Mergers & Acquisitions

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>>> Why These 17 Stocks Have Takeover Appeal


March 2, 2018

MoneyShow

Contributor Group


https://www.forbes.com/sites/moneyshow/2018/03/02/why-these-17-stocks-have-takeover-appeal/#4355e58fecb3


With Wall Street focused on ever-increasing profitability, large companies will need to look for acquisitions that can add to earnings. MoneyShow.com contributors have identified 17 companies that are well run, have excellent products and have the best distribution networks which are logical targets for a possible takeover.

We never suggest that investors buy a stock solely based on takeover speculation. Nevertheless, the potential for a buyout is an additional positive factor to consider. Several leading newsletter advisors, and MoneyShow.com contributors, highlight stocks with takeover appeal.

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Todd Shaver, BullMarket

Bristol-Myers is perking up. Why? It’s the expected consolidation in the healthcare industry. Healthcare is in the throes of a major shake-up.

That creates a situation in which companies face a greater risk by standing pat than possibly overpaying for an acquisition. Amazon, Berkshire Hathaway BRK.B +0% and JPMorgan Chase JPM +0.45% announced last month that they would start their own nonprofit company aimed at lowering medical costs for their employees.

For years healthcare has been one of the best industries in which to invest as industry spending became a steadily larger share of the economy. Drug companies Sanofi and Celgene CELG -0.32% each have started the year off with two large biotech purchases, and Bristol-Myers Squibb BMY -0.94% announced it would pay nearly $2 billion upfront for a cancer drug collaboration with Nektar Therapeutics.

Somebody right now is eying Bristol-Myers. Not only is there a bit of deal mania in healthcare right now, but Bristol-Myers has an activist investor pushing for action.

Carl Icahn could play a big role here. Many times we see him initiate actions that cause a company to put itself up for sale, as opposed to waiting around. However we get there, in a take-out, Bristol-Myers could well exceed our price target based on a standalone operation.


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With nearly $4 of EPS and opportunities for mergers and acquisition (M&A) transactions in the lucrative immuno-oncology cancer drug space, a triple-digit stock price is a reasonable starting point.

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Rob DeFrancesco, Tech-Stock Prospector

Within the tech sector, the sweet spot for M&A tends to be in the market- cap range of roughly $1 billion to $2.5 billion, as targeted companies at that size usually have reached a meaningful revenue level, while still offering respectable top-line growth.

In the year ahead, software is a sector where I think we’ll see an uptick in takeover deals.

Talend, a provider of data integration solutions, is one name that has the potential to generate some buyout interest. The stock is down 22% from the November high of $46.32 even though the company in the latest quarter delivered 40% revenue growth.

At the recent market cap of $1.04 billion, Talend shares trade at 5.4 times the forward consensus revenue estimate. If the company this year is able to put enough sales capacity in place to meet demand, expected top-line growth of 30% could prove to be conservative.

Shares of Hortonworks, provider of a data management software platform tied to open-source Apache Hadoop, have declined 22% from the January high of $22. In early February, Hortonworks reported impressive Q4 revenue growth of 44%.

However, the market did not like that the company offered conservative 2018 revenue guidance of $322 million to $327 million, below the consensus of $327.9 million. With the market cap down to $1.2 billion, the stock now trades at just 3.7 times the guidance midpoint.

Everbridge provides a cloud-based software platform used to automate and manage the operational response to critical public safety threats and disruptive business events.

In the latest quarter, revenue growth accelerated to 37% from 35% in the previous quarter. The stock has fallen as much as 12.6% from the January high of $33.85. At the recent market cap of $871 million, the forward price/sales ratio stands at 6.6.

In the cloud-based payroll & human capital management (HCM) software space, Paylocity is on track to deliver fiscal 2018 (June) revenue growth of 23.4%. The company is steadily building out its product portfolio, recently adding modules covering compensation and employee surveys.

