Navistar International Corp (NAV), Hillshire Brands Co (HSH): Billionaire Mario Gabelli’s Takeover Targets

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Billionaire Mario Gabelli of GAMCO Investors appeared on CNBC on July 9th to discuss a variety of topics, including three stocks which he thought might be potential takeover targets. Acquisitions of public companies occur at significant premia to the market price, allowing investors to earn high profits if they guess right, but we don’t like relying entirely on this kind of speculation and would advise to see that the company is a decent value in its own right before buying.

A trucking takeover

Mario GabelliThe billionaire listed Navistar International Corp (NYSE:NAV) as one of his stocks to watch. We track quarterly 13F filings from hedge funds and other notable investors such as GAMCO as part of our work developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see that GAMCO owned 4.6 million shares of Navistar International Corp (NYSE:NAV) as of the end of March; find Gabelli's favorite stocks.

Navistar International Corp (NYSE:NAV) has been struggling the past few years as its new truck engine did not meet government standards, which drove the stock price down about 50% in the last two years and has analysts calling for losses of $7.63 per share for the current fiscal year. Billionaire activist Carl Icahn has been another major shareholder of Navistar International Corp (NYSE:NAV)—check out more stocks Icahn owns—and had previously tried to merge the company with peer Oshkosh.

Packaged meats

Hillshire Brands Co (NYSE:HSH), a primarily packaged meats company, was another of Gabelli’s potential takeover targets. Hillshire Brands Co (NYSE:HSH)’s revenue was about flat in its most recent quarterly report compared to the same period in the previous fiscal year, yet the stock is still valued at 19 times forward earnings estimates. Part of the reason for this premium pricing is that M&A activity in food companies has been heating up, and the market is anticipating a potential deal. In fact, Hillshire Brands Co (NYSE:HSH)’s own closest peer Smithfield Foods, Inc. (NYSE:SFD) has received an offer from Chinese pork producer Shuanghui.

While the deal might not close, as a number of U.S. constituencies object to the possibility that the U.S. food supply could become exposed to Chinese pork (Shuanghui has stated that, in fact, pork would be exported to China from the U.S.). In addition, activist fund Starboard Value has taken a nearly 6% stake in the company and has been urging the company to break up and potentially sell some divisions. At its current price Smithfield Foods, Inc. (NYSE:SFD) is valued at 11 times consensus earnings for the forward fiscal year.

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