Billionaire Mario Gabelli’s Takeover Targets

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Billionaire Mario Gabelli of GAMCO Investors appeared on CNBC on July 9 to discuss a variety of topics, including three stocks which he thought might be potential takeover targets. Acquisitions of public companies occur at significant premiums 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 if a company is a decent value in its own right before buying.

A trucking takeover

The billionaire listed Navistar International (NYSE: NAV) as one of his stocks to watch. We track quarterly 13F filings from hedge funds and other notable investors such as GAMCO as a part of our work developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), and can see that GAMCO owned 4.6 million shares of Navistar as of the end of March; find Gabelli's favorite stocks.

Navistar has been struggling over 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 -- check out more stocks Icahn owns -- and had previously tried to merge the company with peer Oshkosh.

Packaged meats

Hillshire Brands (NYSE: SLE), primarily a packaged meats company, was another of Gabelli’s potential takeover targets. Hillshire’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’s closest peer Smithfield Foods (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 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 (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 (NYSE: K). The 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 be 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 seems to us that the 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 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 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. 

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This article is written by Matt Doiron and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. 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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