Paylocity shares are down 18% from the all-time high of $53.96 reached in October. With the market cap now at $2.3 billion, the forward multiple on the FY 2019 consensus revenue estimate of $452 million (estimated growth of 22%) is 5.1.

Another possible takeover target Alteryx, which is on our Watch List, is a provider of a cloud-based, self-serve data prep and analytics platform. In each of its last two quarters, Alteryx has generated top-line growth of 52%.

The stock has fallen 19% from its January high of $31.60. At the recent market cap of $1.5 billion, Alteryx trades at 8.5 times the 2018 consensus revenue estimate of $175.5 million, which indicates growth of just over 36%.

Among larger software companies that could attract a buyer, Splunk is a provider of machine data monitoring and analytics solutions. It represents an attractive target. A big legacy vendor looking to buy some growth might be interested in Splunk.

The company looks capable of delivering 25%+ growth even as annual revenue is on pace to exceed $1.5 billion. With the market cap at $12.2 billion, Splunk shares trade at 7.8 times the FY 2019 (Jan.) forward revenue estimate.

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Chuck Carlson, DRIP Investor

Motorola Solutions MSI +0.58% provides communication infrastructure products and services for government, public safety, municipalities, commercial and industrial companies, and first responder agencies.

The stock is trading right around its 52-week high of just over $107 per share. The price resiliency is due, in part, to the company’s solid results.

Motorola Solutions has beaten consensus earnings estimates in 13 consecutive quarters, and the company has surpassed analysts’ revenue expectations in 12 of the last 13 quarters.

The stock may also be benefiting from some takeover speculation. I’m a fan of the stock even without takeover speculation, and the dividend yield of 2% provides a nice kicker to total returns. I expect these shares to beat the broad market this year.

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Ari Charney, Investing Daily's Utility Forecaster

Although we only buy stocks that we’d be happy to hold even if they remain stand-alones, we can’t ignore a company’s takeover potential and the possibility of booking a big capital gain if it gets acquired.

In fact, the utility sector’s correction could kick off the next round of mergers and acquisitions. The sector’s long-term consolidation is hardly over, especially considering that acquirers will be rushing to get deals done before rates head higher.

Arizona-based Pinnacle West PNW +0.86% Capital Corp. has long been on both our wish list and our list of potential takeover targets.

With an enterprise value to EBITDA (earnings before interest, taxation, depreciation and amortization) ratio of just 9.3, Pinnacle West is one of the more affordable utilities for potential acquirers.

Enterprise value shows the full cost of buying a company, including both equity and debt. Acquirers like to compare that cost to the cash flows, or EBITDA, a company typically generates.

A rising population and a growing economy in its main service territory offer Pinnacle West a favorable backdrop for its long-term growth story. With relatively low leverage compared to its peers, Pinnacle West boasts one of the strongest balance sheets in the industry.

Adding to Pinnacle West’s appeal for a prospective suitor is the fact that its primary operating subsidiary, Arizona Public Service Co., is a single-state utility.

In recent years, utility mergers have been increasingly contentious, with prickly regulators demanding ever-greater concessions or spurning deals altogether. Consequently, acquirers are looking for smaller utilities where a deal would only require securing approval from one set of state-level regulators.

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Crista Huff, Cabot Undervalued Stock Advisor

If you want excitement via potential takeover stocks, here are three ideas to consider. These three stocks are currently in play, meaning that it’s been revealed that bigger companies are interested in buying them.

These are not just rumors. Meanwhile, none of these growth stocks are trading anywhere near their buyout values. I think owning these three stocks is a fantastic idea.

KLX Inc. — an aerospace and energy services products maker — was approached by several potential buyers in late 2017. KLX responded by hiring Goldman Sachs to handle a potential M&A transaction. Investors have short memories, and have apparently given up on a buyout offer emerging.

The share price is down with the market in recent days. KLX Inc. is expected to report 2017 EPS up 200%, followed by another 25% EPS growth in 2018. The current P/E is 16.6.

I’m moving KLX Inc. from a Hold to a Strong Buy. This is an excellent stock for aggressive growth investors, and for people who have always wanted to own a takeover stock. The odds are with you right now.

