Three Buyout Candidates with Insider Buying

02/24/2011 12:00 pm EST


Michael Brush

Columnist, MSN Money

Executives at these companies have been buying shares for months, very possibly in anticipation of a bigger payday down the road, writes Michael Brush of MSN Money.

Let's take a quick look at why so many more companies will be takeover bait this year, pushing mergers and acquisitions up to levels not seen since 2007:

  • The economy is clearly rebounding, so companies are no longer in hunker-down mode.
  • But the economy isn't off to the races, either, so companies are on the hunt to build earnings growth through acquisitions.
  • They have the firepower to do it. Public companies have lots of cash saved up, well over $1 trillion—thanks to all that hunkering down and cost-cutting during the meltdown that cost so many people their jobs. Behind the scenes, investors are pouring money into the kinds of funds, called bank-loan mutual funds, that lend cash to power takeovers. And many private-equity shops that specialize in takeovers also have lots of cash to fund them.

The stock analysts at Morningstar have a pretty good record in calling stock moves. So I started with a list of potential buyout candidates they put together, looking at factors such as financial strength and sector trends.

American Eagle Outfitters (NYSE: AEO), Petrohawk Energy (NYSE: HK), and Western Alliance Bancorp (NYSE: WAL) appear on their shortlist of about 70 potential buyout candidates. Adding that to the way insiders at these companies have been buying helps me narrow the list down to a more manageable number: three.

Buy Like an Eagle
With the recent purchases of J. Crew (NYSE: JCG) and Gymboree by private-equity shops, it's clear that buyers are on the hunt for retailers. They'll favor ones that have a strong brand, a strong balance sheet and solid cash flow. It will also help if the target's stock is cheap. American Eagle fits the bill on all counts.

It has more than $600 million in cash and no debt, and had $369 million in cash flow over the past 12 months. The stock trades for 13.6 times forward earnings, which is reasonable for such a powerful brand name with strong growth in its aerie teen-clothing division. Plus, the company has room for cost cutting—a favorite tactic of a private buyer after an acquisition.

Now here's another sign that a takeover might be in the cards for the Eagle. Since early September, insiders have purchased more than $8.5 million worth of stock, including a $6.8 million purchase by board Chairman Jay Schottenstein.

Another Bird of Prey
Natural-gas prices may be weak in North America now because of a supply glut, but major global energy companies are taking advantage of the situation by scooping up the rights to this clean-burning energy in America's oil patch.

CNOOC (NYSE: CEO), China's largest offshore energy producer, just agreed to pay $570 million for a stake in a project to extract natural gas from shale owned by Chesapeake Energy (NYSE: CHK). Last June, Exxon Mobil (NYSE: XOM) bought XTO Energy for $25 billion.

These energy giants are shopping for more than just the energy, says energy-sector expert Robert Robotti, of Robotti & Company Advisors. They're also looking for expertise in extracting natural gas from shale so they can apply it elsewhere in the world. "Energy companies want to export that technological knowledge," he says.

Petrohawk just announced a 23% increase in reserves in natural-gas rich structures such as the Haynesville Shale and Eagle Ford Shale in Louisiana and Texas, making it a more attractive takeover target. A takeover seems natural here, since Petrohawk was created as a "build-to-sell company," according to Morningstar. Recent insider purchases suggest a buyout may be on the horizon. Since last summer, insiders have purchased more than $220,000 worth of stock.

Banking on a Buyout
Big banks are going to be gobbling up smaller banks this year, as the ones with better financial strength go after regional players to build their reach.

Morningstar puts Western Alliance (NYSE: WAL), which offers banking in Nevada, Arizona, California, and Colorado, high on its list of banks ripe for a takeover. Insiders seem to agree. Since last summer, three insiders including CEO Robert Sarver purchased $13.1 million worth of stock.

[Last month, Elliott Gue identified Two Buyout Targets in Oil Equipment, and those stocks are up 11% and 6% since the excerpt ran.—Editor]

Read the rest of the article here…

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS