10 Cheap LBO Targets to Buy

NEW YORK ( TheStreet) -- With the leveraged buyout market heating up, TheStreet has identified 10 potential targets, all of which are priced cheaply to earnings and to free cash flow.

Immucor's ( BLUD) agreement last Tuesday to be acquired by TPG Capital for $27 a share, or $1.973 billion, representing a 30% premium over the previous market close, and Exco Resources ( XCO) CEO Douglas Miller's continuing attempt to take his firm private, are examples of a frothy LBO market.

One Wall Street veteran we spoke to said that "the sweet spot right now is for profitable companies, priced cheaply to free cash flow, with market caps of between $1 billion and $10 billion." This source added "credit spreads have dropped tremendously over the past 18 months, making borrowing easy," for companies looking to acquire.

William Simpson, a partner in the corporate practice of Paul Hastings, confirmed that "by historical measures you can get very good leverage and the money is inexpensive."

Simpson also told TheStreet that "increased confidence about the stability of earnings" is also driving deals, and that although "there haven't been many megadeals" lately, "people are doing larger deals now."

According to Simpson, "the three hottest areas" for LBO deals "have been technology, healthcare and the whole retail restaurant and consumer area" which "part reflects that that area was so dead for a while."

In order to come up with a list of attractively-valued profitable companies with the potential to be taken private, we used the FINVIZ.com stock screener select U.S. stocks using these criteria:
  • Market Capitalization between $1 billion and $10 billion
  • Price/Trailing Earnings ratio below 10
  • Price/Forward Earnings ratio below 10
  • Price/Cash below 5
  • Price/Free Cash flow below 12
  • Positive Return on Equity

This produced a list of 11 names, including leverage buyout specialist Kohlberg Kravis Roberts & Co. ( KKR), which we have not included in our final list of 10 target companies.

Most of these stocks have seen stellar returns over the past year. For most of these names, analysts are on the fence, which may not be surprising after a run-up in the shares.

Here are our 10 LBO targets, sorted by ascending upside implied by the median price target among analysts polled by Thomson Reuters.

10. CNO Financial Group

Shares of CNO Financial Group ( CNO) of Carmel, Ind., closed at $7.88 Thursday, returning 57% over the previous year.

The life insurer announced Wednesday that CEO James Prieur would retire on September 30, with CFO Ed Bonach taking over as the new CEO and also joining the board of directors in Prieur's place.

Major shareholders of CNO Financial at the end of the first quarter included Paulson & Co., with just under 10% of the outstanding shares. CNO in turn announced on July first that it had subscribed for $25 million in limited partnership interests in the Paulson Advantage, LP fund, managed by Paulson & Co.

CNO reported first-quarter net income of $53.9 million, or 19 cents a share, increasing from $33.9 million, or 13 cents a share, during the first quarter of 2010.

On June 30, the company announced it had repurchased 2.2 million shares of common stock during the second quarter, for $16.2 million, or an average cost of $7.35 a share. The company also as required under its secured credit facility made a principal prepayment of $16.2 million, reducing the principal balance of the facility to $308.8 million, with another $10 million payment due on September 30.

Following the June 30 announcements, Wells Fargo Securities analyst Sean Dargan reiterated his "Overweight" or buy rating for CNO Financial Group, with a valuation range of $8 to $10, saying his firm's "positive stance reflects our belief that the current management team is poised to grow CNO's businesses and expand returns."

The shares trade for just under 10 times the consensus 2012 earnings estimate of 80 cents, among analysts polled by Thomson Reuters.

Out of eight analysts covering CNO Financial Group, two rate the shares a buy, while the remaining analysts have neutral ratings.

9. MKS Instruments

Shares of MKS Instruments ( MKSI) of Andover, Mass., closed at $26.39 Thursday, returning 38% from a year earlier.

The company provides instruments, systems and processing solutions to manufacturers of equipment for semiconductor devices and for other thin film applications.

Major shareholders include Royce & Associates, which owned 14% of outstanding shares as of March 31, according to Thomson Reuters.

