Seeking Value in Barron's Leveraged Buyout Candidates List, Part 2

by: Margin of Safety Investor
Last week I covered the first 9 companies from a recent Barron’s report of 27 possible LBO candidates. Today, I’ll look into the investment considerations of the next 9 on the list.
Collective Brands (NYSE:PSS): The shoe retailer is best known for its Payless and Stride Rite brands. With a history of positive free cash flow over the last ten years, PSS showed even stronger results in 2009 and 2010. At $22, PSS seems fairly valued, and the recent growth in accounts receivables is a red flag for slower growth going forward.
DSW Inc (NYSE:DSW): The discount shoe store has long been a rumored buyout target and shares have had a big run over the last six months. The stock seems way overvalued here and I’d be surprised to see a buyout at these levels.
Finish Line (NASDAQ:FINL): Yet another shoe store chain, FINL looks cheap with an EV/EBITDA ratio of 6 and $200M in net cash on its balance sheet. While the company has gotten more efficient, sales have been flat for five years and with a run up in price from $1.75 in 2007 to above $21 today, there doesn’t seem to be much upside from here.
Genesco (NYSE:GCO): The mall based retailer is best known for its Journeys and Hat World stores. Like DSW and FINL, the stock has been boosted by the recent retail takeovers of J Crew and Jo Ann Stores. GCO has the best revenue growth of the bunch and could be a nice growth play. As a value investor who doesn’t like to pay up for growth, I’ll sit this one out.
Harris (NYSE:HRS): HRS currently shows up on several value screens, including Joel Greenblatt’s Magic Formula. The communications equipment provider is a major supplier to US Armed Forces and 50% of its revenue comes from the Federal Government. With a PE near 10 and an EV/EBITDA of 6.4, the stock is relatively cheap compared to other large caps. I’d be interested if there was a pullback in its price. If you’re looking for a good bullish case on HRS, read Tom Armisted’s article here.
Ingram Micro (NYSE:IM): The wholesale distributor of IT products saw its profits squeezed during the slowdown in 2008 and 2009 as companies cut back on their IT spending. IM sells below its tangible book value and just 10% above its net current asset value which is rare for a midcap company with such a strong balance sheet. The industry is brutally competitive and there is always a large inventory risk as many of the products they sell may become obsolete. Shares do look attractive at this level, but I don’t think there is enough downside protection given the uncertain future outlook.
Jabil Circuit (NYSE:JBL): Over the past decade, JBL has turned razor thin margins into positive free cash flow because of its high asset turnover. The cyclicality of the contract manufacturing business doesn’t leave much room for error though and at $20 is at the high end of my value range. The stock is very volatile and may give an active investor an opportunity for a good price in the future.
Limited Brands (LTD): The company behind Victoria’s Secret and Bath & Body Works is overvalued, selling at higher multiples than the other retailers on this list. The company has a lot of debt and lease obligations that could pose potential problems for any leveraged buyout offers.
Lincare Holdings (NASDAQ:LNCR): Lower reimbursement rates for home oxygen therapy have hurt LNCR’s margins over the last few years. In response, they’ve increased their market share and efficiency ratios as other competitors have exited the business. While free cash flow margins averaged an outstanding 20% over the last decade, they’ll probably settle around the mid-teens where they currently stand. Even with lower margins and a hefty debt load, the stock would be attractive on a pullback as they currently are in the middle of my $30-$40 fair value range.
McGraw-Hill (MHP): The publishing giant took a big hit in 2009 because of its S&P division’s role in the financial crisis. However, MHP generates substantial revenue from textbooks, Capital IQ, and JD Power, among others. The market recognizes this fact and MHP now trades near a 52 week high just above $40. MHP is fairly valued at this point but provides a lesson to value investors- wait for the right pitch. MHP sold as low as $20 in 2009 and was still available for $27 last summer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.