It's only one week to go before Valentine's Day and we're keeping an eye out for any eye-catching stocks that could lure bigger companies into a buyout.
Neogen Corp (NEOG) has a stable of unique intellectual property and it has the financial results to prove it. Its gross margin has consistently been around 50% for the last 10 years, dipping briefly in 2009, and it has kept its net margins between 11 and 12%. No wonder the maker of food safety testing kits and veterinarian products is a debt-free cash machine of note.
In 2010, financial analyst Andy Cross punted Neogen as a private equity buyout target, but I think its product range will perfectly complement another larger manufacturer in the veterinary and food safety industry.
The product range of IDEXX Laboratories, Inc. (IDXX) sticks closely to all of veterinary science's disciplines, with antibiotic screening tests for dairy producers and water microbiology testing as add-ons. Neogen also covers veterinary diagnostic instruments and pharmaceuticals, but it has toxicology, food safety, genomic solutions, and research test kits that will add girth to IDEXX's portfolio.
Neogen is trading around $33 at the moment and has a market capitalization of $778.22 million; nearly 30% down from its one-year high. If shareholders want to hold out for that kind of reward, a buyout would cost $1.1 billion or around $46 per share, but I think we could see an offer nearer to $40.
We are witnessing the downfall of long established industries that played dominant roles in the economy and thought they would do so in perpetuity. Fixed line telecoms and postal service-related businesses are on their last legs unless they can adapt. But in manufacturing, the seeds are only germinating now.
Stratasys, Inc. (SSYS) is the leading producer of 3D or direct digital manufacturing printers. A computer-aided design goes straight from a computer and immediately the part can be manufactured without any set-up. This enables customers to manufacture low volume products at mass production costs. Ideal for prototypes, which was its first application, but it also allows for mass customization to take place.
Best described as diversified, Dover (DOV) has four divisions and thirty two subsidiaries that produce a range of products from all-wheel-drive power train systems to hearing aid components. Its largest segment is the engineered systems division that manufactures industrial components as well as sophisticated manufacturing equipment.
The one thing Dover's subsidiaries have in common though, is the autonomy they're allowed. This system will suit Stratasys who will still enjoy independence while gaining sales from Dover's existing clients. Dover on its part will gain a further subsidiary that produces sophisticated manufacturing equipment, but also offers design, prototyping, and consulting services.
Stratasys, trading around $40, has a market capitalization of $864.81 million and an enterprise value of $849.58 million according to YCharts. It might prove an incentive to be part of a large conglomerate, but I expect an offer to still come at a premium. An offer between $47 and $48 per share, or between $990 million and $1.02 billion could make shareholders give way.
Broadening the spectrum
It has built its business model specializing primarily in the production of diagnostic kits for infective diseases, but Meridian Bioscience, Inc. (VIVO) also has a smaller Life Science subsidiary. The subsidiary manufactures bulk antigens and reagents, proteins and other biologicals for use in the discovery of drugs and vaccines and as bulk medical reagents.
According to Trefis.com, 26.3% of Merck & Co's (MRK) stock price is attributed to anti-infective drugs, which is also the biggest contributor to the stock price. Its market share has dropped from 33.5% in 2007 to 28.9% and it is predicted to steadily slide into the lower twenties over the next three years.
Apart from alimentary and metabolism drugs, accounting for 18.3% of its share price, all its product ranges are predicted to lose market share over the next five years. Alimentary and metabolism drugs are predicted to grow Merck's market share from 7.3% to 11.4% in 2018. It's time for this drug manufacturer to diversify.
Meridian's $740.73 million enterprise value is small change for Merck, but it will be a good start on the way to diversifying the company. We could see an offer around $25, up from Meridian's current trading price of around $18.
Pupil and master
The economic downturn has been unexpectedly good to certain industries. The tough career market has pushed many people who are in mid-career to undertake further training to advance their careers. This is illustrated by the rise in middle-aged student debt, the majority of which can be attributed to enrollment in for-profit schools.
One of the schools to have benefited from the upturn is Grand Canyon Education (LOPE). The institution provides on campus and online post-secondary education services, and focuses on graduate and undergraduate degree programs in its core disciplines of education, business, and healthcare. The fact that it is located in Phoenix, Arizona has also been a boon to the school. The city has the second highest job creation data in healthcare and education jobs - two of the main focus areas of the school.
With two schools - Ashford University located in Iowa and University of the Rockies in Colorado - Bridgepoint Education (BPI) was only founded in 1999 and acquired its first two for-profit education institutions in 2005 and 2007. Bridgepoint could feel it's time to extend its footprint into Arizona.
Grand Canyon has revenues of $108.91, which it produces with a gross profit margin of 55.07% and profit margin of 11.82%. Its stock is currently trading around $17, although we could still see an offer over its $753.82 million market capitalization. Perhaps a bid around the 52 week high of $19.30 would entice Grand Canyon shareholders to allow the companies to merge.
The eye of the beholder
Revlon, Inc. (REV) manufactures color cosmetics, women's hair color, skin care, fragrances, antiperspirants and deodorants, and beauty tools. The company's name is still closely associated with color cosmetics by consumers, but debt levels haven't allowed it to develop any strong brands recently.
It will need someone to realize the potential that could be created from Revlon's name. The Estee Lauder Companies, Inc. (EL) might be that someone. The majority of the company's value is created by strong brands in its skincare and cosmetics range, with fragrances and hair care the lesser elements, and it has the ability to extract gains from a buyout of the smaller stock.
Revlon's market capitalization is $824.97 million and the stock trades around $16. I don't see an offer reaching the stock's 52-week high of $19.33; rather a buyout offer could be made below $18 per share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.