First-quarter net income was $38 million, or 73 cents share, increasing from $29.3 million, or 58 cents a share, in the first quarter of 2010. Sales were up 21% year-over-year, to $231.9 million.

After MKS Instruments said on June 15 that it expected its second-quarter sales to come in at the lower-end of its guidance range of $220 million to $240 million, Canaccord Genuity analyst Bobby Burleson maintained his buy rating for the shares, but lowered his second-quarter earnings estimate to 63 cents a share from 69 cents, and his 2011 earnings estimate to $2.70, from $2.96. The analyst lowered his 12-month price target for the shares to $30 from $34.

Burleson remains enthusiast about the stock, saying "is leveraging its technology and market leadership in critical subsystems into adjacent markets, whose similar process control needs make a natural fit for MKSI's strengths in pressure measurement and control, flow measurement and control, plasma, and power products."

The shares trade for just under 10 times the consensus 2012 earnings-per-share estimate of $2.65.

Out of three analysts covering the company, two rate MKS Instruments a buy, while the third analyst recommends selling the shares.

8. Computer Sciences Corp.

Shares of Computer Sciences Corp. ( CSC) of Falls Church, Va., closed at $38.27 Thursday, down 14% from a year earlier.

Major shareholders of the company include Dodge & Cox, with 8% of outstanding shares as of March 31, according to Thomson Reuters.

For the fiscal year ended April 1, CSC reported net income attributable to common shareholders of $740 million, or $4.73 a share, declining from $817 million, or $5.28 a share, the previous year.

Following the filing of the company's annual 10-K report with the Securities and Exchange Commission on June 15, Jeffries analyst Jason Kupferberg began covering the shares with a hold rating and $42 price target, saying his firm was "hard-pressed to find reasons to be positive on CSC right now," although he said the "depressed valuation" of the shares suggested "that a good deal of investor capitulation had already occurred."

Kupferberg said a takeover of the company was unlikely, although he added that free cash flow "generation has improved, which could theoretically spark private equity interest."

The shares trade for 7.5 times the consensus 2012 EPS estimate of $5.11.

Among the 10 analysts covering Computer Sciences, one recommends buying the shares, nine have neutral ratings, and the remaining analyst recommends investors sell.

7. Lexmark International

Shares of Lexmark International ( LXK) of Lexington, Ky., closed at $29.57 Thursday, declining 14% from a year earlier.

The printer manufacturer and imaging software supplier's major shareholders include Artisan Partners, LP, which held over 10% of Lexmark's outstanding shares as of April 30, according to Thomson Reuters.

First quarter net earnings were $83.3 million, or $1.04 a share, declining from $95.3 million, or $1.20 a share, a year earlier. Revenue declined slightly year-over-year to $1 billion, while operating expenses increased 10%, to $276.2 million, which CEO Paul Rooke said reflected "near-term marketplace and transitional challenges."

The company said in April that it expected "a low single-digit percentage decline in revenue year on year," and earnings ranging between 89 cents and 99 cents a share, including 11 cents in restructuring and acquisition-related expenses.

Lexmark acquired Perceptive Software in the second quarter of 2010.

Following the company's analyst meeting in May, JPMorgan analyst Mark Moskowitz reiterated his neutral rating for Lexmark with a $37 price target, saying "both near-term and longer-term revenue growth prospects remain hazy, and logistics-related costs stand to weigh on the Lexmark model in the near-to-mid-term." Moskowitz added that Lexmark's progress in its transition to "higher page usage environments and broaden its solutions and services capabilities to provide end-to-end industry-specific printing solutions," and increased software capability "should be measured in years rather than quarters."

The shares trade for seven times the consensus 2012 EPS estimate of $4.18.

Out of 12 analysts covering Lexmark, three rate the shares a buy, five have neutral ratings, and the remaining four analysts recommend investors part with the shares.

6. Alaska Air Group

Shares of Alaska Air Group ( ALK) of Seattle, Wash., closed at $69.10 Thursday, returning 47% over the previous year.

