The report found five particularly vulnerable companies: ConAgra Foods, Inc. (NYSE:CAG), Consolidated Edison, Inc. (NYSE:ED), Tyco International Ltd. (NYSE:TYC), Fifth Third Bancorp (NASDAQ:FITB) and Ameren Corp (NYSE:AEE). This list might surprise many investors. After all, most of these firms have reputations for stability and good governance however this might not be enough to insulate them from potential takeovers.
Investing in potential acquisition targets is always a risky business. Investors can use the following rundown as a starting point for further research into the investment-worthiness of these five firms.
ConAgra Foods
ConAgra Foods, Inc. (NYSE:CAG) is a major grain and livestock processor that operates on a global basis. The company has fairly strong finances and is widely regarded as a top pick for conservative, retirement-focused investors. The company earned a little less than $500 million on 2012 revenues of approximately $14.2 billion. Altogether, this added up to a profit margin of just over 3 percent. Since these margins are somewhat low relative to the company’s peers, it seems reasonable that an activist investor would be interested in the company.
Consolidated Edison
It is a classic power utility that provides electricity and heating services to customers in the New York City area. It uses oil, natural gas and other means to fire its plants. The company’s finances are in good shape, and it yields a healthy 4 percent. In 2012, Consolidated Edison, Inc. (NYSE:ED) earned approximately $1.1 billion on $12.2 billion gross revenues. Although its return on equity is lackluster at just 10 percent, this is par for the course for a utility company. While boasting acceptable financial performation, Consolidated Edison, Inc. (NYSE:ED) is heavily indebted, carrying over $11 billion in long-term debt and just $395 million in cash. This could be a factor in any potential activist takeover.
Tyco International
Switzerland-based Tyco International Ltd. (NYSE:TYC) is a diverse conglomerate that does a significant amount of business in the healthcare industry. The company’s finances are not in great shape, but some of its recent weakness may have to do with an ongoing acquisition spree. In 2012, Tyco International Ltd. (NYSE:TYC) lost $270 million on about $10.5 billion gross revenues. Although it has $3 in debt for every $1 in cash on hand, it does enjoy an excellent free cash flow of nearly $900 million. Accordingly, it might be fair to bet on a turnaround in its fortunes.
Fifth Third Bancorp
Fifth Third Bancorp (NASDAQ:FITB) is a large regional bank that has a dominant presence in the industrial Midwest. After hitting a rough patch during and after the recent recession, Fifth Third Bancorp (NASDAQ:FITB) has lately been on a tear. In 2012, the company earned $1.5 billion on $6.4 billion gross revenues. With a profit margin of nearly 25 percent, it is clearly doing something right however with more than $4 in long-term debt for every $1 in cash, Fifth Third Bancorp (NASDAQ:FITB) also needs to increase its cash flow. An activist investor could have something to say about this.
Ameren Corporation
St. Louis-based Ameren Corp (NYSE:AEE) is a utility and merchant power company that operates primarily in St. Louis and surrounding areas of Illinois and Missouri. The company uses coal, oil, natural gas, and other sources to generate its electricity. Despite adhering to a similar business model, Ameren Corp (NYSE:AEE) is in significantly worse financial shape than Consolidated Edison. The company lost about $975 million on just over $6.6 billion gross revenues in 2012. It has negative levered free cash flow and nearly $7 billion in debt to just $300 million in cash.
Invest or Wait?
With the exception of Ameren, all of these companies would normally be adequate investment targets. Out of these five, ConEd probably has the strongest finances and thus represents the “safest” choice. Long-term investors could probably make a case for ConAgra Foods, Inc. (NYSE:CAG) and Tyco International Ltd. (NYSE:TYC) as well. Those who don’t mind Fifth Third’s staggering debt load could be forgiven for making a play for that firm as well. For further information on activist investors, the companies they go after, and the strategies to take to profit from their moves click here.
For these reasons, Ameren might actually be the most likely takeover target on this list. With a market cap of less than $8.5 billion, a deep-pocketed activist would have no problem accumulating a stake in the firm and imposing his or her will on its board. With such deep-seated financial problems, he or she might decide that a “housecleaning” is in order. Investors who believe that such a move would boost the company’s long-term performance would do well to look at Ameren at these levels.
In sum, these five companies each present their own set of advantages and challenges. Investors who wish to buy into a specific firm ahead of a potential activist takeover should look to relatively weak Ameren. Those who wish to buy into a firm that can easily stand on its own would do better to look at ConEd or Tyco. Of course, all investors must perform their own due diligence before making decisions with their funds.
The article Five Stocks That Look Especially Vulnerable to Activist Investors originally appeared on Fool.com and is written by Mike Thiessen.
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