Investing in stocks with reasonable valuations, strong management teams and with solid business models always makes sense, but if you want to put some extraordinary potential in your portfolio, it's worthwhile to consider companies that could be takeover targets. A number of high-profile deals have occurred in 2011, such as Warren Buffet's Berkshire Hathaway Inc's (BRK.B) agreement to buy chemical maker Lubrizol (LZ), Google (GOOG) agreeing to buy Motorola Mobility (MMI) and many others. With many companies holding huge amounts of cash on their balance sheets and interest rates still near record lows, it is likely that this acquisition spree will continue.
With that in mind, I have researched a few names that fit the criteria for a takeover, and are therefore more likely to be looked at as a buyout target. Some of these names have been considered to be buyout targets by multiple sources or analysts in the past, but all of them have seen recent potential interest as well. These are solid companies that appear undervalued and likely to rise over the next few months whether or not they are acquired. I have focused some companies in the oil sector as well as a beverage company which appear to be deeply undervalued and likely to rebound sharply due to either more action from a major activist shareholder and/or a possible takeover. Here are some of the names worth looking at:
Central European Distribution Corp's. (CEDC) shares are trading at $3.08. CEDC is a leading beverage distribution company, based in Pennsylvania. The 50-day moving average is $5.82 and the 200-day moving average is $10.19. Earnings estimates for CEDC are 32 cents per share in 2011 and 62 cents for 2012. The 52 week range is $2.75 to $28.08. Book value is stated at $9.76. About 3 analysts out of 18 that cover this stock recently downgraded it, and that led to a sharp drop in what looks to be forced margin call selling and late to the party shorts piling on. However, there are many more analysts that still have buy ratings on the stock and according this article the average price target is about $10.22 per share.
The downgrades seem to be due to disappointment in management and concerns over debt. However, the debt concerns appear overblown. Moody's recently rated CEDC debt as B2. This stock has a very volatile history and has traded at single digit levels only to rally much higher. For example, the week of July 7, 2008, it traded for about $75.90 per share, then the shares dropped to about $6 in February, 2009. Then, in April 2010, the stock soared from the $6 level to about $40 per share. Now the stock is trading for about $3, and I won't be surprised to see another big move to the upside. Insiders have been loading up on shares and have bought millions of dollars worth this year alone. In fact, some large purchases were made as recently as August for about $6 per share. I would imagine that insiders who were interested in buying it for $6 a few weeks ago would be even more interested in buying at half that price now. However, it might be that insiders are restricted from buying now, if the company is in the process of negotiating a buyout offer or some other major deal.
There is strong reason to believe the company is a takeover target, especially due to two recent developments that occurred just a few weeks ago: 1) Management could have sensed buyout interest from other parties, and they also appear to have realized that the low share price made the company a likely takeover target as well. Because of this, management recently adopted a poison pill to prevent a hostile takeover. 2) Shortly after the poison pill agreement was adopted, an investor named Mark Kaufman announced he had acquired a 9.6% stake in the company, a move that made him the largest shareholder. He stated in a letter to the company that he:
wanted to contribute ideas and facilitate additional investment in the company, including further investment from himself.
Mr. Kaufman is a very wealthy investor who was formerly the CEO of Whitehall Group, a leading importer and distributor of wines and spirits in Russia. He is a Co-Chairman of the Moet-Hennessy Advisory Board for Russia. Moet Hennessy is part of the giant French luxury company LVMH Moet-Hennessy, which is primarily owned by French Billionaire Bernard Arnault, and publicly traded in Europe. Between the financial resources, industry knowledge and contacts that Mr. Kaufman has, combined with the high insider ownership from CEDC management, I believe we will see a rebound and/or a buyout in this company that will make some of the recent analyst downgrades look very foolish. I am certain we have not heard the last of Mr. Kaufman, and I bet both he and CEDC management will find a way to turn a nice profit on their recently purchased shares. When Mr. Kaufman announced his stake, the stock jumped about 50% in one day, and that was from higher levels. I believe that investors and shorts who are following short-sighted analysts who lack real experience in this industry and do not have millions invested in this company will be sorry. I think the low share price and Mr. Kaufman are the catalysts that will lead to the takeover of this company by perhaps, LVMH Moet-Hennessy (LVMUY), Diageo (DEO), Constellation Brands (STZ) or another. At about $3, this stock is priced like an option, and if a couple things go right, it could be a five to ten-bagger in a couple of years.
Exco Resources, Inc. (XCO) is trading around $10.81. Exco is an onshore North American oil and natural gas properties, and is based in New York. These shares have traded in a range between $9.33 to $21.04 in the last 52 weeks. The 50-day moving average is $11.78 and the 200-day moving average is $16.65. XCO is estimated to earn about 72 cents per share in 2011, and $1.06 in 2012. XCO pays a dividend of 16 cents per share which is equivalent to a 1.2% yield. The book value is stated at $7.69. Billionaire Wilbur Ross recently bought over $10 million worth of this stock and now owns about 9.8% of the company. Exco has been considered to be a takeover target for the past couple of years when T.Boone Pickens tried to make a deal for the company that was never consummated. Read more on that, and about the recent buying by Wilbur Ross.
Key Energy Services (KEG) is trading at $13.39. Key provides maintenance and other services to oil and gas companies. These shares have traded in a range between $8.27 to $20.77 in the last 52 weeks. The 50-day moving average is $11.87 and the 200-day moving average is $14.93. KEG is estimated to earn 98 cents per share in 2011 and $1.61 in 2012. The book value is $6.84 per share. In terms of PE ratios, this appears to be one of the cheaper oil stocks in the market. According to a recent article, Baker Hughes (BHI) is said to be seeking acquisitions, and Key Energy Services (KEG) could be on their shopping list.
McDermott International (MDR) shares are trading at $11.16. McDermott provides engineering and construction services primarily for offshore oil and gas projects. The shares have traded in a range between $9.34 to $26.14 in the past 52 weeks. The 50-day moving average is $12.66 and the 200-day moving average is $18.51. Earnings estimates for MDR are just $1.19 per share in 2011, and $1.55 for 2012, so the PE ratio is about 6.5 times forward earnings. MDR shares plunged this week after earnings were announced, and closed down about 25%. Some projects were not as profitable as expected this quarter, but the company will likely improve operations in the coming months. With the stock trading at depressed levels, some investors believe this company could be an attractive takeover target for Halliburton (HAL), Baker Hughes (BHI) or Fluor (FLR). Options trading for this stock recently heated up due to takeover speculation.
Range Resources (RRC) shares are trading at $69.76. Range is engaged in natural gas exploration and production. The 50-day moving average is about $66.85 and the 200-day moving average is $58.30. Earnings estimates for RRC are about $1.05 per share in 2011 and $1.46 for 2012. RRC might be an interesting target for a major oil or natural gas company. These shares have been considered to be a buyout target by many investors and analysts. Range Resources is a top takeover candidate, according to Morningstar.
Energy XXI (EXXI) is trading around $30.25. Energy XXI is a independent oil and gas company, based in Bermuda. These shares have traded in a range between $18.79 to $37.20 in the last 52 weeks. The 50-day moving average is $24.68 and the 200-day moving average is $30.20. EXXI is estimated to earn about $2.98 per share in 2011 and $3.76 in 2012. Analysts see revenues and profits for EXXI jumping in 2012, as new wells come into play and rising energy prices boost profit margins. Analysts at UBS have suggested that this company could be a takeover target for a larger firm.
The data is sourced from Yahoo Finance and Insidercow.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes only.
Disclosure: I am long CEDC.