Although TiVo is not in our portfolio, I would note that the entertainment technology stock is in the same situation as KLX Inc. The company revealed that potential buyers have shown an interest. The stock jumped, but investors got bored with waiting.

The stock is dirt cheap, the dividend is big, and the earnings growth is solid. Small-cap stocks can be volatile, but I see very little downside on the share price.

XL Group XL +0% is apparently also in play. The stock rose 12% on news that Allianz has shown an interest in acquiring XL Group or a similar reinsurance company, in order to expand its presence in the U.S.

XL Group traded below book value of about $38 in recent days, then rose to $42. According to one large investment firm, recent M&A activity in the industry took place at 1.4 to 1.7 times book value, which puts a potential buyout price in the range of $53-$65.

After a 2017 loss of $2.01 per share related to higher-than-normal catastrophe losses, the market is expecting 2018 EPS of $3.74. Based on a current share price of approximately 42, the P/E is 11.2 and the dividend yield is 2.1%. Whether a buyout offer emerges or not, XL is an attractive undervalued stock.

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Richard Moroney, Upside

Sprouts Farmers Market, our sole consumer-staples stock, operates a chain of more than 280 grocery stores that specialize in lower-priced fresh produce and organic products.

Merger talks with Target advanced to the late stages last summer, only to fall apart. But, with health-conscious consumers eating more produce, Sprouts remains an attractive takeover candidate in the otherwise sluggish grocery industry.

Prior to the latest quarter, sales had grown at least 12% in 19 straight quarters, while both operating cash flow and free cash flow rose more than 20% for the 12 months ended September.

Sprouts just recently announced that December-quarter earnings per share jumped 33% to $0.16, or a penny above Wall Street expectations.

Overall revenue increased 16% to $1.1 billion and matched the consensus, as same-store-sales rose a healthy 4.6%. Gross profit margin rose slightly to 28.4%. The specialty grocer opened three stores during the quarter, bringing the total to 285 in 15 states.

For 2018, management targets per-share earnings of $1.22 to $1.28, with the midpoint of $1.25 slightly above the consensus. Revenue is expected to climb at least 11.5%. The stock is a rated a Best Buy.

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Doug Hughes, Bank Newsletter

TCF Financial, Fulton Financial FULT +0.37% and Univest Corporation of Pennsylvania are three stocks that we own as takeout plays. We also see takeover potential in Oppenheimer Holdings, which is the largest holding in our portfolio.

TCF Financial just raised their cash dividend 100%. Wow, they are for sale I think. Now raising rates helps them a lot, insiders own a bunch and no bad loans. A deal could happen at $26 a share and nice yield while we wait, also very safe.

Fulton Financial has a great franchise and hot markets, like Maryland and Pennsylvania. Also, for this one, it’s a great regional powerhouse that could be taken for at least $24 a share any day.

Their locations and deposit franchise are sure to get a lot of interest this year. Where many banks need growth markets, they have them. Also, we get a nice yield while waiting for them to get taken over.

Univest has a strong market share in affluent markets of Pennsylvania. It has very low bad loans, a great franchise and they just raised a bunch of money in a secondary last year, so a deal is a few years out on this one, but it has a hot market area and strong earnings growth next year. Overall, it is a very safe bank.

Oppenheimer Holdings is a smaller investment bank with great insider ownership. Earnings are growing at a 100%-plus clip upwards due to short-term rates going higher.

Rising short-term rates should help the company earn $4.00 to $5.00 a share this year, which means a $40 stock or more this year and a takeout price could be as high as $50 a share.

The company and its management are always buying shares. Insiders own 30% and we love that they never ever sell shares. The bank recently bought 450,000 shares of stock at half of tangible book, which is just about the best use of shareholder capital I have ever seen.

I think a sale is coming soon. If you compare them to other investment banks, they are much cheaper on all measures of value, trading under tangible book value. This is our number one holding today.

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