Big Potential? Takeover Targets With Solid Profitability

(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)

Interested in exploring profitable companies with takeover potential?

In a world that’s run by money, it’s commonly acknowledged that large companies will always be looking for acquisitions that can expand business by adding to earnings and market share.

The bottom line is that a takeover target’s operations must be profitable. Yet there are hundreds of different ways to look at a company’s profitability.

Because of the massive amount of options, it’s important to know what to look for when studying a company’s operational results.

One of analysts’ favourite profitability tools is DuPont analysis – it’s a way to look at changes in return on equity (ROE) profitability [i.e. net income/equity] by attributing those changes to certain sources. Some of the sources are more sustainable than others, thereby giving an analysis of strength in increasing profitability.

The DuPont Equation

ROE can be broken up into three components: net margin, asset turnover (a measure of efficiency), and financial leverage (a measure of debt). Increases in the first two are preferable and sustainable, while increases in financial leverage are not.

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

From this breakdown, we can focus on companies with the following characteristics: Increasing ROE along with,

•    Decreasing leverage, i.e. decreasing Asset/Equity ratio
•    Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

Investing Ideas

To help you explore the topic, we created a universe of about 200 companies that have been identified as takeover or leveraged buyout (LBO) targets by various publications, including Barrons, CNN Money, SeekingAlpha and Nasdaq.com.

To narrow down this list, we analysed company profits, and identified the names that have seen favourable profit trends.

analyse These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. visualise annual returns for all stocks mentioned

1. Acorda Therapeutics, Inc. (ACOR): Acorda Therapeutics, Inc., a commercial stage biopharmaceutical company, involves in the identification, development, and commercialization of therapies for multiple sclerosis (MS), spinal cord injury, and other nervous system disorders. Takeover / LBO rumour sourced from Seeking Alpha (http://seekingalpha.com/article/273181-7-dirt-cheap-takeover-targets-in-biotech). MRQ net profit margin at 20.28% vs. 19.55% y/y. MRQ sales/assets at 0.265 vs. 0.192 y/y. MRQ assets/equity at 1.878 vs. 2.328 y/y.

2. American Electric Power Co., Inc. (AEP): Engages in the generation, transmission, and distribution of electric power to retail customers. Takeover / LBO rumour sourced from Wall St. Cheat Sheet (http://wallstcheatsheet.com/trading/are-these-6-stocks-good-takeover-targets.html/). MRQ net profit margin at 21.44% vs. 13.68% y/y. MRQ sales/assets at 0.085 vs. 0.081 y/y. MRQ assets/equity at 3.479 vs. 3.638 y/y.

3. Cerner Corporation (CERN): Designs, develops, markets, installs, hosts, and supports healthcare information technology, healthcare devices, and content solutions for healthcare organisations and consumers worldwide. Takeover / LBO rumour sourced from Seeking Alpha (http://seekingalpha.com/article/274989-big-potential-7-takeover-targets). MRQ net profit margin at 13.79% vs. 13.16% y/y. MRQ sales/assets at 0.201 vs. 0.196 y/y. MRQ assets/equity at 1.288 vs. 1.304 y/y.

4. Dollar Tree, Inc. (DLTR): Operates discount variety stores in the United States and Canada. Takeover / LBO rumour sourced from CNN Money (http://money.cnn.com/2011/05/25/news/companies/thebuzz/index.htm). MRQ net profit margin at 6.15% vs. 5.66% y/y. MRQ sales/assets at 0.622 vs. 0.61 y/y. MRQ assets/equity at 1.561 vs. 1.634 y/y.

5. Gannett Co., Inc. (GCI): Operates as a media and marketing solutions company in the United States and internationally. Takeover / LBO rumour sourced from Wall St. Cheat Sheet (http://wallstcheatsheet.com/trading/are-these-6-stocks-good-takeover-targets.html/). MRQ net profit margin at 7.88% vs. 7.73% y/y. MRQ sales/assets at 0.193 vs. 0.191 y/y. MRQ assets/equity at 2.64 vs. 3.393 y/y.

6. Jabil Circuit Inc. (JBL): Provides electronic manufacturing services and solutions in the Americas, Europe, and Asia. Takeover / LBO rumour sourced from Seeking Alpha (http://seekingalpha.com/article/269050-14-attractive-takeover-targets). MRQ net profit margin at 2.67% vs. 1.52% y/y. MRQ sales/assets at 0.606 vs. 0.606 y/y. MRQ assets/equity at 3.78 vs. 4.035 y/y.

7. LKQ Corp. (LKQX): Provides replacement parts, components, and parts needed to repair vehicles, primarily cars and trucks in the United States and Canada. Takeover / LBO rumour sourced from CNBC (http://www.cnbc.com/id/41238280/Greenberg_10_Possible_Takeover_Targets). MRQ net profit margin at 6.28% vs. 5.91% y/y. MRQ sales/assets at 0.309 vs. 0.276 y/y. MRQ assets/equity at 1.607 vs. 1.65 y/y.

8. Quality Systems Inc. (QSII): Develop and market health-care information systems. Takeover / LBO rumour sourced from Seeking Alpha (http://seekingalpha.com/article/274989-big-potential-7-takeover-targets). MRQ net profit margin at 19.05% vs. 16.49% y/y. MRQ sales/assets at 0.258 vs. 0.248 y/y. MRQ assets/equity at 1.549 vs. 1.63 y/y.

9. Ross Stores Inc. (ROST): Operates off-price retail apparel and home accessories stores under the Ross Dress for Less and dd’s DISCOUNTS brand names in the United States. Takeover / LBO rumour sourced from Seeking Alpha (http://seekingalpha.com/article/269050-14-attractive-takeover-targets). MRQ net profit margin at 7.1% vs. 6.76% y/y. MRQ sales/assets at 0.684 vs. 0.671 y/y. MRQ assets/equity at 2.143 vs. 2.268 y/y.

10. Staples, Inc. (SPLS): Operates as an office products company. Takeover / LBO rumour sourced from CNN Money (http://money.cnn.com/2011/05/25/news/companies/thebuzz/index.htm). MRQ net profit margin at 3.03% vs. 2.34% y/y. MRQ sales/assets at 0.425 vs. 0.418 y/y. MRQ assets/equity at 1.923 vs. 2.052 y/y.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


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