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.
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
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
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.
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
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
has a strong market position, debt-free balance sheet, and burgeoning
cash position might interest a suitor seeking exposure to a high-growth
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.
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
) is a provider of products for purifying semiconductor and other high-tech materials.
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.
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.