Desktop Stock Ticker | Tempting Targets: 5 Stocks Priced for a Takeover

Tempting Targets: 5 Stocks Priced for a Takeover

Companies don’t seem interested in buying rivals at the moment, despite the comparatively low prices they could pay for them. That bodes poorly for stock tickers in general, but investors can still use the math of takeover pros to find bargains.

U.S. shares are 27% cheaper than a year ago, even after climbing 15% in the second quarter. During the first half, though, the value of announced acquisitions in the U.S. fell 45% from a year earlier, according to data provider Dealogic. TrimTabs, an investment research group, calls the second quarter the most bearish it has seen since it started tracking data in 1995, in terms of companies’ zeal for selling new shares to the public and their reluctance to spend cash to buy either their shares or entire companies.

Investors should read that as a sign of stock ticker-market pessimism among company managers, which signals poor market returns to come, according to TrimTabs. Perhaps that makes now a good time to raise cash, or at least trade pricey stock tickers for cheap ones. To the latter end, I’ve listed five companies below that corporate suitors might think are good deals right now, if they weren’t so reluctant to spend. Some of the traits that can make a company a potential takeover target can also make it a promising stock ticker. Chief among them is a modest price.

The companies have, in the parlance of merger and acquisition pros, low EV/Ebitda ratios. EV is enterprise value, which is what an investor would pay to buy a company in its entirety and repay all of its debt. Ebitda stands for earnings before interest, taxes, depreciation and amortization. It’s a measure of underlying profit potential that allows for tidy comparisons of companies. A low EV/Ebitda ratio, then, means a company had a modest takeover price relative to its earnings potential. The companies on my list also generate free cash, something acquiring firms like to see.

BJ’s Wholesale Club (BJ) shares have climbed 31% over the past five years, vs. an 18% decline for the S&P 500. They now sell for 13 times forward earnings, vs. more than 16 times earnings for the index. Sales and profits for BJ’s are rising at the moment, as consumers forsake full-price shops for discount clubs. The company has low profit margins relative to peers like Costco (COST), but also increasing margins, which together suggest both improvement and room for more of it.

Dell (DELL) has suffered sharp sales declines of late, but it has reduced corporate expenses and still produces impressive returns on equity, the mark of an efficient company. In the absence of a global economic recovery, the chief appeal of the stock ticker for investors is a low price. Subtracting the company’s sizable cash balance from its stock ticker price, shares go for about 10 times forward earnings.

Listed below are details on these two companies and three others.

Screen Survivors
Company Ticker Industry Curr. Price EV/Ebitda Return on Equity (%) Dividend Yield (%)
Data as of July 1, 2009
Dell DELL Personal Computers 13.73 5.60 46.9 n/a
Sherwin-Williams SHW Chemicals 53.75 6.86 32.0 2.64
Eastman Chemical EMN Chemicals 37.90 5.63 14.1 4.64
BJ’s Wholesale Club BJ Discount Stores 32.23 5.99 14.8 n/a
Weis Markets WMK Grocery Stores 33.52 5.93 8.2 3.46

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