Takeover and LBO Targets Undervalued by the Graham Number

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One of the biggest considerations companies make when deciding whether to acquire another company is how fairly priced the company is. If the company is overvalued, others will not be interested in buying it.

Analysts and investors follow potential takeover/leveraged buyout targets because when a company announces that it is being taken over, its stock price usually jumps to reflect the takeover premium being paid. This is usually a profitable event for shareholders.

We compiled a list of rumored potential takeover/LBO targets from various sources including CNNMoney and Wall St. Cheat Sheet. We then compared their stock prices to their Graham numbers to find those that may be attractively priced or undervalued.


The Graham number is a measure of maximum fair value created by the "godfather of value investing," Benjamin Graham. It is based on a stock's earnings per share and book value per share:

Graham number = Square Root of (22.5 x Trailing-12-Month EPS x Most-Recent-Quarter BVPS)

The equation assumes that the P/E ratio should not be higher than 15 and the P/BV ratio should not be higher than 1.5. Stocks trading well below their Graham number, or their maximum fair value, may be undervalued. This could indicate that the stocks have more value to price in.

Business section: Investing ideas
Below are the results from this screen. These rumored takeover/LBO targets are trading at steep discounts to their Graham numbers, which may indicate that they are also attractively priced.

Do you think these companies are attractive takeover targets?

Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. American Electric Power (NYS: AEP) : Engages in the generation, transmission, and distribution of electric power to retail customers. Takeover/LBO rumor sourced from Wall St. Cheat Sheet. Diluted TTM earnings per share of $4.02 and a MRQ book value per share value of $30.33 imply a Graham number fair value of $52.38. Based on the stock's price at $38.44, this implies a potential upside of 36.26% from current levels.

2. Best Buy (NYS: BBY) : Operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. Takeover/LBO rumor sourced from CNNMoney. Diluted TTM earnings per share of $2.90 and a MRQ book value per share value of $16.13 imply a Graham number fair value of $32.44. Based on the stock's price at $26.29, this implies a potential upside of 23.4% from current levels.

3. Gannett (NYS: GCI) : Operates as a media and marketing solutions company in the United States and internationally. Takeover/LBO rumor sourced from Wall St. Cheat Sheet. Diluted TTM earnings per share of $1.89 and a MRQ book value per share value of $9.82 imply a Graham number fair value of $20.44. Based on the stock's price at $15.45, this implies a potential upside of 32.27% from current levels.

4. Kulicke & Soffa Industries: Designs, manufactures, and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits, high- and low-powered discrete devices, light-emitting diodes, and power modules. Takeover/LBO rumor sourced from Bloomberg Businessweek. Diluted TTM earnings per share of $1.62 and a MRQ book value per share value of $6.55 imply a Graham number fair value of $15.45. Based on the stock's price at $12.08, this implies a potential upside of 27.91% from current levels.

5. OfficeMax (NYS: OMX) : Distributes business-to-business and retail office products. Takeover/LBO rumor sourced from CNNMoney. Diluted TTM earnings per share of $0.38 and a MRQ book value per share value of $6.27 imply a Graham number fair value of $7.32. Based on the stock's price at $5.90, this implies a potential upside of 24.1% from current levels.

6. Oshkosh (NYS: OSK) : Designs, manufactures, and markets a range of access equipment, specialty vehicles, and vehicle bodies worldwide. Takeover/LBO rumor sourced from Bloomberg Businessweek. Diluted TTM earnings per share of $2.32 and a MRQ book value per share value of $17.86 imply a Graham number fair value of $30.53. Based on the stock's price at $23.22, this implies a potential upside of 31.5% from current levels.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


At the time this article was published Kapitall's Alexander Crawford does not own any of the shares mentioned above. BVPS and EPS data sourced from Yahoo! Finance. The Motley Fool owns shares of Kulicke & Soffa Industries and Best Buy. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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