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These 3 Small Mining Stocks Could be GE's Next Takeover Target
9/27/2012 1:00:00 PM
By: David Sterman
When he was head of General Electric (NYSE: GE ) , Jack Welch had one rule for his company: Be the top player in the field, or don't even bother. The numbers backed him up. Business school professors repeatedly teach that an industry leader can have up to twice thenet profit margins of the second-leading player (which in turn has twice theprofit margins of the third-leading player).
So whenever GE enters into a new niche, it likes to make a rapid push to establish industry leadership.
That's why mining-equipment firms are buzzing right now. GE has stated plans to become a $5 billion player in the industry within a few years. A few acquisitions in the space -- including a May $466 million purchase of Australia's Industrea Ltd. and an August deal for Fairchild International for an undisclosed sum -- have already gotten GE to a $2 billion run rate in the mining-equipment industry.
But there's no way GE can go from $2 billion to $5 billion in just a few years through good old-fashioned organic growth. In fact, the company readily concedes that it will need to make more deals to hit its ambitious target.
This should come as welcome news to investors who are already eyeing the mining sector.
The move comes at a curious time. Leading mining equipment players such as Caterpillar (NYSE: CAT ) are already warning of a slowdown . Why would GE want to invest in an industry that might be cooling off?
It's because the company thinks long-term and is well aware of the fact that many large mines around the world have already given up their most accessible bounty, so future mining efforts will have to dig deeper to get at the good stuff. That's why GE wants to become a leading player in the niche of helping miners work more efficiently, in ever-more challenging environments.
So which company is GE targeting in order to become a key player in this space? Well, industry rumors have been focused on Joy Global (NYSE: JOY ) , which may seem like a bargain for GE after its stock has slid from $96 in early 2012 to a recent $54. Indeed, on a fundamental basis, this is likely a solid entry point, as Joy Global'searnings per share power could exceed $10 by mid-decade thanks to a series of recent acquisitions. It's the near-term mining industry pressures that keep investors from taking that long view.
But here's the real reason the rumors of a GE/Joy Global are likely incorrect. Joy Global is simply too big. The company's currentmarket value is $5.8 billion, and GE would likely need tooffer $8 billion or more to snap up the company. GE rarely makes a deal of that size, and has instead been hinting at smaller tuck-in deals.
Instead, three other companies do look like a nice fit for GE. And while you shouldn't buy a stock solely based on takeover rumors, any deal that transpires would make an investment in any of these stocks just that much sweeter...
1. Generac Holdings (Nasdaq:
Climbing deeper into mines, or venturing farther away from key power grid sources, makes the supply of steady power more challenging. Generac's gear is perfectly suited to this task and nicely complements GE's other offerings in this sphere. GE could likely acquire this company for less than $2.5 billion (implying a solid 50% premium for Generac's shareholders) and add $1 billion in sales to the GE mining division -- before GE uses its sales network to boost Generac's revenue streams even higher.
2. Actuant (NYSE:
The current $2.15 billion market value implies GE could have this business for less than $3 billion and layer in Actuant's current $1.6 billion run rate into its own mining division.
3. Columbus McKinnon (Nasdaq:
Risks to Consider: Stocks should never be bought solely on the basis of a possiblebuyout , and should pass muster from a research perspective, so use these ideas as a starting point for further analysis.
Action to Take --> It seems to be an almost foregone conclusion that GE will make major moves to bulk up its mining division. The company is looking at this space as it is moving out of favor, which is quite savvy. This could help set a floor for all mining-equipment stocks, which have been falling lately due to cautious industry forecasts. Finding good companies that are still poised for far-higher earnings when the cycle peaks is always a wise move, so it would be smart to follow GE's lead.
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.