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ey, private equity firms! No need to limit your search for new targets to the chip industry targets like Freescale (FSL) and Philips Semiconductor. Have you considered buying a nice semiconductor equipment stock? Get ‘em while they’re cheap!

Brett Hodess, an analyst with Merrill Lynch, on Friday wrote a piece focused on finding potential buyout candidates in equipment sector. “The most attractive LBO candidate is often an underperforming company with low valuation and an inefficient capital structure,” he writes. “The goal of the private equity firm is then to use its managerial skill and financial leverage to improve the operating metrics and eventually monetize the enhanced value of the company.” So now you know how LBOs are supposed to work.

To evaluate potential candidates, he used a four-factor ranking system:

  • High free cash flow.
  • Large net cash relative to market cap.
  • low EV [enterprise value]/EBITDA [earnings before interest,taxes, depreciation and amortization]
  • low ROE to identify turnaround potential.

Based on those factors, he came up with his five top LBO candidates:

Source: Five Semi Equipment Buyout Candidates