By Darnell Brown
Some companies become buyout targets because their stock price is less than the company’s intrinsic value. Other companies are targeted for buyouts because their cash on hand can be used to offset the price of the purchase. In either case, the stock holders of a company that is bought out will usually make a substantial profit.
It is expected that in 2011 we will see an increase in company buyouts. One result of the recession is that corporations have cut back on spending cash. It is estimated that corporations worldwide have 4.3 trillion in cash sitting on their balance sheets. As the recession eases, a number of these corporations will be ready to buy companies that exhibit favorable buyout characteristics. Here, is a list of six companies that are being evaluated for their buyout potential.
Symantec Corporation (SYMC) Symantec is a worldwide provider of security, data storage and system management solutions for businesses and individual consumers. Symantec’s most widely known product is its Norton Anti Virus Security system.
Symantec has a market cap of $14.37 billion. The stock has traded in a 52-week range of $12.04 to $20.50. The stock’s current price is $19.04. The company’s stock has been in an upward trend and is currently near the top of its 52-week trading range. This stock is up 40.9% since September of 2010.
Generally, a stock would have to be cheap for the company to be considered a buyout target. In the case of Symantec, its P/E ratio of 13 is considered to be cheap and therefore there is room for a bid over the market price. Also, the company is holding cash and cash equivalents of $2.96 billion. Recently the McAfee computer security company was purchased by Intel (INTC). This purchase has peaked interest in security software companies. There are a number of large cash-heavy tech companies that are looking for acquisitions and could be interested in Symantec.
I think the Symantec Corporation has strong growth potential, and has a cheap stock price. The possibility that this company could be the target for a buyout is also attractive. I will recommend this stock as a Buy.
Peet’s Coffee and Tea Inc. (PEET) Peet’s Coffee and Tea sell roasted coffee beans and teas. It also sells bagged tea, whole leaf tea and specialty food items.
Peet’s Coffee and Tea has a market cap of $782.35 million. The stockholder equity is $172.5 million. The stock is trading at $61.04 toward the top of its 52-week trading range of $33.20 to $62.86. The stock is also above its 50-day and 200-day moving average.
In March 2011, money manager Louis Navellier predicted that Starbucks (SBUX) was looking to purchase a coffee holding company. Rumors had it that (PEET) might be the buyout target. Since that time, the stock of Peet’s Coffee and Tea had enjoyed a tremendous run up. With a P/E ratio of 41.50, the stock is probably a bit extended. Also, first quarter earnings were $5.513 million, which is down from the previous quarter’s earnings of $6.432 million. At its current price, I do not think that Peet’s Coffee and Tea is a good buyout target. Recent coffee prices are up but not by enough to justify this stock's recent valuation. I would rate this stock as a Hold.
CEDC Group (CEDC) This company was founded in Poland and is now the world’s largest producer and distributor of vodka.
CEDC has a market cap of $760 million with stockholder equity of $1.564 billion. The company's 3 year growth is down 26%. The stock has been in a downward trend; over the last 6 months the stock is down 55.9%. The stock has traded in a 52-week range of between $9.92 and $28.0, and is currently trading at $10.40, which is about half of its book value.
Because of the company’s low stock price and substantial revenue, it could be an attractive takeover target. There has been some takeover talk regarding CEDC. One large company, Diageo (DEO), has confirmed that it is looking for acquisitions.
It seems clear that CEDC’s intrinsic value is greater than its market cap indicates. At $10.40, the stock is a bargain. If the CEDC group were to be bought out, stockholders would probably receive a nice premium. I rate this stock a Buy.
Salesforce.com Inc. (CRM) Salesforce.com helps manage customer account records, store and analyze customer information, analyze marketing campaigns and provide post-sales customer service.
The company has a market cap of $20.2 billion with $1.276 billion in stockholder equity. This company has been doing remarkably well. Over the last five years, the company’s earnings per share have grown at a rate of 55.18 %. Over the same period, the company’s free cash flow has grown by 66.84%. The company stock has reflected the growth. The 52-week stock price has ranged from $89.45 to $160.12. The stock is currently trading near the high end of its range at $151.42.
Salesforce.com has a high valuation with a P/E ratio of 123. However, even with its high valuation the company is a good buyout candidate. The company had cash on hand of over $684 million at the end of the first quarter and earned a substantial amount of free cash. It appears that Salesforce.com will continue to be an industry leader and enjoy strong earnings growth. The possibility of a buyout should also be considered when evaluating the stock. I rate this stock a Buy.
Abercrombie and Fitch Co. (ANF) The Abercrombie and Fitch company sells casual clothes and sportswear for men, women and children. It has stores in North America, Europe and Japan.
Abercrombie and Fitch has a market cap of $6.71 billion and a book value of $1.89 billion. Over the past couple of months, the stock has been in an uptrend. The stock has a 52-week range of $36.61 to $78.25. Today the stock is trading at $76.97, close to its 52-week high.
In March 2011, there were rumors that Abercrombie and Fitch might be the target of a takeover. Those rumors never came true but since that time the stock has had a strong run up. The company’s first quarter earnings were $544 million, down from the previous quarter’s earnings of $731 million. Also with a P/E of 31 the stock is not cheap. I cannot see any reason to believe Abercrombie and Fitch will be bought out anytime soon, nor do I believe that the stock price will continue to rise. I rate this stock a Hold.
MannKind Corporation (MNKD) MannKind Corporation develops and sells therapeutic products that help patients with diabetes and cancer.
MannKind Corporation has a market cap of $463.9 million and a book value of $ -185.5 million. The company does not have a P/E as it has never reported a profit. MannKind Corp had zero revenue in 2010, and $93,000 in revenue in 2011. The stock is 64.68% off its 52-week high. Year-to-date, it is down 56.71%. The stock’s current price is $3.55, and the 52-week range is $3.40 to $10.05.
Even though MannKind’s financial data looks terrible the company does have some decent news to report. The company has developed a drug named Afrezza, an inhaled insulin that offers many advantages over injected insulin. If Afrezza receives FDA approval, it could be a blockbuster drug that would make MannKind Corp a legitimate buyout candidate.
While Afrezza has enormous potential, do not expect a product release anytime soon. On January 19, it was announced that the FDA would not approve Afrezza without further human studies. These studies could hold up approval of the drug for two years.
MannKind Corporation is in the unenviable position of having diminishing cash reserves, negative assets ($-185.5 billion) and no other promising drugs in its pipeline. Afrezza seems to be MannKind Corporation's only chance of making a profit. I would not recommend investing in MannKind Corporation and then waiting two years to see if Afrezza works out. I rate this stock a Hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.