We've got inversions, consolidations, and companies shedding units to one another. With all the corporate buying and shuffling, investors with a higher appetite for risk are likely asking themselves how they can partake in this game.
Tobias Carlisle, author of the new book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, has a plan of attack.
Carlisle has devised a formula for figuring out likely takeover targets. “I use a metric called the acquirer’s multiple, which is very similar to the enterprise multiple,” he says in the attached video. “It looks for cash-rich balance sheets and very strong operating earnings in relation to the price that you pay for the business. So it’s the sort of thing that’s very attractive to activist investors, private equity firms, and LBO shops.”
The Santa Monica-based Carlisle has ran the numbers and given us three companies that look like very attractive takeover targets.
Valero Energy (VLO)
“Valero was a beneficiary of the ban on the export of crude oil, but when that was overturned their margins have been squeezed, so they have fallen a long way,” he says. However, Valero is “very, very cheap on an acquirer’s multiple basis, trading on about 5 or 6 times [forward earnings] with pretty strong cash flow so there’s always room for one of those guys (i.e., activists, PE and LBO firms) to come in and do something interesting.”
“Coach has been really badly hurt, they have compressed sales and compressed margins, that makes earnings look really ugly,” Carlisle notes, but there is a bright side. “On an acquirer’s multiple basis they’re still fairly interesting, they’re only trading at about 6 times [forward earnings], there’s potential for some action there and they’ve got this sort of ugly business combined with an external management team - they might be able to do something which is a potential catalyst at this stage.”
CF industries (CF)
“[CF stock] is very cheap on an acquirer’s multiple basis but they’re actually doing something about it,” Carlisle argues. “They pay a little dividend, there’s a pretty substantial buyback going on, and in the world of big cap stocks they’ve got one of the best shareholder yields out there which is also a very interesting thing, since that’s something you might see post an activist or private equity firm [buyout], but they’re sort of doing it proactively which is good to see.”
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