10 Top Morningstar M&A Stock Picks for 2012

NEW YORK ( TheStreet) - As investors look to 2012, it's important to continue to consider M&A as a catalyst for stocks.

Rumors about Yahoo! ( YHOO), Research In Motion ( RIMM) and Netflix ( NFLX) dominated the merger headlines and whipsawed share prices in 2011, sans any completed deals.

"We still see ample opportunity for deals in the coming year as buyers look to scoop up businesses with more promising growth prospects amid an uncertain economic environment," writes Morningstar analyst Bridget Freas in a January report. Freas argues that while lackluster growth and sovereign debt concerns continue to be a deals headwind, companies may look for small-to-midsized deals to drive growth. " We believe acquisitions of smaller rivals will become an increasingly attractive way to augment growth aspirations and fortify market leadership positions amid sluggish organic prospects," writes Freas.

Six companies that Morningstar outlined in its report as potential M&A candidates in 2011 were eventually completed, including Constellation Energy ( CEG) and Petrohawk Energy, which were included on its "top M&A investment ideas list." Often the deals paid off for existing shareholders. While Constellation was bought for a 22% premium to share prices, Petrohawk was taken out at almost double the price that it traded at when Morningstar highlighted it as a M&A candidate.

Here's are Morningstar's ten new top investment ideas among potential acquisition candidates, with details on potential acquirers and reasons why they may be compelling for a growth hungry buyer.

Transocean

Transocean ( RIG) is Morningstar's most notable takeover investment idea for its size, notoriety, upside - and let's face it - its risk. The world's leading offshore rig maker has seen its shares plummet in recent years as a result of potential litigation related to the blowout of BP's ( BP) Macondo oil well, in addition to a slowing of deepwater rig rentals after a drilling moratorium in the U.S. In the third quarter, the firm reported an unexpected quarterly loss of $71 million on higher than expected expense and lower than expected revenue.

However, Morningstar expects that the rig maker may see takeover interest even as it underperforms rig making peers. "I think there are a few candidates here. First, and most obviously, is Seadrill," writes Stephen Ellis of Morningstar. In Aug. 2011, Transocean spent $1.46 billion in cash to buy Norway's Aker Drilling, beating out Seadrill ( SDRL) in a deal that Morningstar calls "ill-timed."

"An all-stock deal could work, given Seadrill's premium priced stock," adds Ellis, citing the company's head John Fredriksen and his propensity to cut opportunistic deals. "Fredriksen could easily spin off Transocean's older, less capable assets, and retain the valuable deepwater and ultra-deepwater rigs if he wishes," adds Ellis.

Priced at a discount to its net asset value, Ellis sees that the firm could also be a target to a competitor like Noble Energy ( NBL) or a dark horse like Ensco Plc ( ESV) in an all-stock deal. Nevertheless, Morningstar highlights the company as a strong investment idea because of its beaten down stock price. Transocean shares fell over 40% in 2011.

Still, Transocean faces significant 2012 headwinds, including an unsettled $40 billion April lawsuit between it and BP on Macondo spill liability, a series of disappointing earnings and the unexpected January retirement of its CFO Ricardo H. Rosa.

Morningstar gives Transocean a five star rating and a fair value of $67 a share, a near 50% premium to current prices. Analysts expect Transocean to earn 26 cents a share in the fourth quarter, according to Zacks. Transocean warrants a $59.01 a share price target and is expected to earn $10.4 billion and $1.06 billion in 2012 sales and profits respectively, according to analysts polled by Bloomberg. For more on Transocean shares see, 15 stocks to ride the energy boom of the next decade.

Within the oilfield services sector, Morningstar highlights potential tie-ups between Halliburton ( HAL) and Weatherford ( WFT), in addition to a merger between land drillers Nabors ( NBR) and Patterson ( PTEN), with Nabors being the likely acquirer because of its size. Morningstar also notes that Diamond Offshore ( DO) may look at acquisitions to expand its slow progressing deepwater presence.

Other energy takeover targets include Range Resources ( RRC), Ultra Petroleum ( UPL), SandRidge Energy ( SD) and Whiting Petroleum ( WLL) according to Morningstar because of their low valuations and operations in unconventional energy plays. Chevron ( CVX) and ExxonMobil ( XOM) have been particularly acquisitive in the shale space, notes Morningstar, with both companies using their large cash balances to buy up unconventional drillers in recent years.

