While the technology sector appears as though it will not offer leveraged buyout or takeover opportunities, the gap between cash flow yield and financing costs in the U.S. energy sector looks much more rewarding, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup Investment Research.
Even the materials sector, which has garnered most of the recent attention of investors, does not look as attractive, he added in a note to clients. Nor do industrials. But the commercial services and supplies industry group, which is home to employment services, waste management and uniform companies, may.
So which companies do Citigroup analysts think are the most likely takeover or LBO targets?
Names like Wendy’s International Inc. (NYSE:WEN) and Applebee's International Inc. (APPB) show up on the consumer services list, although Mr. Levkovich said he suspects takeover talk involving the lodging and dining industries may be overdone.
Citigroup thinks both Halliburton Co. (NYSE:HAL) and Southwest Airlines (NYSE:LUV) are unlikely candidates, but they remain on the list along with names of note like El Paso Corp. (EP), Southwestern Energy Co. (NYSE:SWN), Devon Energy Corp. (NYSE:DVN), Hess Corp. (NYSE:HES), Occidental Petroleum Corp. (NYSE:OXY), Noble Corp. (NYSE:NE) and Diamond Offshore Drilling Inc. (NYSE:DO). Liz Clairborne Inc. (LIZ), Marsh & McLennan Cos. (NYSE:MMC) and BJ’s Wholesale Club Inc. (NYSE:BJ) were also mentioned.
The U.S. equity market is shrinking, Mr. Levkovich said, pointing to Federal Reserve Board data showing that more shares are being retired than are being issued. As a result, the growing scarcity of stocks is providing them with a boost.
“Indeed, M&A activity generally peaks one year before equity markets top out because of the cash redeployment requirement,” he said.