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Do you follow potential takeover targets? When a company announces that it is being taken over, its stock price usually jumps to reflect the takeover premium being offered for the company. This is why analysts and others follow potential takeover targets.

We compiled a list of rumored potential takeover/leveraged buyout (LBO) targets from various sources including CNN Money and Bloomberg Businessweek for those that appear attractively priced relative to free cash flow, with P/FCF below 15. Since 15 is generally considered a fair value level for most companies, those with ratios below 15 may be undervalued.

Then to analyze these companies' profitability, we ran DuPont analysis on the names. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:

ROE

= (Net Profit/Equity)

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

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

Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these 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)

Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.

Interactive Chart: Press Play to compare changes in market cap over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

Do you think these are likely takeover candidates? Use this list as a starting point for your own analysis.

List sorted by P/FCF.

1. Select Medical Holdings Corporation (SEM): Operates specialty hospitals and outpatient rehabilitation clinics in the United States. Market cap at $1.24B, most recent closing price at $8.68. P/FCF at 7.24. Takeover/LBO rumor sourced from CNBC. MRQ net profit margin at 5.13% vs. 3.29% y/y. MRQ sales/assets at 0.259 vs. 0.234 y/y. MRQ assets/equity at 3.369 vs. 3.473 y/y.

2. Symantec Corporation (SYMC): Provides security, storage, and systems management solutions to secure and manage information. Market cap at $12.B, most recent closing price at $16.21. P/FCF at 7.4. Takeover/LBO rumor sourced from Seeking Alpha. MRQ net profit margin at 13.99% vs. 8.23% y/y. MRQ sales/assets at 0.141 vs. 0.132 y/y. MRQ assets/equity at 2.621 vs. 2.73 y/y.

3. Saks Incorporated (SKS): Operates fashion retail stores in the United States. Market cap at $1.74B, most recent closing price at $10.85. P/FCF at 9.15. Takeover/LBO rumor sourced from Seeking Alpha. MRQ net profit margin at 4.% vs. 2.88% y/y. MRQ sales/assets at 0.435 vs. 0.404 y/y. MRQ assets/equity at 1.764 vs. 1.842 y/y.

4. Staples, Inc. (SPLS): Operates as an office products company. Market cap at $10.48B, most recent closing price at $15.11. P/FCF at 11.46. Takeover/LBO rumor sourced from CNN Money. MRQ net profit margin at 4.39% vs. 4.28% y/y. MRQ sales/assets at 0.481 vs. 0.461 y/y. MRQ assets/equity at 1.915 vs. 2.003 y/y.

5. CA Technologies (CA): Designs, develops, markets, delivers, licenses, and supports information technology management software products that operate on a range of hardware platforms and operating systems. Market cap at $12.5B, most recent closing price at $26.29. P/FCF at 12.66. Takeover/LBO rumor sourced from Seeking Alpha. 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.

6. Coventry Health Care Inc. (CVH): Operates as a managed healthcare company in the United States. Market cap at $4.33B, most recent closing price at $30.39. P/FCF at 12.76. Takeover/LBO rumor sourced from Bloomberg Businessweek. MRQ net profit margin at 4.62% vs. 3.62% y/y. MRQ sales/assets at 0.409 vs. 0.354 y/y. MRQ assets/equity at 1.918 vs. 2.015 y/y.

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

Source: 6 Undervalued Takeover/LBO Targets With Strong Sources Of Profitability