5 Undervalued Potential Takeover Targets

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For the last year, private equity activity has slowed down as companies are unable to find suitable additions to their portfolios. The 5 companies below offer well recognized brands and are typically in industries which attract investors, retail and restaurants. As PE firms look to increase their deal flow, these firms can serve as possible takeover targets.

A possible place where to start speculating on the next big private equity deal is among firms with low sales multiples, in absolute and relative terms. Abnormally low ratios often signal that the brand generates significant sales, but due to a poorly operating operation, the stock trades at depressed levels.


Aeropostale (NYSE: ARO) is trading at a depressed sales ratio of 0.7 despite seeing sales grow at an annualized rate of 10.6% over the last 5 years. Although the retailers announced that spring sales and earnings will likely fall below estimates, its stock has performed relatively well throughout the years. Small, poor performing retailers have seen a surge in private equity activity over the last two years and at the onset of 2011, the rumor mill was reporting that Aeropostale may become a potential target. Management has proved to be resistant to such talks, but a continued short term streak of negatively revised top line figures may force the board to reconsider.   

Another undervalued retailer, Sketchers USA (NYSE: SKX), has seen modest sales growth over the last half decade. However, the most recent year-over-year 20% sales drop has battered the retailer’s stocks; it is currently trading at 0.42 times sales. Not official, rumors have surfaced that Nike can potentially emerge as a buyer for the struggling shoes maker. Sketchers offers strong brand equity, a diverse product mix and a stable balance sheet with a negative net debt position.   The last time when heavy speculation about private equity investment emerged was in 2007, forcing management to address the issue. Rumors of a deal are not yet as heavy.

The Food Industry

The Cheesecake Factory (NASDAQ: CAKE) investors have seen the company’s share price stagnate over the past year, while its restaurant rival, O’Charley’s, has appreciated by 60%. The reason for the massive surge in O’Charley’s share price... Fidelity launched a $9.85 per-share tender offer for all of the company’s shares.  Compared to its rivals, The Cheesecake Factory is trading at a low earnings ratio and a P/S multiple of only 0.96. Sales have not been flat either, increasing by approximately by 6% a year for the last 5 year period.

Wendy’s (NASDAQ: WEN) is a big name with a relatively small balance sheet, a scenario which might be appealing to rivals or private equity firms who are looking to buy the brand for cheap. After selling Arby’s to Roark Capital Group in order to receive $130 million in cash and unload $190 million in Arby’s debt, Wendy’s can find itself among the list of recent restaurant takeover targets. Trading at a low sales multiple of 0.94 while growing its 5-year revenue figure by 14.5%, Wendy’s is undervalued within its peer group. McDonald’s for example, offers investors a price multiple of 3.65 and top line performance has actually been almost 1000 basis points worse.

Meet Processing

The North American poultry market might not be the most intriguing business out there, but investors are primarily interested in profits, not glamour! Pilgrim’s Pride (NASDAQ: PPC), trading at only $7.40 has seen its shares drop drastically from the 2007 highs of over $40. Rising feed costs further crippled the entire poultry producer last year, forcing Pilgrim’s to seek outside sources of financing. The world’s largest beef processor Brazil’s JBS recently raised its investment in Pilgirm’s to 75%; if the company cannot manage its expenses the remainder of the shares may have to be sold to JBS in order to get full financial support from the large Brazilian food giant.

Are there any other potential takeover targets?

The Motley Fool owns shares of Aeropostale and SKECHERS USA. apinkasovitch has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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