12 Takeover And LBO Targets Well Below Their Graham Numbers

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 |  Includes: ARO, BBY, CRUS, DGIT, ELNK, HRS, IRDM, OMX, RSH, SEE, STI, TAP
by: Kapitall

Analysts speculate about potential takeover/leveraged buyout targets because when a firm announces that it is being taken over or acquired, the target’s stock often jumps in price to reflect the takeover premium paid by the acquirer.

We compiled a universe of rumored potential takeover/LBO targets from various sources, including The Motley Fool and iStockAnalyst. We screened these stocks for those that are trading at significant discounts to the Graham Number.

Benjamin Graham, the “godfather of value investing” and one time mentor of Warren Buffett, developed an equation to calculate the fair value of a stock, known as the “Graham Number.” When stocks are trading at significant discounts to this number, they are considered undervalued relative to it.

The Graham Number only requires two data points: current earnings per share and current book value per share. 
The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). 

This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. (To access a complete analysis of this list's recent performance, click here.)

Do you think these companies are at attractive valuations for a takeover? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by Graham.

1. OfficeMax Incorporated (NYSE:OMX): Specialty Retail, Other Industry. Market cap of $531.48M. Takeover/LBO rumor sourced from CNN Money. TTM Diluted EPS at $0.46, MRQ Book Value Per Share at $7.23, Graham number at $8.65 (vs. current price at $6.18, implies a potential upside of 39.98%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.65). The stock is a short squeeze candidate, with a short float at 20.22% (equivalent to 5.31 days of average volume). The stock has had a couple of great days, gaining 18.39% over the last week.

2. Molson Coors Brewing Company (NYSE:TAP): Beverages Industry. Market cap of $8.11B. Takeover/LBO rumor sourced from Seeking Alpha. TTM Diluted EPS at $3.58, MRQ Book Value Per Share at $43.50, Graham number at $59.19 (vs. current price at $43.30, implies a potential upside of 36.71%). The stock has gained 2.56% over the last year.

3. Best Buy Co. Inc. (NYSE:BBY): Electronics Stores Industry. Market cap of $9.51B. Takeover/LBO rumor sourced from CNN Money. TTM Diluted EPS at $3.10, MRQ Book Value Per Share at $16.72, Graham number at $34.15 (vs. current price at $25.43, implies a potential upside of 34.29%). Might be undervalued at current levels, with a PEG ratio at 0.84, and P/FCF ratio at 7.19. The stock has had a couple of great days, gaining 6.18% over the last week.

4. Iridium Communications Inc. (NASDAQ:IRDM): Communication Equipment Industry. Market cap of $540.29M. Takeover/LBO rumor sourced from Seeking Alpha. TTM Diluted EPS at $0.44, MRQ Book Value Per Share at $9.47, Graham number at $9.68 (vs. current price at $7.38, implies a potential upside of 31.20%). The stock is a short squeeze candidate, with a short float at 20.89% (equivalent to 18.57 days of average volume). The stock has performed poorly over the last month, losing 13.48%.

5. Sealed Air Corporation (NYSE:SEE): Packaging & Containers Industry. Market cap of $2.79B. Takeover/LBO rumor sourced from Seeking Alpha. TTM Diluted EPS at $1.42, MRQ Book Value Per Share at $16.08, Graham number at $22.67 (vs. current price at $17.42, implies a potential upside of 30.12%). The stock is currently stuck in a downtrend, trading 5.28% below its SMA20, 17.39% below its SMA50, and 28.48% below its SMA200. The stock has performed poorly over the last month, losing 19.09%.

6. SunTrust Banks, Inc. (NYSE:STI): Money Center Banks Industry. Market cap of $10.64B. Takeover/LBO rumor sourced from Business Insider. TTM Diluted EPS at $0.81, MRQ Book Value Per Share at $36.40, Graham number at $25.76 (vs. current price at $19.82, implies a potential upside of 29.95%). The stock has had a couple of great days, gaining 15.37% over the last week. The stock has performed poorly over the last month, losing 19.07%.

7. Cirrus Logic Inc. (NASDAQ:CRUS): Semiconductor Industry. Market cap of $996.26M. Takeover/LBO rumor sourced from Seeking Alpha. TTM Diluted EPS at $2.71, MRQ Book Value Per Share at $6.04, Graham number at $19.19 (vs. current price at $15.28, implies a potential upside of 25.59%). The stock has had a couple of great days, gaining 16.55% over the last week.

8. DG FastChannel, Inc. (NASDAQ:DGIT): Business Services Industry. Market cap of $578.44M. Takeover/LBO rumor sourced from iStockAnalyst. TTM Diluted EPS at $1.67, MRQ Book Value Per Share at $18.48, Graham number at $26.35 (vs. current price at $21.08, implies a potential upside of 25.01%). The stock is a short squeeze candidate, with a short float at 13.24% (equivalent to 7.25 days of average volume). The stock has had a couple of great days, gaining 17.83% over the last week.

9. RadioShack Corp. (NYSE:RSH): Electronics Stores Industry. Market cap of $1.31B. Takeover/LBO rumor sourced from CNN Money. TTM Diluted EPS at $1.46, MRQ Book Value Per Share at $8.10, Graham number at $16.31 (vs. current price at $13.13, implies a potential upside of 24.24%). The stock has had a couple of great days, gaining 12.32% over the last week.

10. Aeropostale, Inc. (NYSE:ARO): Apparel Stores Industry. Market cap of $935.66M. Takeover/LBO rumor sourced from Seeking Alpha. TTM Diluted EPS at $1.86, MRQ Book Value Per Share at $4.42, Graham number at $13.60 (vs. current price at $11.59, implies a potential upside of 17.35%). The stock has performed poorly over the last month, losing 31.22%.

11. Harris Corp. (NYSE:HRS): Communication Equipment Industry. Market cap of $5.04B. Takeover/LBO rumor sourced from Seeking Alpha. TTM Diluted EPS at $4.60, MRQ Book Value Per Share at $20.29, Graham number at $45.83 (vs. current price at $39.63, implies a potential upside of 15.63%). Might be undervalued at current levels, with a PEG ratio at 0.89, and P/FCF ratio at 13.22. The stock is a short squeeze candidate, with a short float at 11.06% (equivalent to 9.78 days of average volume). The stock has had a couple of great days, gaining 13.72% over the last week.

12. EarthLink Inc. (NASDAQ:ELNK): Internet Service Providers Industry. Market cap of $790.03M. Takeover/LBO rumor sourced from The Motley Fool. TTM Diluted EPS at $0.45, MRQ Book Value Per Share at $7.06, Graham number at $8.45 (vs. current price at $7.33, implies a potential upside of 15.34%). The stock is a short squeeze candidate, with a short float at 8.63% (equivalent to 5.08 days of average volume). The stock has had a couple of great days, gaining 5.32% over the last week.

EPS and BVPS data 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.