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The one consistent in this year's rocky market has been mergers and acquisitions. With that in mind, I thought I'd take a look for potentially undervalued companies with cash rich balance sheets that could make tempting targets for a leveraged buyout.

To start, I took the Russell 1000 and only included companies with more cash on their balance sheet than debt. I then eliminated any company with returns on invested capital below 9%. Finally, I sorted the remaining companies on an EV / EBITDA basis. The following are the 15 top ranked stocks.

Ticker Company EV / EBITDA ROIC P/E
LEXMARK INTL-A 2.51 24.66% 5.83
AARON'S INC 2.61 16.42% 16.69
HUMANA INC 2.69 22.16% 10.98
VISHAY INTERTECH 2.77 21.85% 7.89
CAREER EDUCATION 2.78 33.31% 5.85
TELLABS INC 2.88 9.55% 20.05
ITT EDUCATIONAL 3.04 229.96% 6.51
AEROPOSTALE INC 3.15 88.46% 7.61
AOL INC 3.25 14.28% 67.97
WELLPOINT INC 3.28 13.78% 10.95
APOLLO GROUP-A 3.30 71.89% 8.02
WESTERN DIGITAL 3.48 36.82% 9.59
GAP INC/THE 3.52 45.72% 9.62
TERADYNE INC 3.55 54.34% 7.95
WASHINGTON POS-B 3.81 14.99% 10.49

With an average EV / EBITDA barely 3 despite an average ROIC of over 45%, shares certainly look cheap. In particular, several of the stocks look worthy of a second look.


The former dial up giant has been a disaster since peaking at the turn of the century. However, the current CEO is a former Google (NASDAQ:GOOG) exec who seems committed to turning AOL into a content giant, the company still has several valuable properties, and the company may be trading for a discount to the sum of its parts.

The Gap (NYSE:GPS) and Aeropostale (NYSE:ARO)

Both stocks have been crushed over the past year on concerns over poor same store sales and rising commodity prices. However, at today's prices, the companies are trading at prices that imply their brands are going into permanent decline. In the present day, both companies are generating tremendous cash flows and buying incredible amounts of cash. The retail sector has seen tons of interest from private equity lately, and both companies are trading for huge discounts to the valuations similar companies like J. Crew were purchased for. If either ARO or GPS can show signs of growing again, the stock prices should have a long way to run.

Lexmark (NYSE:LXK)

Despite a history of huge profitability and repurchasing over 1/3 of shares outstanding in the past five years, Lexmark trades for dirt cheap valuations. Investors are basically fearful of the future of the printing industry in an increasingly paperless world. However, Lexmark has some potential product hits on the horizon, and a private equity firm could find its huge cash flows attractive for heaping debt on, or Dell (NASDAQ:DELL) could see them as a tempting strategic target to compete with Hewlett-Packard (NYSE:HPQ).

Disclosure: I am long ARO.

Source: 15 Cash-Rich Leveraged Buyout Candidates