CNBC recently screened for small- and mid-cap companies that could attract takeover offers on the basis of valuation. CNBC examined free cash flow yield, enterprise multiple, and total debt as a percentage of equity to find the following nine names emerged:
| Symbol | Company | Industry | EV/EBITDA | FCF Yield | Debt % |
| NPK | National Presto Industries, Inc. | Industrials | 5.1 | 15.4 | 0.0 |
| ANF | Abercrombie & Fitch | Cons. Disc. | 4.3 | 7.4 | 24.7 |
| BKS | Barnes & Noble | Cons. Disc. | 5.2 | 18.8 | 21.7 |
| MOV | Movado Group | Cons. Disc. | 5.0 | 7.9 | 0.0 |
| SAFM | Sanderson Farms | Cons. Staples | 3.9 | 7.2 | 2.2 |
| MGLN | Magellan Health | Health Care | 5.4 | 7.8 | 24.0 |
| GDOT | Green Dot | Financials | 2.4 | 9.2 | 24.0 |
| VSH | Vishay Intertechnology | Info. Tech. | 3.8 | 6.4 | 24.9 |
| KLIC | Kulicke & Soffa | Info. Tech. | 5.8 | 6.5 | 2.4 |
Source: These 9 stocks could be the next takeover targets
[W]hich companies could be next to get a suitor?
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[O]ne must think like an acquirer. While stock investors typically look at valuation measures like price-to-earnings ratios or a stock’s dividend yield, a potential pursuer looks at a company differently, from what’s known as a “control perspective” in the valuation context.The price one is paying for a company’s expected earnings, or the size of the dividend checks that company sends out, has paramount relevance for an individual investor. That’s because the investor must more or less accept the company’s operations and corporate structure as is. But if an investor is acquiring control over a company, that party can completely revamp a company’s operations—changing its management, shifting its capital structure, or combining operations with other portfolio companies, among many other maneuvers.
That’s why investors in prospective M&A candidates should perform valuation analysis in the context of a company’s core operations.One way to do this is to examine a company’s free cash flow yield. That’s a valuation measure that compares a company’s cash flow per share (a broad measure of how successfully a company is generating income) to its market price per share.
A second way to get inside the mind of a potential buyer is to look at a metric known as enterprise multiple, which we get by taking a company’s enterprise value (essentially, the market value of a company’s shares plus the market value of its debt, minus its cash and investments) and dividing it by its earnings before interest, taxes, depreciation, and amortization (EBITDA). The lower a company’s enterprise multiple, the less investors are paying for a business in terms of its earnings, and thus the better value it may be.
However, even if a company has an attractive valuation on both a free cash flow yield and enterprise multiple basis, a high degree of leverage will make an acquisition less attractive. Also, a high debt-to-equity ratio may also be taken as a sign of poor corporate health (though cross-industry or even cross-company capital structure comparisons are difficult to make).
Read more: These 9 stocks could be the next takeover targets
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