My first rule of investing: never buy stock in a company simply
because you think it will be bought out. Simply put, most rumored
deals never happen. But I do like to keep an eye the rumor mill,
because it can often point the way to intriguing companies that
still look good on their own merits.
There's lots of chatter out there right now, even though overall
activity levels have cooled since the robust levels of late summer.
Among the rumors making the rounds, these three potential targets
look fairly appealing on their own merits.
After a recent downbeat quarterly report released in early
December,shares of this teen-focused retailer plunged nearly -15%.
In the fickle world of teen fashion, this retailer has moved in and
out of the spotlight so many times I've lost count. At times, teens
flock to Aeropostale while shunning rivals
Abercrombie & Fitch (NYSE:
Hot Topic (Nasdaq:
. Not this season.
But in good times or bad, Aeropostale is nicely profitable:
free cash flow
hit a record $280 million in fiscal (January) 2010. And management
has proven to be quite friendly to shareholders, reducing the share
count by 25% in the past five years. Prior to the recent quarterly
shortfall, management announced plans in late November to buy back
another $300 million in stock, which would reduce the share count
by an additional 12% to 15%.
That's not enough to boost the company's stock price, which now
trades for less than 10 times (downwardly revised) fiscal 2011 and
2012profit forecasts. And that's led some to suspect that private
equity firms have approached the retailer about going private.
What's it worth? As a simple rule of thumb, it's hard to pull off a
deal below the 52-week high, which in this case is around $32,
around 35% above current levels. Is management inclined to sell?
Perhaps not. They know that fickle teens could quickly return from
rival retailers, and when that happens,shares could re-visit the
52-week high -- and then some. This looks like a solid value play
regardless of whether a buyout materializes. Butshares could
languish for at least a few more quarters until same-store sales
start to perk up.
Eastman Kodak (NYSE:
Withshares of this former consumer electronics giant languishing
below $4 this summer, many investors figured it would soon be left
for dead. After all, the core film developing business -- which has
shrunken considerably but still throws off
-- will eventually dry up. (Though some believe the legacy business
may have found a floor, supporting demand for printing press
plates, color negative paper and other old-school photography
hardware.) The company has bought time by re-financing its debt
burden, but it will eventually need to start paying off its more
than $2 billion in underfunded pension benefits.
On the positive side of the ledger, Eastman Kodak has reasonable
in the area of digital cameras and inkjet printers. But if you
exclude royalty revenue, this is still an unprofitable company.
Rumors of a buyout first emerged in late October, pushingshares up
+10% in one day to around $4.50.Shares have made a similar upward
move in the last week and now fetch around $5.25. Trading action
among Eastman Kodak's call options has been even more robust.
The logic behind a buyout varies. Some think the company's
still-strong brand name recognition could be better monetized by a
larger and more sophisticated consumer electronics company. Others
think an Asian firm may view the company as a way to quickly
control U.S. market share in cameras and printers. Yet others think
that the company's base of intellectual property is
underappreciated in the context of the company's current
Frankly, I'm not sure if any of these rumors hold any water. But it
is hard to ignore the heavy call buying, which you usually see when
traders think they smell a big gain. Rumors of an $8 or $9 a share
buyout price have circulated on some trading desks, which
wouldyield a huge gain for $5 and $6 calls. Again, who knows if
there is fire here, or if this is just smoke.
Broadwind Energy (Nasdaq:
The U.S. wind power business really hit the tank in 2010 as hope
for federal support never materialized. So this company, which
makes super-sized wind turbines, turbine gearing and other
components, has seen itsshares fall from $10 to $2 in the past
year. With its cash balance at just $10 million, continued expected
operating losses and an inability to raise much interest in a fresh
sale of equity at this time, Broadwind's options are dwindling
while it waits for the wind energy industry to rebound.
. The industrial titan has been expanding its portfolio of wind
power products and may be sniffing around, according to the rumor
mill. Broadwind is already a supplier of gears to GE, although it
also works with GE rivals such as Vestas (which could complicate
any deal talks). Buyout rumors gained credence a few months ago
when an analyst at Raymond James suggested the two firms may be
talking. (That was an unusual move. As a former sell-side analyst,
I was prohibited from ever writing about any such rumor gossip --
which is usually a big no-no with securities regulators).
The rumors gained fresh credence on November 30 whenshares shot up
more than 10% on very heavy volume. Volume spiked sharply again
this past Monday. What would GE pay? I've seen several references
to a $2.50 buyout 25% above current levels. Broadwind likely
believes that such an offer is far too low, but it's not clear how
muchleverage the company has.
Action to Take -->
Aeropostale is an excellent company that has recently stumbled. Its
prodigious cash flow and large retail footprint tell you that it
will weather the current storm just fine. I'd buy this company
regardless of any buyout rumors.
The Eastman Kodak rumors seem quite speculative, although the
company's brand recognition, intellectual property and decent
market share in cameras and printers surely hold appeal.
Despite the modest upside on this play, my gut tells me that
Broadwind is likely the most feasible buyout scenario of the three
companies discussed here. A decision to buy Broadwind makes ample
sense for GE. But if the GE deal doesn't happen,shares could
quickly re-visit the 52-week low of $1.53.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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