Seeking Value in Barron's Leveraged Buyout Candidates List, Part 3

by: Margin of Safety Investor

In this article, the third and final in the series, I cover the final 8 companies featured in Barron's LBO candidate list. Parts I and II are here and here.

Men's Wearhouse (MW): The stock price of the men's clothier jumped 38% in the past year and appears pricey at today's levels. A PE of 26 and EV/EBITDA of 8.2 makes the company overvalued compared with other retailers on this list.

Molex (NASDAQ:MOLX): MOLX makes small electronics components like SIM card sockets and internal antennas. Like other contract manufacturers, profits fell off in 2008, and 2009, but have risen back to pre-recession levels. A private equity firm may be able to squeeze higher margins from the operations by cutting out some of the high SG&A expense and increase the firm's value. However, if MOLX maintains the status quo, I think the company is overvalued at $27, suggesting the buyout premium is already reflected in the price.

Nordstrom (NYSE:JWN): One of Fortune's Most Admired Companies, the high-end retailer generates margins and ROE well above its peers. With 6.3% net margins and inventory turnover of 6.3, JWN's "true" profit margin is a whopping 36%! Mr. Market has factored this all in and at $48, JWN is no bargain.

Radioshack (NYSE:RSH): The venerable electronics retailer is a favorite among value investors for good reason. With a PE under 10 and EV/EBITDA of 4, it is one of the cheapest stocks in the >$1B universe. Trading at $16, RSH looks significantly undervalued and could double from here. The company is buying back large amounts of stock, even adding debt to do so. I wouldn't be surprised to see either a takeover or a management led buyout here, but declining FCF margins are a bit of a concern.

Ross Stores (NASDAQ:ROST): One of the best run retailers this side of Nordstrom, ROST current offers better values in its stores. At $88, the stock is rich even for a company that averages a 30% ROE.

SAIC (SAI): The IT and Security outsourcer for the government has seen its business boom over the last 5 years. Revenues grew by 50% but shares outstanding increased significantly as well, diluting shareholders. The boom will need to continue in order for a new investor to profit, as the shares look fairly valued at $17.

Sealed Air (NYSE:SEE): The packaging leader is another perennial buyout candidate. Averaging a FCF margin of 8.2% over the last 10 years, the company has a strong history of cash generation. Sales are currently hovering around 2006 levels, so any improvement should flow straight to the bottom line. If growth materializes, SEE could trade into the low $30s, about a 20% upside to today's price.

Tech Data (TECD): An IT distributor and competitor to Ingram Micro (NYSE:IM) [covered in Part II], the company appears undervalued. In a highly competitive industry full of product changes and uncertainty, management is crucial. At the recent Value Investing Congress, Kian Ghazi gave a bullish presentation on the industry, and IM in particular.

After reviewing the 27 companies on the original list, 10 look like buys or are deserving of more research: ARO, DOX, AEO, CA, IM, HRS, LNCR, RSH, and SEE.

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

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