Many corporations have huge amounts of cash sitting on the balance sheet, and that money is earning close to nothing in this low interest rate environment. The U.S. Federal Reserve recently affirmed it would continue with a low-rate policy in order to help boost the economy until at least 2012. We know that investors and savers have been hurt by low rates and it has forced many of them into high-yielding dividend stocks. Corporations are not as easily able to invest cash assets into the stock market due to the risks of losses and the appearance of becoming more of a mutual fund than a focused company.
Companies like Apple (AAPL) have nearly $100 billion sitting on the balance sheet and management needs to find ways to create shareholder value with it. Companies can buy back stock, or pay a special dividend, but sometimes the best solution is to buy an entire company, in some cases a direct competitor, or a growing upstart in a related field that provides some synergy.
Furthermore, the best time to make an acquisition is when equity valuations are reasonable, as they are now. A few high-profile deals have already occurred in 2012, and with many corporations holding large cash balances that earn next to nothing, the buyouts are likely to continue. The stocks below are appear undervalued and have upside potential whether or not they are acquired, but as an added bonus, these names are considered to be takeover targets by analysts and investors:
Leap Wireless (LEAP) is a wireless communications provider. At least one analyst believes that this stock could fetch about $13 per share in a takeover, due to the spectrum and cash flow value. With the stock currently trading below $9 per share, that leaves plenty of upside potential. A JPMorgan analyst thinks that AT&T (T) might seek to acquire this company since the T-Mobile Merger was called off. Based on the book value of $8.81 per share, this stock looks undervalued, and a buyout would be a great way to unlock value for shareholders. These shares look like an interesting, but speculative buy now.
MetroPCS Communications (PCS) is a leading provider of pre-paid wireless and broadband services. This company looks like an even more likely takeover target from a company like AT&T because the stock is trading at about half the 52-week high, plus this company is solidly profitable. A buyout could enable a spectrum increase for the acquiring company and that was reportedly a motivation for AT&T to buy T-Mobile. The same JPMorgan analyst considers this company to be a potential target as well. With this stock trading around $9 per share, which is just above book value of $7.81 per share, this stock has upside with or without a takeover.
Huntsman Corporation (HUN) is a specialty chemical company and is based in Utah. Eastman Chemical Company (EMN) recently agreed to buy Solutia (SOA) at a very attractive valuation. This is waking up the sector and investors are realizing that these stocks are undervalued when compared to the valuations achieved on the Solutia deal. One article sums up the potential and states:
"Huntsman is at a very attractive valuation," said Jake Dollarhide, CEO of Longbow Asset Management in Tulsa, Oklahoma. "Chemicals have always been an economic play. If you think the recovery is in its infancy, then chemical investments could be a home run."
Huntsman shares are trading around $13 per share and well below the 52-week high of $21.52. Earnings estimates for HUN are at $1.67 in 2011, so the stock looks undervalued in terms of the PE ratio as well. HUN pays a dividend of 40 cents per share which provides a yield of 3.1%. This stock can rise as the economy improves. A takeover would be an added bonus, especially if it was at $24 per share, as some analysts have stated in the article link above.
Celanese Corporation (CE) is another chemical company that could be acquired. This company pays a dividend of 24 cents per share which provides a yield of .5%. Earnings estimates are about $4.74 for 2011 and this puts the PE ratio at about 11 times earnings. Analysts believe this stock could go as high as $70 per share in a takeover and that would be a substantial gain from the current share price of about $50. However, Hunstman shares pay a larger dividend, the PE ratio is lower and the projected buyout price has more potential gains when compared to Celanese, so it makes sense to consider Huntsman shares first.
The data is sourced from Yahoo Finance and Stockcharts.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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.