Alaska Air: Let's Make a Deal?

03/26/2014 8:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Early indications point to more companies playing "Let’s make a deal" in 2014; in fact, dollar volume of takeover deals in the US hit $153 billion for January, more than three times the level in 2012, suggests Richard Moroney, editor of Dow Theory Forecasts.

An increase in deal making this year begs the question—what companies will have the urge to merge?

One metric used to ferret out stocks ripe for takeover is the enterprise ratio, or a company’s enterprise value (stock-market value plus debt minus cash) divided by EBITDA (earnings before interest, taxes, depreciation, and amortization).

Analysts often use enterprise value as a proxy for a company’s takeover value, since enterprise value takes into account both debt and equity.

The lower the enterprise ratio, the more attractive a company appears to a potential acquirer. Our Quadrix stock-rating system calculates the enterprise ratio for more than 4,600 stocks.

We do not advocate buying a stock simply because of takeover potential; we would only consider stocks that also earn Overall scores in the top quintile, boasting attractive fundamentals in addition to their takeover potential.

The airline sector has had its share of consolidation, which makes Alaska Air (ALK) an interesting takeover play.

The stock’s Overall Quadrix score of 99 gives it plenty of appeal beyond its takeover possibilities. The stock has gained more than 16% so far in 2014, far outpacing the broad market.

Per-share profits should rise at least 21% in 2014. Alaska Air trades at 13 times the consensus 2014 earnings of $6.55 per share, 11% below the industry median. The stock is rated Buy.

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