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Ferro Corp. Resists Takeover Bids

|Includes:Ferro Corporation (FOE), KHC, SHLM

Last week a majority of traders thought that sequestration would overwhelm the financial markets, causing some type of a correction in the equity markets. Unfortunately for them and many others that shorted the equity indexes, there was no fear at all, just conviction in a U.S. led equity rally that is nearing all-time highs. Some of the surge upwards is attributable to the Federal Reserve's ultra dovish stance, as there is no doubt at all that Bernanke and company will be providing tons of liquidity in the near-term. The other part of the bullish equation to all-time highs is the economic data, as it has been coming in handily above expectations. Last week, housing data, consumer confidence, capital good orders, initial jobless claims, Chicago Purchasing Manager and ISM manufacturing, all came in well-above consensus.

With such strong data coming in day-after-day, and no real ramifications so far from Italian elections and other Eurozone shockwaves, stocks are expected to go higher until the spring. There are some obstacles over the next few weeks, but perhaps this will be another year, where sell in May and go away, works. When the economy hits late spring-early summer, much of the dismal income growth that we have seen as of late will begin to hit the wallets of consumers. Folks will have either spent or saved much of their 2012 bonuses and special dividends distributed by companies at the end of last year. We will also see payroll tax hikes start to hurt the economy as consumers will not be able to mask the shortfall with the aforementioned boosts in income. Tax refunds will also be spent by that time, and many people will have to start budgeting wisely and cut back on spending.

This year is expected to bring good economic times, with some solid growth and prosperity in the U.S. economy. One aspect of a strong economy is M&A activity, which we have begun to see happen this year, most notably Warren Buffet's acquisition of H. J. Heinz Company (NYSE: HNZ). Mergers and acquisitions tell investors that companies want to put more money to work and that defensively holding cash is more or less a waste of capital. Finding companies that are targeted for acquisition can be very profitable and usually results in the largest gains for investors. One company that has been a recent takeover target is Ferro Corp. (NYSE: FOE).

Ferro Corp produces performance materials such as coatings, colors, ceramics, plastics and other by-products. The company recently received a tender offer of $6.50 a share, both in cash and stock. Ferro consequently rejected A. Shulman Inc.'s (NASDAQ: SHLM) buyout bid, and firmly expressed their belief that the company should remain independent. Some analysts on the street think the takeover bids will keep coming for Ferro, as the company is an attractive prospect and a good addition for many competitors in the space. Moreover, the company has had some issues as of late, as the material producer continues to try and curtail its costs to improve profits.

The company recently sold its declining solar paste assets to Heraeus, and is expected to take other measures to contain costs. FOE is also in the process of restructuring. There are folks on both sides of the aisle on this stock, with some banking on a recovery and others betting on the demise of the company. Buying before today's move was recommended, but there is still room to run for this company. Good assets and a solid product line always outperform, despite some other areas of the business not working.

Looking ahead, Ferro Corp expects its fiscal year 2012 EPS to be in the range of 7 to 12 cents per share, while the company's 2013 EPS is expected to be in between 25 to 30 cents per share. With its former CEO, James Kirsch, resigning in November of last year, the company's new management is expected to bring a new and improved operational efficiency. The company is also expected to benefit from overseas sales, in particular China's new push into solar companies. The country announced recently its intention to release a subsidy package to promote the use of solar power. Most analysts agree that the new steps taken by the company will boost its profitability, as margins are expected to yield good results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: FOE, KHC, SHLM