|8 Likely Buyout Targets to Consider Today|
1 comment | by: Investment Underground March 21, 2011 | about: AVP, DPS, HANS, LO, PEET, STZ, UA, WPO
With their recently announced deal to buy half of Yoplait, General Mills (GIS) has prompted rumors of further consolidation in the consumer durables sector. Looking forward, we at Investment Underground think the following stocks could be prime takeover candidates:
Avon Products (AVP): Avon Products is a global manufacturer and marketer of beauty and related products. The three main categories that Avon operates in are beauty, fashion, and home products. They are also the world’s largest direct seller with more than $10 billion in annual revenue. AVP has a market cap of $11.43B, operating cash flow of $702M, and consistent quarterly dividends around $0.22 per share, making AVP a leader in personal products globally. Given AVP’s positioning in the personal products industry, Avon could be a prime takeover candidate for competitors such as The Estee Lauder Company (EL) or French conglomerate L'Oreal SA (LRLCY.PK) looking to expand their reach into the direct sales portion of the personal products market. Because AVP currently has one of the lowest operating margins in the sector (11.50%), competitors such as EL could view AVP as an attractive investment in hopes of increasing profitability.
Constellation Brands (STZ): Constellation Brands, Inc. is a wine company with a market position in the United States, Canada, the United Kingdom, Australia and New Zealand. STZ has three core business segments: Constellation Wines (branded wine, spirits and other), Corporate Operations and Other, and Crown Imports (imported beer). Some of STZ’s largest brands include: SVEDKA vodka, Robert Mondavi wines, Arbor Mist, and Simi. Through a 50/50 joint venture with Grupo Modelo, STZ is positioned as a leading importer of premium beer in US, with a strong brand portfolio that includes: Corona, Modelo, Pacifico, and St. Pauli Girl. STZ has a market cap of $3.85B, operating cash flow of $582.8M, and currently trades at a 19.38 P/E multiple. STZ could be a potential target for Diageo (DEO) given STZ’s strong wine portfolio and lucrative joint beer venture with Grupo Modelo. Diageo is currently the world’s leading producer of spirits, but buying a company with strong exposure to the wine and beer categories such as STZ would allow DEO to expand their market presence in the alcoholic beverages industry.
Lorillard (LO): Lorillard is a manufacturer of cigarettes in the US. LO’s most popular product by far is their Newport line of menthol flavored cigarettes, which comprise a 35% market share of all menthol cigarettes sold in the US, although LO does manufacture other brands including: Kent, True, Maverick, and Old Gold. Lorillard has a $12.68B market cap, which makes it one of the smallest tobacco manufacturers in the US. LO has the highest operating margin in the industry at 29.14%, an operating cash flow of $1.09B, and pays a $1.12 dividend. LO could be a potential LBO target of tobacco conglomerate Altria (MO), given LO’s consistent cash flows, and the FDA’s decision to not ban menthol cigarettes last Friday.
Dr. Pepper Snapple Group (DPS): Dr Pepper Snapple Group, Inc. is an integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States, Canada and Mexico. Some of DPS’ brands include: Dr. Pepper, 7UP, Snapple, Mott’s, Hawaiian Punch, and Clamato. Currently, half of DPS’ annual volume is distributed through a company-owned bottling and distribution network, with the remaining volume divided among Coca-Cola, Pepsi, and independent third-party distributers. DPS has a market cap of $8.48B, has an operating cash flow of $2.54B, and pays a $0.25 dividend. Due to DPS’ 40.4% market share of non-cola carbonated soft drinks, DPS is a strong potential takeover target of industry titans Coca-Cola (KO) and PepsiCo (PEP).
Hansen Natural (HANS): Hansen Natural Corporation is a holding company that, through its subsidiaries, develops, markets, sells and distributes products in the alternative beverage category which includes: natural sodas, fruit juices, juice drinks, energy drinks and energy sports drinks. HANS has a market cap of $4.93B, operating cash flows of $229M, and trades at a 24.28 P/E multiple. HANS is particularly lucrative target, as it has $599M in cash on its balance sheet with only $274k in debt. HANS is situated in a similar position as DPS with regards to potential takeover candidates, which include KO and PEP.
Under Armour (UA): Under Armour is a relative newcomer to the performance apparel and gear industry that pioneered an immensely popular compression and perspiration wicking fabric that is widely used by both professional athletes and the general public. UA now competes with industry staples Nike, Reebok, and Adidas. UA has a market cap of $3.24B, operating cash flows of $50.11M, and trades at a 47.64 P/E multiple. Due to UA’s competitive operating margin of 11.68%, and $203M cash on its balance sheet compared with only $15.9M of debt, UA could be a potential takeover target of rival Nike (NKE), who currently holds $4.79B of cash on its balance sheet and could greatly benefit through the acquisition of UA branded products.
Peet's Coffee & Tea (PEET): Peet's Coffee & Tea, Inc. is a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea. The Company sells its coffee through multiple channels of distribution, including grocery stores, home delivery, office, restaurant and food service accounts and Company-owned and operated stores in six states. PEET has a market cap of $617M, operating cash flows of $24.76M, and trades at a 37.5 P/E multiple. Given the recent announcement of a Starbuck’s (SBUX) and Green Mountain Coffee (GMCR) partnership to provide Starbuck’s coffee in GMCR’s k-cup home brewing station, there has been pressure on PEET to team up if possible. Additionally, there have been rumors of a Starbuck’s buyout to provide PEET products in grocery stores and single-serve coffee dispensers.
Washington Post (WPO): The Washington Post Company is a diversified education and media company. The company’s Kaplan, Inc. subsidiary provides a variety of educational services, both domestically and outside the United States. WPO’s newsprint holdings are concentrated in their flagship Washington Post newspaper, but WPO also has magazine holdings in Newsweek, and operates six television broadcast stations. WPO has a market cap of $3.55B, pays a dividend of $2.35/share, and has operating cash flows of $693M. There have been talks of WPO selling off divisions, or possible selling the company to a private equity buyer. Due to Goldman Sachs (GS) holding a 40% stake in Education Management Corporation (EDMC), possible buyout candidates for WPO may include other prominent investment banks such as JP Morgan (JPM) or Barclays PLC (BCS) in an effort to gain a piece of this increasingly profitable industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.