(By Michael Vodicka)
"The M&A space is heating up and I have an inside scoop on one of the best takeover targets in food and agriculture."
Buyouts are one of the fastest and easiest ways for investors to score big gains.
That was on full display last week when Warren Buffet pulled out his "elephant gun" and made a bid for leading food maker H.J. Heinz Company (NYSE: HNZ). With the Oracle of Omaha identifying his latest target, shares surged from just above $60 to $72, producing a snappy 20% gain for anyone along for the ride. Take a look at the big gain below.
With the S&P 500 sitting on record cash balances, the M&A (mergers and acquisition) space has been seriously heating up. AMR Corp. (AAMRQ), formerly known as American Airlines, just announced an $11 billion merger with United Airways Group, Inc. (LCC), sending shares of AMR Corp skyrocketing to more than a 100% gain in one day. Take a look below.
Even hints of a potential merger can be enough to send shares soaring. That's what happened with Office Depot (NYSE: ODP) just this morning, jumping 18% on rumors the company was close to being acquired by Office Max (NYSE: OMX).
But even though these buyouts are great news for investors who owned these companies, the real trick is finding stocks that are on the cusp of being taken over. And that is exactly what I have done.
The company I am talking about is Ingredion, Inc. (NASDAQ: INGR), a manufacturer of food ingredients that it sells to food producers that has a market cap of $5 billion. There are three very good reasons why Ingredion is the perfect takeover target.
The first is rising commodity costs. Food companies like Conagra Foods, Inc. (NYSE: CAG) and Mondelez International, Inc. (NASDAQ: MDLZ) continue to struggle with margin compression due to higher input costs to build their food products. Buying a company like Ingredion would enable a major food company that purchases billions in ingredients every year to better manage and control expenses.
The second is Ingredion's size. At just over $5 billion, the company is a small mid cap, dwarfed in size by mega-cap food companies like Archer Daniels Midland Co. (NYSE: ADM). Larger food companies easily have the financial power and resources to absorb a $5 billion company that will help them grow and better and hedge input costs
The fourth is valuation. In spite of Ingredion's market-beating gain of 21% in the last 6 months, shares are trading with a forward P/E (price-to-earnings) ratio of 11 times, a sharp discount to its ten-year average of 15 times, its peer average of 13 times and the S&P 500's 14 times. Looking forward, analysts are projecting 8% earnings growth in 2104 and average earnings growth of 10% in the next five years.
As you can see, there are more than a few good reasons why Ingredion looks like an awesome takeover target. This kind of upside potential is exactly what I look for in my premium newsletter, the "iStock Growth Trader," a biweekly newsletter that provides exclusive access to all my best trading and investment ideas.
Downside: Although Ingredion hedges its exposure to volatility in the grain markets, it does carry exposure to rising input costs to build its ingredient products.
Price Target: If Ingredion simple traded in line with its historical average, shares would jump to $90, a 36% increase from current levels. If Ingredion were bought out by a larger food company, shares could easily jump above $105, a 60% premium from current levels.