3 Cash-Rich Takeover Targets

Includes: AEO, ATVI, GD, MSFT
by: Bret Jensen
Merger & Acquisition has picked up dramatically recently as organic growth is tough to come by, interest rates are at rock bottom, and the Wall Street takeover engine seems to be humming along. Given these factors, it might be prudent to look for cash rich companies selling at reasonable valuations that could be takeover targets. Here are three that should be considered:
Activision (NASDAQ:ATVI): Activision Blizzard, Inc., through its subsidiaries, publishes online, personal computer (PC), console, and handheld games worldwide. The company develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net. Activision is the creator of Guitar Hero and Call of Duty and a myriad of other titles. It also produces the online games World of Warcraft and Starcraft II among others. It has a pristine balance sheet with $3/share of cash.
ATVI sells at 15 times this year’s earnings and less than 13 times next year’s consensus. It also pays a dividend of 1.5%. Finally, it is selling at the bottom of its five year valuation range measured by P/E, P/S, and P/CF. Given its low valuation, cash on balance sheet, and stable of popular games; it is not hard to see this company being acquired at some point in the future. Microsoft (NASDAQ:MSFT) might be a logical partner given its growing entertainment and devices division produces over $8 billion of revenue. World of Warcraft is the largest online multiplayer game in the world with 11.5 million subscribers and over $1 billion in revenue.

American Eagle Outfitters (NYSE:AEO): American Eagle Outfitters, Inc. operates as an apparel and accessories retailer in the United States and Canada. The company offers denim wear, sweaters, graphic t-shirts, fleece, outerwear, and accessories targeting 15 to 25 year old girls and guys under the American Eagle brand name; and clothing and accessories for kids through online under the 77kids by American Eagle brand name. AEO sells at 16 times this year’s earnings and less than 15 times next year’s consensus. It also has just under $4/share in cash on its balance sheet. Insiders have bought over 600,000 shares recently as well. Both its Aerie and 77Kids concepts have plenty of growth ahead of them. Given its valuation, cash on hand, and growth opportunities; it would not be hard to imagine a bigger apparel retailer purchasing AEO. Most likely, given its strong cash flow and no debt; a buyout by a private equity concern is more likely. Either way, the stock is undervalued at $16.
Force Protection (NASDAQ:FRPT): Force Protection, Inc., together with its subsidiaries, engages in the design, manufacture, testing, delivery, and support of blast and ballistic protected vehicles. The company’s specialty vehicles protect their occupants from landmines, hostile fire, and improvised explosive devices (IEDs). Its vehicle platforms comprise The Buffalo, a mine protected clearance vehicle; and The Cougar, a family of medium-sized blast and ballistic-protected vehicles, including The Cougar Mastiff, a 6-wheeled vehicle, and The Cougar Ridgeback, 4-wheeled vehicle; and The Cheetah, a lighter weight 4-wheeled vehicle. FRPT is selling at under 13 times this year’s earnings and little over 11 times next year’s projected earnings. Cash on balance sheet is over $2/share and represents over 40% of the stock price. This makes Force Protection a ridiculously cheap stock, and a good acquisition target for a major defense contractor looking to fill out is portfolio.

Disclosure: I am long MSFT.