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Upside's Trio Of Cash-Rich Takeover Targets

 May 26, 2011 10:31 AM

by Richard Moroney, editor Upside Stocks

Dealmakers and investment bankers expect the trend in takeovers to continue, partly because companies have amassed considerable war chests after two years of robust earnings and cash flow.

With this in mind, we looked for high-potential stocks with takeover appeal. Here are three potential takeover targets that we consider to be standouts.

Companies drawing attention from dealmakers tend to share these characteristics:

• Solid balance sheets. Companies with reasonable debt loads and sizable cash positions have financial flexibility, along with a ready source of funds to service debt and invest in growth initiatives.

• Healthy cash flow. Cash flow makes it easier for a potential buyer to repay new debt used for an acquisition. Moreover, cash flow makes it easier for an acquirer to execute its business plan and finance further expansion.

• Reasonable enterprise ratios. A favorite tool of takeover analysts, the ratio equals enterprise value (stock-market value plus debt, less cash) divided by EBITDA. A low enterprise ratio indicates that cash flow is high relative to a firm's total value.

The three stocks outlined here have more cash on hand than total debt, along with long-term debt equal to less than one-fourth of total capital.

Moreover, each stock has trailing 12-month cash flow from operations that exceeds total debt. Finally, based on Quadrix Value scores, the stocks rank among the cheapest 26% of U.S.-traded stocks.

Amerigroup (AGP), a provider of managed health-care services for more than 1.9 million members, has an enterprise ratio of 5.0 — cheaper than about 88% of U.S.-traded stocks.

On Dec. 31, unregulated cash and investments stood at $249 million, or enough to retire total debt. Cash provided by operations surged 173% last year to $402 million.

The company's focus on the Medicaid market could make it an attractive takeover target for larger managed-care companies such as UnitedHealth or WellPoint. Amerigroup is the largest pure-play provider in the managed Medicaid market.

Under current law, roughly 16 million to 20 million new Medicaid enrollees are expected to become eligible in 2014. Amerigroup is rated Best Buy.

DG FastChannel (DGIT) has a strong market position, debt-free balance sheet, and burgeoning cash position might interest a suitor seeking exposure to a high-growth industry.

A leading provider of digital-media services to the advertising sector, DG is leveraged to two favorable trends — the migration of advertising spending to the Internet and the ongoing transition to high-definition (HD) content.

In 2010, per-share profits surged 67% on a 30% sales gain.At the end of December, DG had net cash of roughly $2.60 per share. Trailing 12-month cash flow per share is nearly $3.00, up 42% from the year-earlier period.

The stock earns an Overall score of 98, with strong scores for Quality (91), Financial Strength (95), and Earnings Estimates (86). DG is being upgraded to a Best Buy.

Entegris (ENTG) is a provider of products for purifying semiconductor and other high-tech materials.

Demand has been particularly robust for the company's filtration and fluid-handling products, while sales of coatings and graphite products were also strong. E

ntegris' products are used to make flat-panel displays, solar cells, and components for various high-tech applications.

Entegris had no debt at the end of March and cash of more than $1 per share, up from $0.55 a year earlier. Trailing 12-month cash flow rose nearly threefold to $124 million.

The stock's Value score of 85 compares favorably to the industry average of 64. Entegris, with a 99 Overall score, is a Best Buy.


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