5 Stocks Priced for a Takeover (Screens)

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5 Stocks Priced for a Takeover (Screens)

Posted by baracc 486 days ago (http://www.smartmoney.com)

“Winner’s curse” and “empire building” might sound like chapter titles of a Harry Potter knockoff, but they have nothing to do with wizardry. They’re terms researchers use to explain why, when one company buys another, it usually gets a bad deal.
The winner’s curse is why you’re better off selling on eBay than buying; in auctions, winning bidders tend to overpay. The same goes for companies sought by more than one suitor, and the number of auction participants is inversely correlated with the subsequent returns. That is, frothy deals blow more of the buyer’s money.
“Empire building” is something of a dig at managers. Even absent auctions, company takeovers tend to lose money, because companies, like individuals, often buy high. During a merger wave from 1998 to 2001, researchers calculate that companies squandered 12 cents in shareholder capital for each dollar they spent. Longer-term studies raise similar doubts about the financial rewards of takeovers, to the point where researchers theorize that managers buy other companies mostly because they want to run bigger operations. They build empires, but at a cost to their stock prices.
Just like on eBay, as a shareholder involved in a takeover you’re usually better off as a seller than a buyer. The average acquisition in recent decades has commanded a stock premium of some 35%. Predicting which companies will one day attract bids isn’t easy. You might choose wrong. A deal might take years. It might not come with the price premium you’d hoped for. Fortunately, corporate suitors look for things that are pretty similar to what individual investors look for anyhow -- low purchase prices relative to potential profits. So investors can search for cheap stocks using the same measures buyout pros use, but view takeover potential as an aside rather than the main rationale for their decisions.
The companies listed below have low “EV/Ebitda” ratios. EV stands for enterprise value, which is the cost to own all of a company’s shares and pay off its debt while applying its cash to the transaction. Ebitda is earnings before interest, taxes, depreciation and amortization. It’s a measure of underlying profit potential that ignores some accounting charges related to past transactions, as well as interest and tax payments, the size of which often change after a deal. In addition to having low EV/Ebitda ratios -- low takeover prices relative to their profit potential -- these companies generate ample free cash, which suitors would presumably be happy to lay claim to.

Advance Auto Parts (AAP) made the list. You might presume all things auto-related are slumping at the moment, with car sales having recently fallen to nearly a three-decade low. But a dearth of new car purchases means more repairs for old ones, so car parts sellers are riding out and perhaps even benefitting from the economic slump. Advance Auto shares have gained 22% in a year, as the broad market has dropped 40%. Its sales and profits are expected to grow modestly this year and next, while broad-market profits have recently plunged. Shares cost less than 15 times earnings and come with a dividend, the size of which is unfortunately too pitiful to mention.
Top priorities in a spending downturn include food and medicine, and perhaps a swipe of underarm deodorant, but not necessarily a spritz of name-brand perfume. Accordingly, sales for Inter Parfums (IPAR), which holds scent licenses for Burberry, Gap, Brooks Brothers, Bebe and more, are seen falling 14% this year. The stock price has been shattered over the past year, losing 62%. At that price, its formerly small dividend yield is almost respectable: 2.3%. Inter Parfums owes little and generates plentiful free cash, which means management, unlike that at most companies, hasn’t suddenly turned sour on stock repurchases now that prices are low. Last quarter the company retired close to a half-million shares. I’m guessing it’s getting a good deal. Shares fetch less than 9 times earnings.
Have a look if you like at details on these and other companies on the table below.

Screen Survivors

TickerCompanyIndustryShare PriceMarket Value ($mil)EV/EbitdaForward P/E

AAPAdvance Auto Partscar parts$41.6439437.5815

ANNAnn Taylor Storesclothing stores5.002860.86n/a

BJBJ's Wholesale Clubdiscount stores32.2118945.6414

IPARInter Parfumsperfume5.601722.668

WGWillbros Groupoil & gas services9.803842.038

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