Billionaire Mario Gabelli of GAMCO Investors appeared on CNBC on July 9th to discuss a variety of topics, including three stocks which he thought might be potential takeover targets. Acquisitions of public companies occur at significant premia to the market price, allowing investors to earn high profits if they guess right, but we don’t like relying entirely on this kind of speculation and would advise to see that the company is a decent value in its own right before buying.
A trucking takeover
Navistar International Corp (NYSE:NAV) has been struggling the past few years as its new truck engine did not meet government standards, which drove the stock price down about 50% in the last two years and has analysts calling for losses of $7.63 per share for the current fiscal year. Billionaire activist Carl Icahn has been another major shareholder of Navistar International Corp (NYSE:NAV)—check out more stocks Icahn owns—and had previously tried to merge the company with peer Oshkosh.
Packaged meats
Hillshire Brands Co (NYSE:HSH), a primarily packaged meats company, was another of Gabelli’s potential takeover targets. Hillshire Brands Co (NYSE:HSH)’s revenue was about flat in its most recent quarterly report compared to the same period in the previous fiscal year, yet the stock is still valued at 19 times forward earnings estimates. Part of the reason for this premium pricing is that M&A activity in food companies has been heating up, and the market is anticipating a potential deal. In fact, Hillshire Brands Co (NYSE:HSH)’s own closest peer Smithfield Foods, Inc. (NYSE:SFD) has received an offer from Chinese pork producer Shuanghui.
While the deal might not close, as a number of U.S. constituencies object to the possibility that the U.S. food supply could become exposed to Chinese pork (Shuanghui has stated that, in fact, pork would be exported to China from the U.S.). In addition, activist fund Starboard Value has taken a nearly 6% stake in the company and has been urging the company to break up and potentially sell some divisions. At its current price Smithfield Foods, Inc. (NYSE:SFD) is valued at 11 times consensus earnings for the forward fiscal year.
Cereal
Gabelli also included $1.5 billion market cap cereal company Post Holdings Inc (NYSE:POST) in his discussion. Markets have awarded Post a premium valuation as well, with trailing and forward earnings multiples of 39 and 25 respectively, suggesting that GAMCO is not alone in thinking of it as a possible takeover target. Net income has been down significantly, going by recent reports, but Wall Street analysts apparently expect the company to recover. The billionaire also mentioned that he liked the company’s CEO.
We would compare Post to Kellogg Company (NYSE:K). That stock is a potential defensive pick, with a beta of 0.4 and a dividend yield of 2.7% at current prices and dividend levels. With the sell-side expecting earnings per share to do quite a bit better in 2014, its forward P/E is 16 (though of course as a larger company Kellogg is a much less likely acquisition target- if anything, it would be a suitor for a company like Post). We’d note that higher costs have caused Kellogg’s operating income and profits to fall from their levels a year ago.
Final thoughts
It looks to us like markets have already bid up some of these companies’ stock prices in anticipation of a potential deal, making them potentially risky investments if an offer is not made. Certainly Hillshire Brands Co (NYSE:HSH) and Post appear to be less interesting from a value perspective than the peers we’ve listed here (though we’d probably avoid Kellogg as well on the basis of its recent performance). Navistar International Corp (NYSE:NAV) also seems a bit speculative for our taste, or at least difficult to evaluate, given how weak this year’s and next year’s numbers are expected to be.
Disclosure: none
