- Tax inversion is a strategy corporations use to avoid US taxes by moving overseas.
- Some companies claim that tax inversion will enable them to increase profits, since they'll be paying less in taxes.
- We screened for companies involved with tax inversion to see if the numbers bear out this strategy.
On Sunday, Minneapolis-based medical device maker Medtronic Inc. (NYSE:MDT) announced that it was acquiring rival Covidien plc (NYSE:COV) for $42.9 billion. While the deal brings Medtronic significantly closer to realizing its global and portfolio strategies, another interesting aspect of the acquisition is that the new company will be headquartered in Ireland. The Emerald Isle is popular with corporations, thanks to its 12.5% corporate tax rate, which is considerably lower than the US's 35%.
If the acquisition is approved and Medtronic does officially make Ireland its tax domicile, Bloomberg reports that it will be the biggest company to avoid US corporate taxes - the highest in the world - by incorporating abroad. The maneuver, called tax inversion, has grown increasingly prevalent within the healthcare and oil industries over the last few years.
Pfizer (NYSE:PFE) flirted with the idea in May, while pursuing AstraZeneca (NYSE:AZN), which is headquartered in London. Back in 2012, Dr. Dre established a tax base in Ireland for Beats. In total, around 44 American companies have incorporated abroad in recent years, costing the US billions in tax revenue.
Some companies claim that tax inversion will enable them to increase profits, since they'll be paying less in taxes. In 2012, Aon (NYSE:AON) told analysts that the company's move to the UK was expected to lower its tax rate by five percentage points and, in turn, potentially boost annual profits by $100 million.
The potential for greater profits as a result of a reduced tax rate inspired us to take a closer look at the companies involved with tax inversion. We began with a universe of stocks pulled from Bloomberg's list of companies that have made tax-inversion deals over the last nine years.
Next, we screened that group for companies that have greater earnings per share (EPS) growth trailing-twelve months (TTM) vs. prior TTM than the industry average and projected EPS growth for next year greater than the industry average. This shows that these companies were high-growth firms in the past and are believed to be high-growth firms into the near future.
Finally, we looked for potentially undervalued stocks by screening for stocks with a price-to-book (P/B) ratio below the industry average. This valuation ratio compares a stock's price to its book value, and is calculated by dividing the most recent closing price by the stock's book value per share in the most recent quarter.
Like many valuation ratios, a low P/B ratio doesn't guarantee that a stock is undervalued; in fact, there may just be something wrong with the firm. That's why we looked at EPS growth first, so we could get a sense of past performance and perceived forward trajectory.
1. Argo Group International Holdings, Ltd. (AGII, Kapitall snapshot): Underwrites specialty insurance and reinsurance products in the property and casualty market worldwide. Market cap at $1.31B, most recent closing price at $49.92.
EPS growth (TTM vs. prior) TTM is 138.26% vs. an industry average of 101.27%.
Projected EPS growth (next year vs. this year) is 12.26% vs. an industry average of 8.32%.
P/B at 0.86 vs. an industry average of 1.55.
The company acquired PXRe and moved to Bermuda in 2007.
2. Applied Materials Inc. (AMAT, Kapitall snapshot): Provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide. Market cap at $27.23B, most recent closing price at $22.37.
EPS growth (TTM vs. prior) TTM is 315.15% vs. an industry average of 57.25%.
Projected EPS growth (next year vs. this year) is 25.23% vs. an industry average of 21.56%.
P/B at 3.76 vs. an industry average of 4.10.
The company is acquiring Tokyo Electron, and will move to the Netherlands this year.
3. Chiquita Brands International Inc. (CQB, Kapitall snapshot): Engages in the distribution and marketing of bananas and fresh produce under the Chiquita and other brand names worldwide. Market cap at $473.89M, most recent closing price at $10.10.
EPS growth (TTM vs. prior) TTM is 89.07% vs. an industry average of 47.30%.
Projected EPS growth (next year vs. this year) is 593.75% vs. an industry average of 13.58%.
P/B at 1.23 vs. an industry average of 5.91.
The company is merging with Fyffes, and will be based in Ireland.