7 M&A Plans That Work Even if There Is No M&A
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Wall Street crazes come and go. Because they invariably drive stock prices to astronomical and unsustainable levels, the key is to capitalize on them, not fall in love with them. The latest craze is the mergers and acquisitions boom — a record $310 billion worth so far this year — which seems to be spurring new takeover rumors every hour, on the hour. As we all know, though, buying a stock solely on takeover speculation is mighty dangerous. What if there’s no deal?
The latest issue of Insight, an investment newsletter out of Hammond, Ind., that sports an imposing track record and focuses on small and midcap stocks, appears to offer a sensible money-making strategy for playing the ever risky M&A-mania game. It has compiled a list of seven companies it views as ripe takeover targets but also, importantly, have superior year-ahead potential minus a takeover.
The newsletter says its seven picks rank among the cheapest 30% of all American stocks. Further, editor Richard Moroney says, all seven have solid cash flow, strong balance sheets, and the capacity to take on more debt. In addition, he points to attractive year-ahead prospects based on modest valuations, solid market positions, and decent growth prospects.
Additionally, Mr. Moroney views the fundamentals of each of the seven as strong enough to offer the potential of 15% to 20% market appreciation over the next 12 months. In other words, it’s seven plays for hitting the M&A jackpot, as the newsletter sees it, even if the M&A play is nonexistent.
Given its above-average performance, Insight’s market insights should not be taken lightly. Since its May 1999 inception, its buy list has gained 463.7%, the letter claims, while the Russell 2000 index rose 89.2% and the Standard & Poors 500 index increased by 16.4%. Furthermore, the letter’s best buy list has grown at an annualized rate of 23.7% since its inception, versus 8.3% for the S&P 500.
Three of the letter’s M&A picks are also rated best buys. Mr. Moroney offers some brief comments on each, kicking off with a leading metal fabricator, Ampco-Pittsburgh Corp., whose backlogs are bulging. As of March 31, they stood at $656 million, up 86% from a year earlier. The increase reflects robust global demand, with capacity for making certain types of steel rolls sold out throughout 2008. Mergers in the consolidating global steel industry represent a risk for Ampco, but strong demand and a shortage of production capacity should support sales and profit margins.
The second, staffing firm Korn/Ferry International, has more than 70 offices in 40 countries and provides executive recruitment and coaching and middle management recruiting. In the near-term, market share gains, improved cross-selling, and international expansion should drive Korn/Ferry sales and profits. Consensus estimates project pershare profits will grow 17% in fiscal 2007 and 16% in fiscal 2008. At 17 times its expected fiscal 2008 profits of $1.49 a share, the stock seems reasonably valued, given its healthy operating momentum. Based on its enterprise value, Korn/Ferry is cheaper than 72% of American stocks. Long-term debt (14.8% of total capital) is modest and cash equals about $6 a share.
The third best buy is Trico Marine Services Inc., a provider of marine-support vessels to the offshore oil and gas industry. It has an enterprise value of 4.1, lower than about 97% of all American stocks. At the end of March, Trico’s cash was equivalent to $19 a share, partly because of a recent debt offering. Its price to cash flow ratio is 7.4, among the cheapest 11% of American stocks. Helped by strong demand in the North Sea and 92% fleet utilization, March quarter earnings jumped 16%, beating Wall Street expectations. This year’s consensus Street estimate is $3.88 a share, up from $3.50 a month ago. Trading at about 11 times expected 2007 earnings, the stock is cheap, Mr. Moroney says. Another plus: An activist hedge fund is seeking board seats.
Rounding out the newsletter’s top picks with takeover potential are Cleveland-Cliffs Inc., North America’s largest iron ore producer; Dawson Geophysical Company, a leading provider of onshore seismic data acquisition services; crude oil refiner Frontier Oil Corp., and offshore oil and gas explorer Tidewater Inc.