Mosaic

Agricultural and fertilizer giant Mosaic ( MOS) is Morningstar's largest takeover investment idea, with a market cap at over $22 billion. In 2011 Cargill, a private fertilizer conglomerate and commodity trader, shed its 64% stake in Mosaic, which Morningstar sees as a positive for a takeover attempt by a mining player like Australia's BHP Billiton ( BHP).

"We think BHP Billiton is a possible suitor, given its well-documented bid for Potash Corporation of Saskatchewan, which was ultimately unsuccessful," writes Morningstar. Mining giants may look to buy Mosaic's phosphate and potash mining businesses in favor of developing greenfield projects. BHP's closest competitors are Rio Tinto ( RTP) and Vale ( VALE) and Potash ( POT).

With mines in Saskatchewan, New Mexio and Michigan, Mosaic is the world's number one producer of phosphate with a 13% share of global production and it's the second largest North American producer of potash. Because of its Minnesota-based headquarters, Morningstar argues that Mosaic may be a more suitable target than Canada-based Potash, which had previous takeover bids quashed by the government.

Morningstar gives Mosaic shares a four star rating and fair value of $69 a share, an over 25% premium to current share prices of $54.93. Mosaic reported earnings of $1.40 a share on Jan. 4 beating a $1.28 a share consensus estimate compiled by Zacks. Analysts give Mosaic an estimated price target of $64.72 a share on 2012 revenue of $11.5 billion and profit of $2.3 billion, according to data compiled by Bloomberg. For more on Mosaic shares, see 7 fertilizer stocks that hedge funds love and Daniel Loeb's Third Point portfolio.

Within the basic materials space, Morningstar also highlights Cloud Peak Energy ( CLD) as a takeover candidate after Rio Tinto divested its blocking position in the low-cost coal producer that has operations in the Powder River Basin. Other takeover candidates are Global Power ( GLPW), First Quantum Minerals ( FM) and Aptar Group ( ATR).

Nasdaq OMX Group

Nasdaq OMX Group ( NDAQ) is no stranger to the M&A market. After NYSE Euronext ( NYX) and Deutsche Boerse agreed to a February $9 billion tie-up, Nasdaq and IntercontinentalExchange ( ICE) teamed up on a richer $11.3 billion April bid for NYSE Euronext. That bid was quashed by the Department of Justice in May. Not so much an acquirer, Morningstar now highlights Nasdaq OMX as a "as an appealing target by a larger exchange operator, perhaps from outside the U.S." The benefit may be Nasdaq's $4 billion market cap and diversification among different geographies and financial products like stocks, futures, options and index derivatives, according to Morningstar

The New York-based exchange operator operates the Nasdaq stock market, in addition to the Boston and Philadelphia Stock Exchanges and other U.S. options, cash equities future and derivatives clearing businesses. After a 2007 merger with OMX for $3.7 billion, Nasdaq took control of seven exchanges in Nordic countries like Sweden, Denmark and Finland, among others.

Morningstar gives Nasdaq OMX Group a four star rating and a fair value of $33 a share, an over 30% premium to current share prices of $25.32. The company is expected to earn $62 cents a share in its first quarter 2012 results due in February, according to Zacks consensus estimates. Analysts give Nasdaq OMX Group an estimated price target of $29.53 a share on 2012 revenue of $3.5 billion and profit of $488 million, according to data compiled by Bloomberg. For more on Nasdaq OMX shares, see 4 stocks for volatile markets . For more on exchanges M&A see why the MF Global failure won't alter exchange evolution.

While Morningstar doesn't specify a takeover candidate for Nasdaq, previously announced bids may indicate what can and can't work as a deal. Currently, the NYSE Euronext and Deutsche Boerse tie-up is on jagged rocks with European competition authorities, while a February merger attempt between the London Stock Exchange and the Toronto Stock Exchange was iced. Both the LSE and TSX have since found new tie-ups. Depending on the NYSE merger, Deutsche Boerse may have an easier time looking at other U.S. exchanges, with less of a presence in European derivatives than NYSE Euronext.

Morningstar also highlights the CBOE ( CBOE) as being an "easily digestible" target of a U.S. exchange because of its small size and lack of product diversification.

Charles River Laboratories

Drug research services giant Charles River Laboratories ( CRL)may be a leveraged buyout candidate because of its predictable earnings, diminished share prices and management issues, according to Morningstar. "Private equity firms have historically demonstrated a strong interest in contract research organizations, which have been out of favor in the market for some time and ripe for restructuring efforts," write Morningstar analysts.

