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10 Top Morningstar M&A Stock Picks for 2012

Stocks in this article: RIG MOS NDAQ CRL AGP NIHD ABMD DHX ICLR CHS

Chico's FAS

Womens clothing retailer Chico's FAS (CHS - Get Report) may draw private equity interest for a leveraged buyout at a premium to current share prices because of its debt-free balance sheet, strong free cash flows and niche retail market operations, which have the potential for expansion, according to Morningstar.

Chico's currently operates branded and designed private label clothing to women over the age of 35, while it's White House-Black Market brand of monochrome clothes appeals to a younger audience. In addition it runs a Soma lingerie line and acquired Boston Proper in Sept 2011.

Because the company operates in the competitive consumer goods sector and may need additional capital to expand domestically and internationally, Morningstar sees Chico's as a strong private equity candidate. "With relatively conservative assumption, 4X leverage, 15% IRR and only limited top-line and margin expansion over the next decade , we think that an LBO could make sense... Such a takeout would occur in the "high teens (if not higher)," writes Morningstar.

Morningstar gives Chico's FAS four star rating and a fair value of $15 a share, an over 25% premium to current share price of $11.84. The company is expected to earn $11 cents a share in its first quarter 2012 results due on Feb. 15, according to Zacks consensus estimates. Analysts give the company an estimated price target of $13.13 a share on 2012 revenue of $2.4 billion and profit of $164 million, according to data compiled by Bloomberg. For more on retail shares, see 20 winning stocks set to post new highs in 2012.

Within the consumer cyclical and clothing retail, Morningstar highlights American Eagle (AEO), Collective Brands (PSS), Carters (CRI) and GameStop (GME) as its top takeover candidates. All four retailers, who sell a range of clothes, video games and toys, are take-private candidates according to Morningstar because of their minimal financial leverage and strong cash flows.

In the retail and consumer cyclical space, VF Corporation (VFC) and Phillips Van Heusen (PVH) stand out as potential acquirers because of their need to add new labels and sales distribution platforms, according to Morningstar.

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