Below we present three companies that have been identified as potential takeover / leveraged buyout (LBO) candidates by UBS and Street Insider. Notably, these 3 companies also have operating cash flow growth that is exceeding their net income growth – an encouraging sign of earnings quality, as well as financial health. (To access the complete list of 200+ takeover targets, click here.)
When operating cash flow grows faster than net income, it is a sign that cash (as opposed to accruals) is becoming a larger part of earnings. Due to management’s discretion in reporting accruals, an increasing portion of cash translates to higher earnings quality.
And don’t forget: higher cash holdings make companies more attractive as takeover targets, because their cash holdings directly reduce the purchase price of the company.
Do you agree that these companies are takeover / LBO targets? Use this list as a starting-off point for your own analysis...
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
List sorted by difference between operating cash flow growth and net income growth.
1. Pepsico, Inc. (NYSE:PEP): Processed & Packaged Goods Industry. Market cap of $101.50B. UBS identified the company as a takeover/LBO target.
Quarterly net income fell by 4.81% y/y (from $1.43B to $1.37B), while quarterly operating cash flow grew by 19.50% ($1.47B vs. $1.76B y/y) (comparing 16 weeks ending 2009-12-26 vs. 16 weeks ending 2010-12-25).
PEP has a relatively low correlation to the market (beta = 0.52), which may be appealing to risk-averse investors. The stock has lost 0.98% over the last year.
2. Cabot Oil & Gas Corporation (NYSE:COG): Independent Oil & Gas Industry. Market cap of $5.36B. UBS identified the company as a takeover/LBO target.
Quarterly net income grew by 35.07% y/y (from $36.36M to $49.11M), while quarterly operating cash flow grew by 50.99% ($106.70M vs. $161.11M y/y) (comparing 3 months ending 2009-12-31 vs. 3 months ending 2010-12-31).
COG is exhibiting strong upside momentum--currently trading 6.99% above its SMA20, 15.87% above its SMA50, and 42.1% above its SMA200. The stock has had a couple of great days, gaining 6.07% over the last week.
3. Tibco Software, Inc. (NASDAQ:TIBX): Business Software & Services Industry. Market cap of $4.36B. Street Insider identified the company as a takeover/LBO target.
Quarterly net income grew by 18.15% y/y (from $31.73M to $37.49M), while quarterly operating cash flow grew by 20.51% ($35.93M vs. $43.30M y/y) (comparing 3 months ending 2009-11-30 vs. 3 months ending 2010-11-30).
*Net income and operating cash flow sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.