In Oct. 2011, private equity giants The Carlyle Group and Hellman & Friedman bought PPD ( PPDI) for $3.9 billion at a 30% premium, and INC Research, owned by Avista Capital Partners and the Ontario Teachers' Pension Plan, bought Kendle International ( KNDL) for $232 million in May 2011. "Charles River could be the next logical takeout candidate, despite modest leverage," writes Morningstar.

So-far-unsuccessful cost cutting initiatives may also be attractive for a buyer to wrench out operational gains, while the company's stable cash flows set up nicely for a private equity acquirer.

Morningstar gives Charles River Laboratories a five star rating and a fair value of $50 a share, an over 50% premium to current share prices of $32.78. The company is expected to earn $56 cents a share in its fourth quarter 2011 results due on Feb. 13, according to Zacks consensus estimates. Analysts give the company an estimated price target of $34.71 a share on 2012 revenue of $1.14 billion and profit of $107 million, according to data compiled by Bloomberg. For more on Charles River shares, see 8 biotech stocks to watch.

Onyx Pharmaceuticals ( ONXX), BioMarin ( BMRN) and Seattle Genetics ( SGEN) are Morningstar's top pharmaceutical takeover targets for a large-cap acquirer.

With the retirement of two top executives, large cash stockpiles and a slow R&D pipeline for new drugs, Morningstar highlights Amgen ( AMGN) as a the most likely acquirer in the pharmaceutical space. "We believe the new blood might be beneficial to the firm's productivity and reputation, and could potentially trigger a wave of acquisitions to replenish the pipeline and jumpstart the company," writes Morningstar.

Chico's FAS

Womens clothing retailer Chico's FAS ( CHS) 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.

NII Holdings

Latin American carrier NII Holdings ( NIHD) is a prime target for consolidation by a bigger telecommunications player because of its strong wireless spectrum assets, a 10 million-plus wireless subscriber base and the strongest average revenue per user in the region, according to Morningstar.

"Now armed with spectrum, and more than 10 million subscribers, the firm should start to garner plenty of takeout attention," writes Morningstar. The company currently has wireless operations in Mexico, Brazil, Argentina, Peru and Chile, over 800 megahertz of spectrum and a walkie-talkie partnership with Sprint ( S) to go with its subscribers.

The region's leading carrier and the fourth largest wireless provider in the world America Movil ( AMX) is a strong candidate to take out NII Holdings as it continues its buying spree.

"Internationally, America Movil continues to buy-up everything in sight. After engulfing nearly all of cable-giant Net Servicos in Brazil, the firm recently swallowed up the remaining 40% of fixed-line brethren Telmex that it didn't already own. Given its seemingly insatiable hunger for expansion, scale, and synergies, we wouldn't be at all surprised to see it make a similar play for NII Holdings at some point," writes Morningstar. That's especially true after a 2010 merger between NII Holdings and Televisa was put on ice in Aug. 2011.

Morningstar gives NII Holdings a five star rating and a fair value of $42 a share, more than double its current share price of $20.46. The company is expected to earn $25 cents a share in its first quarter 2012 results due on Feb. 23, according to Zacks consensus estimates. Analysts give the company an estimated price target of $36.04 a share on 2012 revenue of $7.4 billion and profit of $279 million, according to data compiled by Bloomberg. For more on NII Holdings shares, see 5 telecom picks for 2012.

Amerigroup

Managed healthcare company Amerigroup ( AGP), which has a specialty in providing publicly funded healthcare programs to Medicaid and Children's Health Insurance recipients is Morningstar's strongest healthcare takeover target because of an expected inflow of patients to the company when the Affordable Care Act becomes effective in 2014 if it's not overturned.

"Amerigroup - with its 2 million Medicaid members spread across 11 states - seems like a particularly attractive target," writes Morningstar.

A takeover could create back office efficiencies, while also providing a larger corporate managed healthcare provider an inroad into growing publicly funded healthcare programs. " The company has specialized expertise that could enable a historically commercial-market-focused peer such as Aetna ( AET) to compete in the Medicaid business," adds Morningstar. Currently, Morningstar also sees Amerigroup shares as 20% undervalued, even without a M&A catalyst.

Morningstar gives Amerigroup a three star rating and a fair value of $76 a share, a near 10% premium to its current share price of $69.78. The company is expected to earn $61 cents a share in its fourth quarter 2011 results due on Feb. 17, according to Zacks consensus estimates. Analysts give the company an estimated price target of $68 a share on 2012 revenue of $8.2 billion and profit of $188 million, according to data compiled by Bloomberg. For more on managed healthcare sector shares, see TheStreet's portfolio of top-rated managed healthcare stocks.

