News Analysis date published New: 
Wednesday, July 11, 2012 - 08:30
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Wednesday, July 11, 2012 - 08:30
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Wednesday, July 11, 2012 - 08:30

3 Stocks That Could Get Big-Time Buyout Offers

Wednesday, July 11, 2012 - 8:30am

If you're an executive at a struggling retailer, then you've been warned. Either come up with a way to turn the ship around, or get ready for investors to make life quite difficult. In this tough economic climate, investors are in no mood to hold on to any retail stock that is posting weak sales and profits. And that spells a gloomy stock price -- often for an extended period.

Yet there is one crowd that is looking to profit from these retailers' woes: Private-equity firms. These firms are sitting on lots of cash and are starting to circle like vultures, picking up distressed assets on the cheap. Indeed they've already begun to pick off their prey, and I think there's a way for investors to profit from all of this.

At the end of May, Sycamore Partners announced plans to buy clothing retailer Talbots (NYSE: TLB) for $369 million. Shares of Talbot's rose 90% to $2.44 on the day the deal was announced.

Just last week (July 2), Aria Partners announced its intention to acquire shares of Christopher & Banks (NYSE: CBK), another clothing retailer, for $1.75 a share -- a roughly 50% premium to the prior trading session's closing price.

In both instances, these retailers were none too pleased. Talbots only agreed to be acquired after it became apparent that no other suitors would come and top Sycamore Partners' seemingly low-ball offer. Christopher & Banks issued a terse "no thanks" to Aria Partners, though that may just be the initial tactic as the two sides sit down to negotiate.

For the rest of us, this emerging trend bears watching. That's because a number of retailers are trading at rock-bottom prices, and if they languish much longer, then they may soon get their own buyout offers. As I've noted before, that's not an intrinsic reason to own a stock, but it can be seen as one of several reasons to consider buying.

Talbot's and Christopher & Banks emerged on the radars of the private-equity firms after seeing their price-to-sales ratio slip below 0.5. The charm of targeting retailers with such low price-to-sales ratios is that, in theory, they are a lot closer to their multi-year bottom than their multi-year top.

Here are three other retailers sporting rock-bottom valuations that will likely either rebound on their own, or perhaps find themselves the recipient of the next buyout offer.

1. Big Five Sporting Goods (Nasdaq: BGFV)
Price-to-sales ratio: 0.19

This sporting goods retailer went public in 2003 at $9 and was able to deliver solid growth in a rising economy, which eventually pushed shares up to $25 by 2007. By then, earnings were handily exceeding $1 per share a year. Yet in the past few years, economic headwinds have led sales growth to stall out, and earnings fell to just $0.53 per share in 2011. Shares have since slid all the way down to just $7.50.

Yet it's that price-to-sales ratio that shows how unloved this stock is. Even mighty Wal-Mart (NYSE: WMT), which is now the largest seller of sporting goods, yet has struggled with growth, isn't this cheap. It has a price-to-sales ratio that is almost three times higher.

2. MarineMax (NYSE: HZO)
Price-to-sales: 0.40

Stop by any marina, and you'll hear the same tale of woe: Few people are buying boats right now. It's what happens whenever the economy slows. Yet whenever the economy rebounds, old boats go to the scrap heap and buyers begin snapping up new boats once again.

That may be cold comfort for this boat seller. Sales hit $1.26 billion back in fiscal (September) 2007 but are now around $500 million. And its shares have fallen from more than $30 back in 2006 to a recent $9.50. Yet behind the scenes, this is a healthier business than it might appear. Management has boosted sales of services like repairs, spare parts, insurance and financing, all of which carry robust profit margins. As a result, sales and profit trends are improving, even as overall boat sales remain in a funk.

That sets the stage for very solid results when the economy improves, though private-equity firms may look to pounce long before that happens. After all, these same folks are targeting Winnebago (NYSE: WGO) with a recent buyout offer, taking advantage of a cyclical business that is on the down leg of the cycle.

3. Radio Shack (NYSE: RSH)
Price-to-sales: 0.10

This electronics retailer has been a value trap. Shares fell from around $20 in late 2010 to around $7 by this past winter, at which time I figured Radio Shack's track record of prodigious cash flow would provide solid support to shares. Unfortunately, management subsequently announced that cash flow was beginning to slump, and shares have fallen all the way to $4.

Radio Shack generated annual EBITDA of around $275 million a year, though Goldman Sachs now pegs that figure at $150 million in the years ahead. Still, when you consider that the entire company is valued at less than $400 million, you realize that price equity could afford to pay four times projected EBITDA -- and still provide a 50% premium to the current share price.

This has been an ugly stock, without a clear fix, and will likely stay that way until the day arrives that private-equity swoops in with a tempting buyout offer.

Risks to Consider: If the U.S. economy slips into recession, then these retailers could slump even further.

Action to Take --> These are troubled companies, and investors have dumped them to very low valuations. Yet that's precisely the kind of deal that private-equity shops seek out. All of these companies generate solid EBITDA margins and may not be around much longer as a public company if their shares continue to languish. If you're willing to do a little further research on these stocks, then you might find yourself with a stock with an offer on the table, causing it to surge by a wide margin in short order.

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.

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