The company operates in two segments: Alaska Airlines, and Horizon Air Industries, which is a regional airline operating in the Pacific Northwest, as well as in Canada and Mexico.

Major shareholders include Primecap Management, with a 7% stake as of March 31, according to Thomson Reuters.

First-quarter net income was $74.2 million, or $2.01 a share, increasing from $5.3 million, or 15 cents a share, in the first quarter of 2010.

Excluding "$51 million in adjustments to reflect the timing of gain or loss recognition resulting from mark-to-market fuel-hedge accounting," and other extraordinary items for both periods, first-quarter operating income was $29.5 million, or $0.80 per share, increasing from $13.1 million, or $0.36 per diluted share, a year earlier.

In an industry note from late June, Rodman & Renshaw analyst Daniel McKenzie reiterated his "market outperform" rating for Alaska Air Group, with a $72 price target, saying the company "has consistently ranked among the best in the industry in our studies over the past 2 years and the findings are reflected in part in the carrier's ability to earn a return on invested capital both in 2010 and so far this year."

McKenzie expects Alaska Air Group to earn $2.40 a share for the second quarter and $7.85 for all of 2011.

The shares trade for eight times the consensus 2012 EPS estimate of $8.37.

Out of 12 analysts covering Alaska Air, seven rate the shares a buy, four analysts are neutral, and one recommends selling the shares.

5. Alliant Techsystems

Shares of Alliant Techsystems ( ATK) of Minneapolis closed at $72.27 Thursday, returning 17% over the previous year.

The company is a military contractor primarily focused on producing ammunition for soldier-carried weapons, as well as those used on armored vehicles and aircraft. The company also manufactures solid rocket motors for the military and also for "all of NASA's current and planned human spaceflight programs."

Major shareholders include First Eagle Investment Management, which held over 10% of outstanding shares as of March 31, according to Thomson Reuters.

For the fiscal year ended March 31, the company reported net income of $313.2 million, or $9.32 a share, increasing from $278.7 million, or $8.33 a share, the previous year.

Jeffries analyst Howard Rubel on June 20 reiterated his buy rating for Alliant with a $94 price target, saying that the company had been repurchasing shares during the second quarter, which appeared "to be in response to the sharp underperformance of the stock." Rubel estimates that the company will earn $8.50 a share in 2012 and $9.40 in 2013, saying that "if the stock traded at the mid-point of the P/E ratio for its peers, the shares could trade at $85 today."

Rubel estimates Alliant will see annual revenue of between $350 and $400 million when NASA completes its "transition from the Constellation program and Ares I to a new heavy-lift vehicle."

The shares trade for eight times the consensus 2012 EPS estimate of $8.81.

Six of the 13 analysts covering Alliant Techsystems rate the stock a buy, while the remaining analysts all have neutral ratings.

4. RadioShack

Shares of RadioShack ( RSH) of Fort Worth, Texas, closed at $13.79 Thursday, down 33% from a year earlier.

Major shareholders include Ivory Investment Management LP, with over 6% of outstanding shares as of March 31, according to Thomson Reuters.

First-quarter net income was $35.1 million, or 33 cents a share, declining from $50.1 million, or 39 cents a share a year earlier. The first-quarter results included $2.5 million (after tax) in costs associated with the prepayment of debt. Net sales and operating revenue increased 2% year-over-year to $1.06 billion.

After RadioShack issued $325 million in senior notes in May, BB&T Capital Markets analyst Anthony Chukumba lowered 2011 EPS estimate for the company to $1.69 from $1.73 and his 2012 estimate to $1.78 from $1.83, to "reflect higher incremental interest expense from the senior notes offering and increased share repurchase assumptions given the difference between the interest rate on the senior notes and the negligible interest income RadioShack is currently earning on its cash balance."

The analyst maintained his neutral rating on the shares.

The shares trade for 7.6 times the consensus 2012 EPS estimate of $1.82.

