are unlikely to recapture 1997's IPO magic again.
In a telephone interview, vice chairman Eric Billings, said that although he anticipates "much activity" this year underwriting REITs, the firm is looking to expand asset management and private equity, handle more merger and acquisition advisory business, and conduct secondary offerings for the companies it has taken public.
"We are not just an IPO firm; we're a capital markets firm," Mr. Billings said.
Still, the rocky last few weeks for Friedman Billings may raise a caution flag for investors gung-ho about commercial banks entering the rocky world of investment banking.
Friedman Billings was Wall Street's hottest investment bank last year, underwriting $1.9 billion of new stock offerings, an eye-popping 481% increase over 1996's $327 million, according to Securities Data Co.
That vaulted it into the big leagues among venerable Wall Street names. In such activity, the firm ranked behind Salomon Smith Barney and ahead of Lehman Brothers.
In October, Friedman Billings announced it was taking itself public and that PNC Bank, the nation's 13th-largest banking company, would buy a 4.9% stake.
Investment bankers say PNC, based in Pittsburgh, considered buying the entire firm (PNC had been interested earlier in acquiring Oppenheimer & Co.) but decided instead to buy a small stake.
PNC paid $47 million for its 4.9% stake in Friedman Billings. Although that doesn't sound high on its own, it means PNC Bank valued the entire firm at around $959 million - not far from the $1.2 billion that NationsBank Corp. paid for Montgomery Securities.
Many Wall Street watchers found it hard to fathom the price that PNC paid, given the vast difference in revenues between Montgomery and Friedman.
Montgomery reported 1996 revenues of $705 million, while Friedman Billings' were $110 million. Friedman Billings reported 1997 revenues of $256 million, with $121 million coming in the fourth quarter. Montgomery, now a part of NationsBank, will not disclose 1997 numbers, a spokesman there said. Mr. Flanagan, the independent analyst, said that on average, publicly traded brokerages reported 1997 revenues were 30% higher than for the previous year.
Officials at PNC would not comment on their investment decision.
Friedman Billings' 132% revenue growth last year vastly outperformed such similarly sized competitors as Jefferies Group Inc., Legg Mason Inc., and Raymond James Financial Inc. But none of those firms was so dependent on IPOs - particularly specialty finance and REIT IPOs - as Friedman Billings.
Those firms' shares also have suffered recently. Since Dec. 23, when Friedman Billings went public, Jeffries shares have given up 5.2%, Legg Mason's 10%, and Raymond James' 15.1%.
Friedman Billings has underperformed its peers with a 25% decline, analysts say, mainly because the IPO market has vanished. Although PNC probably will be providing clients in need of investment banking services soon, analysts say an extended dry period for IPOs would be bad news for Friedman Billings.
REIT public offerings in particular are not expected to revive soon. About $1.9 billion worth of such IPOs were offered in the fourth quarter - nearly half the volume for the entire year. And these stocks are less attractive than before, because the Treasury yield curve has flattened - cutting into the source of mortgage profits.
In the meantime, there are early questions as to how much the alliance with PNC will help the Virginia firm's revenue picture.
Sources say Blackrock Financial Management, a unit of PNC, did not want Friedman Billings to be sole manager in an upcoming IPO for a REIT called Anthracite Mortgage Capital Inc. But Blackrock, which advises Anthracite, was reportedly pressured by the bank to include Friedman Billings in the deal.
Mr. Billings confirmed that Prudential Securities and Lehman Brothers will co-manage the IPO.