Seeking Alpha
Value, growth, long-term horizon, medium-term horizon
Profile| Send Message|
( followers)  

Company profitability is not as straightforward as it often appears to be. Although net income is the popular headline number that analysts follow during earnings season, companies can earn these profits in different ways, with some preferred over others. This is why it is important to also study the sources of profits for a company.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

ROE can be broken up into three components such that increases in ROE can be attributed to those components.

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with,

• Decreasing leverage, i.e. decreasing Asset/Equity ratio

• Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

To illustrate this analysis, we ran DuPont on a universe of rumored potential takeover/leveraged buyout (LBO) targets compiled from various sources including CNBC and Wall Street Cheat Sheet.

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 stocks are attractive takeover targets? Use this list as a starting point for your own analysis.

List sorted by increase in ROE.

1. Jabil Circuit Inc. (NYSE:JBL): Provides electronic manufacturing services and solutions in the Americas, Europe, and Asia. Market cap of $4.30B. Takeover/LBO rumor sourced from Seeking Alpha. MRQ Net Profit Margin increased to 2.67% from 1.52% year-over-year, Sales/Assets increased to 0.6065 from 0.6063, while Assets/Equity decreased to 3.78 from 4.04. This is a risky stock that is significantly more volatile than the overall market (beta = 2.01). The stock has gained 24.46% over the last year.

2. American Electric Power Co., Inc. (NYSE:AEP): Engages in the generation, transmission, and distribution of electric power to retail customers. Market cap of $19.19B. Takeover/LBO rumor sourced from Wall St. Cheat. MRQ Net Profit Margin increased to 21.44% from 13.68% year-over-year, Sales/Assets increased to 0.0847 from 0.0815, while Assets/Equity decreased to 3.48 from 3.64. The stock has gained 19.12% over the last year.

3. Symantec Corporation (NASDAQ:SYMC): Provides security, storage, and systems management solutions to secure and manage information. Market cap of $11.96B. Takeover/LBO rumor sourced from Seeking Alpha. MRQ Net Profit Margin increased to 10.83% from 9.19% year-over-year, Sales/Assets increased to 0.14 from 0.13, while Assets/Equity decreased to 2.60 from 2.62. The stock has lost 4.7% over the last year.

4. Xerox Corp. (NYSE:XRX): Engages in the development, manufacture, marketing, service, and finance of document equipment, software, solutions, and services worldwide. Market cap of $11.60B. Takeover/LBO rumor sourced from Seeking Alpha. MRQ Net Profit Margin increased to 5.73% from 4.61% year-over-year, Sales/Assets increased to 0.1828 from 0.1760, while Assets/Equity decreased to 2.33 from 2.52. Might be undervalued at current levels, with a PEG ratio at 0.69, and P/FCF ratio at 9.77. The stock has lost 28.61% over the last year.

5. LKQ Corp. (LKQX): Provides replacement parts, components, and parts needed to repair vehicles, primarily cars and trucks in the United States and Canada. Market cap of $4.41B. Takeover/LBO rumor sourced from CNBC. MRQ Net Profit Margin increased to 6.28% from 5.91% year-over-year, Sales/Assets increased to 0.31 from 0.28, while Assets/Equity decreased to 1.61 from 1.65. The stock has gained 33.99% over the last year.

6. Acorda Therapeutics, Inc. (NASDAQ:ACOR): A commercial stage biopharmaceutical company, involves in the identification, development, and commercialization of therapies for multiple sclerosis (MS), spinal cord injury, and other nervous system disorders. Market cap of $892.18M. Takeover/LBO rumor sourced from Seeking Alpha. MRQ Net Profit Margin increased to 20.28% from 19.55% year-over-year, Sales/Assets increased to 0.26 from 0.19, while Assets/Equity decreased to 1.88 from 2.33. The stock is a short squeeze candidate, with a short float at 12.64% (equivalent to 10.15 days of average volume). The stock has lost 13.96% over the last year.

7. Quality Systems Inc. (NASDAQ:QSII): Develop and market health-care information systems. Market cap of $2.15B. Takeover/LBO rumor sourced from Seeking Alpha. MRQ Net Profit Margin increased to 19.05% from 16.49% year-over-year, Sales/Assets increased to 0.26 from 0.25, while Assets/Equity decreased to 1.55 from 1.63. The stock is a short squeeze candidate, with a short float at 15.55% (equivalent to 8.61 days of average volume). The stock has gained 10.94% over the last year.

8. Staples, Inc. (NASDAQ:SPLS): Operates as an office products company. Market cap of $10.41B. Takeover/LBO rumor sourced from CNN Money. MRQ Net Profit Margin increased to 4.97% from 4.42% year-over-year, Sales/Assets increased to 0.48 from 0.47, while Assets/Equity decreased to 1.90 from 2.05. Might be undervalued at current levels, with a PEG ratio at 0.84, and P/FCF ratio at 12.13. The stock has lost 31.81% over the last year.

9. Cerner Corporation (NASDAQ:CERN): Designs, develops, markets, installs, hosts, and supports healthcare information technology, healthcare devices, and content solutions for healthcare organizations and consumers worldwide. Market cap of $10.21B. Takeover/LBO rumor sourced from Seeking Alpha. MRQ Net Profit Margin increased to 13.79% from 13.16% year-over-year, Sales/Assets increased to 0.2010 from 0.1962, while Assets/Equity decreased to 1.29 from 1.30. The stock is a short squeeze candidate, with a short float at 8.32% (equivalent to 7.37 days of average volume). The stock has gained 30.33% over the last year.

10. Ross Stores Inc. (NASDAQ:ROST): Operates off-price retail apparel and home accessories stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. Market cap of $10.76B. Takeover/LBO rumor sourced from Seeking Alpha. MRQ Net Profit Margin increased to 7.04% from 6.48% year-over-year, Sales/Assets increased to 0.64 from 0.63, while Assets/Equity decreased to 2.20 from 2.31. The stock has gained 46.32% over the last year.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 10 Takeover/LBO Targets With Strong Sources Of Profitability