6 Rallying Takeover/LBO Targets With Strong Sources Of Profitability

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 |  Includes: ATHN, CA, FINL, LKQ, ROST, TLRD
by: Kapitall

Analysts closely follow potential takeover/leveraged buyout (LBO) targets because, on the announcement of a takeover, the target stock usually jumps in price to reflect the premium being paid for the company. If you're interested in this trading strategy, here are some ideas to get you started.

We compiled a list of potential takeover/LBO targets from various sources including iStockAnalyst and CNN Money. We then ran DuPont analysis of return on equity (ROE) on these companies to find those with strong sources of profitability.

DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

We therefore focus on companies with the following positive 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 with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the 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 likely takeover candidates? Use this list as a starting point for your own analysis.

List sorted alphabetically.

1. athenahealth, Inc. (NASDAQ:ATHN): Provides ongoing billing, clinical-related, and other related services to medical group practices primarily in the United States. Takeover/LBO target rumor sourced from Seeking Alpha. The stock is currently rallying 6.60% above its 20-day MA, 7.10% above its 50-day MA, and 11.71% above its 200-day MA. MRQ net profit margin at 6.31% vs. 6.07% y/y. MRQ sales/assets at 0.264 vs. 0.261 y/y. MRQ assets/equity at 1.439 vs. 1.573 y/y.

2. CA Technologies (NASDAQ:CA): Designs, develops, markets, delivers, licenses, and supports information technology management software products that operate on a range of hardware platforms and operating systems. Takeover/LBO target rumor sourced from Seeking Alpha. The stock is currently rallying 17.46% above its 20-day MA, 22.67% above its 50-day MA, and 20.25% above its 200-day MA. MRQ net profit margin at 20.82% vs. 17.48% y/y. MRQ sales/assets at 0.107 vs. 0.096 y/y. MRQ assets/equity at 2.058 vs. 2.176 y/y.

3. Finish Line Inc. (NASDAQ:FINL): Operates as a mall-based specialty retailer in the United States. Takeover/LBO target rumor sourced from Seeking Alpha. The stock is currently rallying 6.44% above its 20-day MA, 5.01% above its 50-day MA, and 2.58% above its 200-day MA. MRQ net profit margin at 1.97% vs. 1.58% y/y. MRQ sales/assets at 0.412 vs. 0.386 y/y. MRQ assets/equity at 1.394 vs. 1.463 y/y.

4. LKQ Corp. (LKQX): Provides replacement parts, components, and parts needed to repair vehicles, primarily cars and trucks in the United States and Canada. Takeover/LBO target rumor sourced from CNBC. The stock is currently rallying 1.77% above its 20-day MA, 6.81% above its 50-day MA, and 20.75% above its 200-day MA. MRQ net profit margin at 6.28% vs. 5.91% y/y. MRQ sales/assets at 0.309 vs. 0.276 y/y. MRQ assets/equity at 1.607 vs. 1.65 y/y.

5. The Men's Wearhouse, Inc. (MW): Operates as a specialty retailer of men's suits in the United States and Canada. Takeover/LBO target rumor sourced from Seeking Alpha. The stock is currently rallying 1.15% above its 20-day MA, 8.40% above its 50-day MA, and 12.88% above its 200-day MA. MRQ net profit margin at 6.82% vs. 4.59% y/y. MRQ sales/assets at 0.405 vs. 0.391 y/y. MRQ assets/equity at 1.402 vs. 1.425 y/y.

6. 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. Takeover/LBO target rumor sourced from Seeking Alpha. The stock is currently rallying 0.14% above its 20-day MA, 6.10% above its 50-day MA, and 22.75% above its 200-day MA. MRQ net profit margin at 7.04% vs. 6.48% y/y. MRQ sales/assets at 0.643 vs. 0.633 y/y. MRQ assets/equity at 2.199 vs. 2.305 y/y.

*Accounting data sourced from Google 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.