Today Kohlberg, Kravis, and Roberts made a run for Dollar General stores DG, a discount retailer (see story).
For a while now, Dollar General has been on the primary value screen that I use and that I wrote about in my earlier post “The stock screen that picked two takeovers”.
So am I a genius? Yeah, sure, for a day. 
But the value of a cash-focused screen is that it puts you in the ballpark for takeover candidates. Companies usually take over other companies for two main reasons (1) the target has a higher earnings growth rate, which will make the buyers earnings look better, or (2) the target has a lot of cash that, along with a discounted stock price, makes it attractive for a leveraged buy-out (where the acquirer earmarks the cash for paying down the financing raised for the takeover).
The primary screen I use features companies with both good cash positions and decent returns on equity – so often there will be potential acquirers sniffing around. When you use such a screen, focus especially on companies whose names you recognize. Known companies that are temporarily in the dog-house are additionally attractive for their brand.
I don’t use the screen specifically to hunt for takeovers, but it’s shown to have its benefits.
For those that don’t want to dig back into previous posts, the two companies I owned that were taken out in the past 6 months are Kos Pharmaceuticals KOSP (no longer listed) by Abbott Labs ABT, and Florida Rock Industries FRK by Vulcan Materials VMC. Alas, though I thought about it, I didn’t move on Dollar General when it was in the low-teens; and it was the recognized brand name that caught my attention.
KKR recently also took a big enough position in Motorala MOT to have to file with the Securities Exchange Commission. MOT hasn’t quite made my screen as such, but I did a cash analysis on it and I agree with KKR that it is a very good value at current prices – at least compared to other tech stocks.
Cheers,
Allocator
2 Comments
March 13, 2007 at 9:16 pm
Do you think BOOM is a takeover candidate?
March 13, 2007 at 9:53 pm
One can never know for sure about any stock as a takeover candidate. When I checked out your BOOM (Dynamic Materials Corporation), it has a nice return on equity of 36%, and a decent P/E of 18. It’s price/cash-flow ratio is at 16.7, close but not quite low enough to be picked up by my standard screen.
It has very little debt, so its liabilities coverage was also within the bounds I like to see, but it doesn’t exactly have a huge pile of cash and marketable securities. The cash + marketable securities + receivables – payables per share is about 4% of the stock price. I get interested at 20% for a true cash play.
Notwithstanding, this looks like a nice little small-cap growth stock (11 million shares outstanding). Thanks for pointing it out. It’s takeover appeal might be its unique manufacturing niche (they weld metal plates together with explosives – what’s not to like about THAT?) as a vertical integration acquisition, or maybe just its growth rate.
But I’m not a takeover specialist. I look for companies with lots of cash more for their financial strength and flexibility.
Cheers,
Allocator