Among the 20 analysts covering RadioShack, four rate the shares a buy, 14 are neutral, and two analysts recommend selling the shares.

3. Vishay Intertechnology

Shares of Vishay Intertechnology ( VSH) of Malvern, Pa., closed at $16.20 Thursday, more than doubling from a year earlier.

Major shareholders include Bank of New York Mellon, which controlled 6% of outstanding shares as of March 31, according to Thomson Reuters.

On May 13, the company completed a $150 million convertible debt offering maturing in 2041 with a coupon of 2.25%, to finance the repurchase of $150 million worth of common shares. The company completed a similar deal in November.

For the fiscal quarter ended April 2, the semiconductor manufacturer reported net income attributable to common shareholders of $75.3 million, or 43 cents a share, increasing from $45.4 million, or 24 cents a share, in the first quarter of 2010. First-quarter revenues totaled $695.2 million, increasing 9% year-over-year, and the company estimated that its second-quarter revenue would range between $695 million and $735 million.

On May 10, after the company priced the $150 debt offering, Longbow Research analyst Shawn Harrison reiterated his buy rating for Vishay Intertechnology, with a price target of $23, "based upon the ongoing healthy underlying end demand environment, the leverage VSH has generated off a substantially restructured cost base, and VSH's healthy free cash generation, which provides management many options to increase shareholder value."

The shares trade for eight times the consensus 2012 EPS estimate of $2.00.

Two of the five analysts veering Vishay Intertechnology recommend buying the shares. The remaining analysts all have neutral ratings.

2. Teradyne

Shares of Teradyne ( TER) of North Reading, Mass., closed at $15.19 Friday, returning 53% over the previous year.

The company provides semiconductor test products and services.

Major shareholders include FMR LLC, which controlled close to 7% of outstanding shares as of March 31.

First-quarter net income was $94.9 million, or 41 cents a share, increasing from $50.1 million, or 24 cents a year earlier. Excluding $25.2 million in income from the sale of discontinued operations, first-quarter operating income was 29 cents a share.

Craig-Hallum analyst Christian Schwab has an "Accumulate" or buy rating on Teradyne, with a $19 price target, saying in April after the company reported its first-quarter results that "there is greater likelihood of upside to our current estimates than risk." Schwab estimates the company will earn $1.72 a share for 2011 and $1.88 a share in 2013.

Hallum added that "the company continues to hold a sizeable net cash balance of roughly $946 million or $5.12/share as it looks to pursue acquisition opportunities."

The shares trade for eight times the consensus 2012 EPS estimate of $1.87.

Out of 13 analysts covering Teradyne, eight recommend buying the shares, four have neutral ratings, and the remaining analyst recommends selling the shares.

1. Lam Research

Shares of Lam Research ( LRCX) of Fremont, Calif., closed at $44.74 Thursday, returning 13% over the previous year.

The company designs and manufactures semiconductor processing equipment.

Major shareholders include FMR LLC, with nearly 8% of outstanding shares, as of March 31.

Lam Research issued $750 million in long term notes in May.

The company earned $182.2 million, or $1.45 a share during the quarter ended March 27, increasing from $120.3 million, or 94 cents a share. Quarterly revenue totaled $809.1 million, increasing from $632.8 million a year earlier.

Morgan Stanley analyst Atif Malik has an "Overweight" or buy rating on Lam Research, saying after the first-quarter results were announced in April that the company "remains a core holding," with the highest dollar "exposure to smartphone/tablet content, share gain potential," and a "strong management execution record."

Malik's 12-month price target for the shares is $60 and he estimates the company will earn $5.85 a share in 2011 and $6.16 a share in 2012. Morgan Stanley expects Lam Research to outperform relative to its peer group because of "faster top line growth compared to peers," and also calls the company the "best 'derivative play' on increasing memory content in tablets and smart phones."

The shares trade for just under nine times the consensus 2012 EPS estimate of $5.09.

Out of 13 analysts covering Lam Research, six rate the shares a buy, four have neutral ratings and three analysts recommend investors sell the shares.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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