Digirad：并购中诞生的新优先股IPO

Overview of Digirad\'s new preferred stock, DRADP.

Brief look at the company.

Comparison with other high-yield preferred stocks.

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there's any trading potential. In this article, we want to shed light on the newest Preferred Stock issued by Digirad Corporation (DRAD). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

Before we submerge into our brief analysis, here's a link to the 424B3 Filing by Digirad Corp.

In July 2019,

, a wholly-owned subsidiary of DRAD, entered into a merger agreement with a Minnesota private company,

, that at the effective time of the merger each share of ARTM common stock will be converted into the right to receive 0.03 shares of this newly issued preferred stock IPO. As a result, an aggregate of 1.6M shares of the new preferred stock IPO were issued totaling $16M. You can find some relevant information about the new preferred stock in the table below:

Digirad Corp 10.00% Series A Cumulative Perpetual Preferred Stock

(DRADP) pays a fixed dividend at a rate of 10% and has a par value of $10. The new issue has no

rating, pays quarterly dividends, and is callable as of 09/11/2024. Currently, the new issue trades below its par value at a price of $9.50 and has a 10.53% current yield and YTC of 11.33%. The dividends paid by this preferred stock are

eligible for the preferential 15%-20% tax rate on dividends. They also are

eligible for the dividend received deduction for corporate holders. This means that the "qualified equivalent" current yield and YTC would be 8.77% and 9.44%, respectively.

Here's how the stock's YTC curve looks like right now:

Below, you can see a price chart of the common stock, DRAD. Definitely, does not match the investor's dream of a trend.

For 2018, the company has paid a $0.18 dividend on its common stock, as with 2M shares outstanding the absolute value of the expense is $0.36M. However, since August 2018, no dividends were declared and paid by Digirad. Purely informative, for reference, the yearly dividend expenses for the newly Series A Preferred Stocks are $1.6M.

In addition, with a market capitalization of around $11.51M, DRAD is the 11th smallest company in the "Medical Appliances and Equipment" sector (according to Finviz.com).

Below you can see a snapshot of Digirad's capital structure as of the time of its last quarterly filing in June 2019. You also can see how the capital structure evolved historically.

As of Q2 2019, DRAD had total debt of $15.3M, ranking senior to the newly issued preferred stock. The new Series A preferred stock's rank is junior to all outstanding debt and equal to the other future preferred stocks of the company. The Series A is currently the only preferred stock issued by DRAD.

After common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders, our main criteria when determining credit risk is the

Market Cap/(Long-term debt + Preferreds) ratio

. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 11.51/(15.31+ 16) =

0.36

, which cannot be defined as a good number after the market capitalization coverage reaches only one third of the liabilities.

As there aren't any other preferred stocks issued by DRAD and also there aren't any relative preferreds issued by other companies in the "Medical Appliances and Equipment" sector, I will compare the newly issued preferred stock with all outstanding high yield preferred stocks with no suspended distribution. As a "high yield" I will use these issues with a Nominal Yield of more than 9%.

By their Yield-to-Call and Current Yield

By their % of PAR and Current Yield

The full list:

With the current market capitalization of only $16M, DRADP cannot be an addition to the iShares Preferred and Income Securities ETF (NASDAQ:PFF), which is important to us due to its influence on the behavior of all fixed-income securities. I'll just remind you about the last year's rally in the fixed-income borne from the redemption of the two "giants" HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.

As fixed-income traders, we follow every preferred stock or baby bond which is listed on the stock exchange. As such,

DRADP

is no exception, and the homework we always do we share it with the public. It's not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.

The company's trend looks disastrous, the company has not paid dividends for a year now and have very light coverage of its debt and preferred stock. Moreover, 10% financing is never a good sign, and with this we enter into the speculative territory. For those who would prefer to take the significant risk with this IPO, there's no guarantee that in a few months the dividends will not be suspended. Generally, if there was an arbitrage opportunity I would not hesitate to participate, otherwise I would not open a naked long position in such a company.

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.