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Here we offer a helpful way to look at potential takeover targets – by evaluating their levered free cash flow relative to their enterprise value.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares. From this value we subtract cash holdings because, in the event of a takeover, that cash would be used towards the takeover price.

For this article, we screened takeover targets (rumored from various sources) for those that had high amounts of levered free cash flow relative to enterprise value, possibly indicating that the firm is undervalued and therefore an attractive takeover candidate. (To access the complete universe of takeover/LBO targets, click here.)

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Do you think these companies could be taken over? Use this list as a starting-off point for your own analysis.

List sorted by levered free cash flow to enterprise value.

1. Genworth Financial Inc. (NYSE:GNW): Life Insurance Industry. Market cap of $5.46B. Takeover/LBO idea sourced from iStockAnalyst. Levered free cash flow / enterprise value at 18.04% (levered free cash flow at $2.17B and enterprise value at $12.03B). This is a risky stock that is significantly more volatile than the overall market (beta = 3.13). The stock is currently stuck in a downtrend, trading 6.08% below its SMA20, 11.13% below its SMA50, and 12.71% below its SMA200. The stock has lost 23.36% over the last year.

2. American Eagle Outfitters, Inc. (NYSE:AEO): Apparel Stores Industry. Market cap of $2.63B. Takeover/LBO idea sourced from TheStreet.com. Levered free cash flow / enterprise value at 15.59% (levered free cash flow at $296.13M and enterprise value at $1.90B). The stock is currently stuck in a downtrend, trading 9.76% below its SMA20, 12.12% below its SMA50, and 8.25% below its SMA200. It's been a rough couple of days for the stock, losing 7.96% over the last week.

3. Computer Sciences Corporation (NYSE:CSC): Information Technology Services Industry. Market cap of $6.91B. Takeover/LBO idea sourced from Street Insider, Barrons, and Merrill Lynch. Levered free cash flow / enterprise value at 12.96% (levered free cash flow at $1.05B and enterprise value at $8.10B). The stock might be undervalued at current levels, with a PEG ratio at 0.91, and P/FCF ratio at 6.78. The stock has lost 9.02% over the last year.

4. Teradyne Inc. (NYSE:TER): Semiconductor Equipment & Materials Industry. Market cap of $2.94B. Takeover/LBO idea sourced from John Dorfman, chairman of Thunderstorm Capital. Levered free cash flow / enterprise value at 12.64% (levered free cash flow at $283.03M and enterprise value at $2.24B). The stock has performed poorly over the last month, losing 10.86%.

5. Gap Inc. (NYSE:GPS): Apparel Stores Industry. Market cap of $11.20B. Takeover rumor sourced from Barrons. Levered free cash flow / enterprise value at 11.7% (levered free cash flow at $1.12B and enterprise value at $9.57B). It's been a rough couple of days for the stock, losing 16.62% over the last week.

6. Lear Corp. (NYSE:LEA): Auto Parts Industry. Market cap of $3.87B. Takeover rumor sourced from UBS. Levered free cash flow / enterprise value at 10.92% (levered free cash flow at $463.95M and enterprise value at $4.25B). The stock has gained 49.82% over the last year.

*Levered free cash flow and enterprise value sourced from Yahoo! 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.

Source: 6 Takeover/LBO Targets Undervalued Relative to Levered Free Cash Flow