M&A Ideas: Takeover/LBO Targets Undervalued by the Graham Number

M&A Ideas: Takeover/LBO Targets Undervalued by the Graham Number

Research  these Stocks on Kapitall’s Playground Now

 
research now

One of the biggest considerations companies make when deciding whether to acquire another company is how fairly priced the company is. If the company is overvalued, others will not be interested in buying it. (STAY AHEAD OF THE CURVE: Follow Kapitall on Twitter)

Analysts and investors follow potential takeover/leveraged buyout (LBO) targets because when a company announces that it is being taken over, its stock price usually jumps to reflect the takeover premium being paid. This is usually a profitable event for shareholders.

We compiled a list of rumored potential takeover/LBO targets from various sources including CNN Money and Wall St. Cheat Sheet. We then compared their stock prices to their Graham Numbers to find those that may be attractively priced, or undervalued.

The Graham Number is a measure of a stock's maximum fair value. It was created by the "godfather of value investing" Benjamin Graham and uses a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

Business Section: Investing Ideas

 Below are the results from this screen. These rumored takeover/LBO targets are trading at steep discounts to their Graham Numbers, which may indicate that they are also attractively priced.

Do you think these companies are attractive takeover targets?

 

Interactive Chart: Use the Compar-O-Matic to compare analyst ratings for the stocks mentioned below:

Use this list as a starting point for your own analysis.

 

“1. American Electric Power Co., Inc. (AEP, Earnings, Analysts, Financials): Engages in the generation, transmission, and distribution of electric power to retail customers. Takeover/LBO rumor sourced from Wall St. Cheat Sheet. Diluted TTM earnings per share at 4.02, and a MRQ book value per share value at 30.33, implies a Graham Number fair value = sqrt(22.5*4.02*30.33) = $52.38. Based on the stock's price at $38.44, this implies a potential upside of 36.26% from current levels.

 

“2. Best Buy Co. Inc. (BBY, Earnings, Analysts, Financials): Operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. Takeover/LBO rumor sourced from CNN Money. Diluted TTM earnings per share at 2.9, and a MRQ book value per share value at 16.13, implies a Graham Number fair value = sqrt(22.5*2.9*16.13) = $32.44. Based on the stock's price at $26.29, this implies a potential upside of 23.4% from current levels.

 

“3. Gannett Co., Inc. (GCI, Earnings, Analysts, Financials): Operates as a media and marketing solutions company in the United States and internationally. Takeover/LBO rumor sourced from Wall St. Cheat Sheet. Diluted TTM earnings per share at 1.89, and a MRQ book value per share value at 9.82, implies a Graham Number fair value = sqrt(22.5*1.89*9.82) = $20.44. Based on the stock's price at $15.45, this implies a potential upside of 32.27% from current levels.

 

“4. Kulicke&Soffa Industries Inc. (KLIC, Earnings, Analysts, Financials): Designs, manufactures, and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits, high and low powered discrete devices, light-emitting diodes, and power modules. Takeover/LBO rumor sourced from Bloomberg Businessweek. Diluted TTM earnings per share at 1.62, and a MRQ book value per share value at 6.55, implies a Graham Number fair value = sqrt(22.5*1.62*6.55) = $15.45. Based on the stock's price at $12.08, this implies a potential upside of 27.91% from current levels.

 

“5. OfficeMax Incorporated (OMX, Earnings, Analysts, Financials): Distributes business-to-business and retail office products. Takeover/LBO rumor sourced from CNN Money. Diluted TTM earnings per share at 0.38, and a MRQ book value per share value at 6.27, implies a Graham Number fair value = sqrt(22.5*0.38*6.27) = $7.32. Based on the stock's price at $5.9, this implies a potential upside of 24.1% from current levels.

 

“6. Oshkosh Corporation (OSK, Earnings, Analysts, Financials): Designs, manufactures, and markets a range of access equipment, specialty vehicles, and vehicle bodies worldwide. Takeover/LBO rumor sourced from Bloomberg Businessweek. Diluted TTM earnings per share at 2.32, and a MRQ book value per share value at 17.86, implies a Graham Number fair value = sqrt(22.5*2.32*17.86) = $30.53. Based on the stock's price at $23.22, this implies a potential upside of 31.5% from current levels.

 

 

(Written by Alexander Crawford. BVPS and EPS data sourced from Yahoo! Finance.)

 

Use Kapitall's Tools: Looking for ways to analyze this list?

Use this article snapshot as a launch pad (click here for help): Simply click on the links, and use Kapitall's tab navigation to browse through the data…

 

Analyze These Ideas: Getting Started

Dig Deeper: Access Company Snapshots, Charts, Filings

New to Kapitall?

1. New to the site? Click here to register for a free account, and gain access to more tools and data
2. Looking for more investing ideas like this? Click here to sign up for your free copy of Kapitall Weekly
3. Follow us on SeekingAlpha, Motley Fool, Nasdaq and Twitter

playfor100kwirebanner2png

Leave a Reply

Protected by WP Anti Spam

hrtwirebanner2png