3 Potential Takeover Targets

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Billionaire Mario Gabelli, the Chairman and CEO of Gabelli Funds, has delivered an annualized compounded return of 7.9% in the past 15 years, beating the S&P 500’s return of only 4.5% during the same period. Recently, on CNBC, he pitched three stocks which could be a potential takeover targets.

They are Navistar (NYSE: NAV), Hillshire Brands (NYSE: SLE), and Post Holdings (NYSE: POST). Let’s take a closer look at these three companies to determine whether or not investors should follow Mario Gabelli into these stocks.

Investing with activist investor Carl Icahn

Navistar is a manufacturer of commercial and military trucks, IC Bus brand buses, and other recreational vehicles. Interestingly, Navistar has been a target of two activist investors -- Carl Icahn and Mark Rachesky. Each of them hold around 12 million shares, accounting for 15% of the company. Carl Icahn expressed his concerns about the company’s board in September 2012, stating that the company spent money on lawsuits against its stakeholders, including competitors, regulators, and suppliers.

The company is undergoing a restructuring under the leadership of new CEO Troy Clarke. It attempts to grow its market share with a $100 million investment, increasing the company’s service capacity by 22% and landing new deals in its key markets. It estimates to have a market share of around 18% by the end of this year. An 8%-10% EBITDA (earnings before interest, taxes, depreciation, and amortization) run rate has been targeted in the next two years.

Mario Gabelli mentioned that Navistar’s business was simple. It is a cyclical business and fluctuates along with the GDP and demand for its Class A truck. He believes that the company could generate around $15 billion in revenue and $1 billion in EBITDA in the next two years. Navistar is trading at around $28.80 per share with a total market cap of $2.3 billion.

If a $1 billion EBITDA could be generated, the stock might experience tremendous gains. If a simple EBITDA multiple of 9 is applied, it could be worth more than $43 per share.

Hillshire Brands can soar

Hillshire Brands, the leader in meat-centric food solutions to foodservice and retail markets, operates in three main segments: Retail, Foodservice, and Australian Bakery. Most of its revenue, or 71% of the total revenue, was generated from the retail business, while the Foodservice segment accounted for 26% of the total sales in 2012. Wal-Mart is its biggest customer, representing as much as 25% of total net sales.

Mario Gabelli commented that Hillshire Brands is a leader in all of the three categories it operates in including lunchmeat, hot dogs, and breakfast sausages. The company has restructured itself by selling its Australian Bakery business for around $85 million. The company reported that it was on track to deliver as much as $100 million in savings. An additional $45 million in annual benefit is expected to be achieved by 2016.

For 2013, the company expects EPS in the high end of the $1.60-$1.70 range. Mario Gabelli believes that its EPS could rise to $2.40 per share. With a simple P/E of 20, its stock price could reach $48 per share, a 43% premium to its current trading price of around $33.60 per share. 

Post Holdings, one of the leading companies in the U.S. cereal market

Post Holdings is the third-biggest company in the U.S. cereal industry with a 10.5% market share. It owns several well-known brands, including Honey Bunches of Oats, Great Grains, Pebbles, and Post Raisin Bran. The company has expanded its footprint via acquisitions.

Recently, it also announced that it will acquire the branded and private label cereal, granola, and snack business of Hearthside Food Solutions for around $158 million, expanding its presence in the high growth natural food space. The deal is expected to bring around $70 million to annual revenue after close.

Since Post Holdings has been growing via acquisitions, it has a huge amount of goodwill and intangible assets on its balance sheet. As of March 2013, it had $1.48 billion in equity, more than $1 billion in long-term debt, $365.4 million in cash, and more than $2.1 billion in goodwill and intangibles. Consequently, the tangible book value was negative at $620 million.

However, Mario Gabelli bets on the company’s leadership, with CEO Bill Stiritz, mentioning that he is “a gifted CEO.” He believes that Bill Stiritz would put together an interesting company in the next 3-4 years. The market values Post at 10.1 times its trailing EBITDA.

My Foolish take

Long-term investors could really consider Navistar, Hillshire Brands, and Post Holdings to be in their potential takeover target portfolio. Growing consumer businesses like Hillshire Brands and Post Holdings could experience a high EBITDA multiple in case of a takeover.

Among the three, I like Navistar the best with its ongoing business restructuring and the participation of two famous activist investors. It could drive Navistar's value much higher going forward. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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