3 Takeover Targets Worth Watching

by: Insider Monkey

Takeovers are the new way to expand. In today’s rapidly shrinking world, more businesses are expanding through acquisition than ever before. Hedge fund manager T. Boone Pickens did it with his oil company. Google (NASDAQ:GOOG) has done it repeatedly, buying patents from IBM (NYSE:IBM) and acquiring Motorola Mobility (NYSE:MMI) for its 24,000+ patents. More recently, SAP did it when bought the cloud computing SuccessFactors (NYSE:SFSF). It seems it is easier to buy than build, especially in technology.

Take a company like Dynasil Corporation of America (NASDAQ:DYSL). The company has a market cap of just $26.64 million and was just awarded a $3.65 million contract from the Department of Homeland Security’s Domestic Nuclear Detection Office (DNDO). It was awarded to bolster DYSL’s research and development of gamma and neutron radiation detectors. The thing is DYSL, as good as they obviously must be at the technical stuff, actually has a fairly fragmented business. Point in fact, in addition to making analytical instruments, optical instruments, and machinery components, DYSL also makes instruments to measure the sun protection factor of sunscreens, medical probes and tools to detect lead paint. Further, in as much as the company makes a wide range of products, its operations are further divided between its direct sales force and a division for contract research. The company announced last year that it was seeking financing to strengthen its capital structure and give it the financial flexibility to achieve its “expansion goals through both organic and acquisition growth,” according to a filing on Edgar. While this has been done, to date, via DYSL acquiring smaller companies, at just $1.80 (DYSL’s opening price on December 12), which is 8.48 times its earnings, and a one-year target estimate of $8 a share, DYSL is priced to buy.

RadiSys Corporation (NASDAQ:RSYS) is also an attractive buy. The application software and hardware company was trading at $4.61 a share when the market opened Monday December 12, and a one-year target estimate of $9.75 a share Right now, it is priced at just 7 times its forward earnings. It has 30.20% quarterly revenue growth and very consistent earnings growth. RSYS’s earnings grew 7.48% per annum over the last five years and are expected to grow by 10% per annum over the next five years. This estimate may be less than the 16.02% predicted for its industry and the 18.42% for its sector but it is still very healthy and there is plenty of room for upside. In addition, the company has had a 30% increase in sales and a 27% increase in net income, so the earnings forecast could be a little conservative. RSYS may do better than expected for other reasons as well. The company recently announced a variety of new features, including tunnel terminating gateway and I-WLAN capabilities to its high performance security gateway. Jim Simons’ Renaissance Technologies has a stake worth over $7 million in RSYS.

Investors should also take notice of Iteris Inc (NYSEMKT:ITI). The transportation systems company makes roadway sensors, vehicle sensors, transportation systems and environmental technology. As of the open of trading on December 12, ITI was trading at $1.24 a share with a one-year target estimate of $2.00 a share, priced at just 9.46 times its forward earnings. It acquired a large chunk of Berkeley Transportation Systems (BTS) in late October, which allowed it access to BTS’s Performance Measurement System (PeMS) technology to enhance the user interface for its existing sensor tools, improving the animation and visualization of data. ITI boasts quarterly revenue growth of 15.50% and its forecasts for the next five years are just as strong. Analysts expect ITI’s earnings will grow 35% per annum over the next five years, compared to just 16.02% for its industry and 18.42% for its sector. Jim Simons’ Renaissance Technologies is a fan of ITI, as is Stuart Peterson’s Artis Capital Management.

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