Dice Holdings

Careers Web site operator Dice Holdings ( DHX) is a strong takeover candidate because of a consolidation trend among Internet job search sites, in addition to its blue chip properties according to Morningstar.

Dice Holdings operates jobs Web sites like Dice.com, eFinancialCareers.com, ClearanceJobs.com and AllHealthcareJobs.com, which serve job seekers in the tech, finance and energy sectors. In Aug. 2010, the company acquired the popular oil & gas media, data and jobs Web site Rigzone.com. "Dice's niche assets are some of the best in the business," writes Morningstar of the sites.

After the company modified its change of control statutes, Morningstar notes that a takeover may now be more lucrative and amenable for the company's executives. While Morningstar doesn't identify a likely acquirer, the rumor mill has been active for Web based careers sites.

In Aug. 2011, Reuters reported that Monster Worldwide ( MNST) could receive takeover interest from larger Web and media giants like Yahoo! ( YHOO), Google ( GOOG) and IAC/InterActiveCorp ( IAC).

Morningstar gives Dice Holdings a three star rating and a fair value of $10 a share, a small premium to its current share price of $9.97. The company is expected to earn $15 cents a share in its first quarter 2012 results due on Feb. 2, according to Zacks consensus estimates. Analysts give the company an estimated price target of $12.71 a share on 2012 revenue of $201 million and profit of $43 million, according to data compiled by Bloomberg. For more on Dice Holdings, see 9 stocks that gain every earnings day.

Abiomed

In the medical devices sector, Abiomed ( ABMD) is Morningstar's top takeover candidate because of key new products in development, which should garner the interest of larger competitors. The Danvers Ma. -based company specializes in ambulatory, catheter and biventricular devices used by cardiologists and surgeons for patients who are suffering from heart trauma.

"Abiomed could attract attention from nearly any large cardiac device firm; in fact, one of J&J's (JNJ) key managers recently expressed M&A interest in the ventricular assist device market in which Abiomed competes," writes Morningstar. In addition, according to Morningstar, the company's minimally invasive Impella devices were recently included in U.S. clinical guidelines and possess strong growth prospects that may attract M&A.

"While fairly valued as a stand-alone entity, we believe Abiomed could be worth nearly 40% more than recent chare prices as an M&A target," writes Morningstar

Morningstar gives Abiomed a three star rating and a fair value of $17 a share, a discount to its current share price of $18.71. The company is expected to lose $1 cents a share in its fourth quarter 2011 results due on Feb. 9, according to Zacks consensus estimates. Analysts give the company an estimated price target of $22.14 a share on 2012 revenue of $149 million and profit of $3.9 million, according to data compiled by Bloomberg. For more on Abiomed, see top stocks of the 10 best mutual funds.

Icon Plc

Dublin-based contract research firm Icon Plc ( ICLR) is a leveraged buyout target like U.S. competitor Charles River Laboratories because of its modest leverage and depressed trading prices, according to Morningstar. The company trades as an ADR on Nasdaq and specializes in outsourced biotech, pharmaceutical and medical device phase I to IV research projects. In 2011, Icon shares dropped over 20% on a slowing of demand in its key European market, according the Morningstar.

Presently, Icon generates more than 40% of its revenue from Europe. "Icon doesn't have the operational baggage of Charles River, but the stock nonetheless has been trading at depressed levels for quite some time now." Writes Morningstar, who points to larger contract research companies like

Covance ( CVD) and Quintiles as acquirers who could benefit from Icon's businesses. "Its global infrastructure could make the firm an attractive target for a mid-tier competitor looking to build scale to gain entry into the industry's top ranks."

Morningstar gives Icon Plc a five star rating and a fair value of $32 a share, nearly double its current share price of $18.51. The company is expected to earn $9 cents a share in its fourth quarter 2011 results due on Feb. 23, according to Zacks consensus estimates. Analysts give the company an estimated price target of $19 a share on 2012 revenue of $1.16 billion and profit of $58.9 million, according to data compiled by Bloomberg. For more on Icon, see 8 health care buys ahead of earnings.

>>To see these stocks in action, visit the 10 Top Morningstar M&A Stock Picks for 2012 portfolio on Stockpickr.

--Written by Antoine Gara in New York

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