Second 'Double Net' Stock Gets a Big Buyout

 | Mar 18, 2016 | 11:00 AM EDT
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A second "double net" stock that I've been following has agreed to a buyout. Rofin-Sinar Technologies (RSTI) plans to sell itself to Coherent Inc. (COHR) for $32.50 a share in cash — a 41.8% premium over what RSTI had been trading for prior to the deal's announcement.

The $942 million acquisition represents just the latest takeover of what I call double-net stocks, or those that trade for just 1x to 2x net current asset value. My Double Net Dividend Portfolio (which I also call my "Buying Ugly Portfolio") consists of such stocks that have at least $250 million in market cap and have paid a dividend within the past year.

RSTI wasn't in the portfolio, but Ingram Micro (IM) was -- and agreed to a $6 billion buyout last month from China's Tianjin Tianhai Investment Co. Tianjin will pay $38.90 in cash per share for IM, or a 31.2% premium over the stock's price prior to the deal.

Rofin-Sinar had been the subject of demands from activist investor Silver Arrow Capital, but Wednesday's merger announcement might not completely satisfy some shareholders. That's because RSTI traded as high as $43 a share five years ago, although the stock stumbled thereafter and has been range-bound ever since.

But as I wrote recently, takeovers are always a possibility with these cheaply valued companies. Some attributes that Rofin-Sinar and Ingram share also explain their appeal to acquirers — and could make other "Buying Ugly" components ripe for takeovers. For example, both IM and RSTI:

  • Were trading at relatively small multiples of their net current asset values (which is inherent to the portfolio).
  • Have fairly healthy amounts of cash on their books. Both firms ended their latest quarters with more than $6 in cash per share.
  • Traded at relatively low forward price-to-earnings ratios prior to the takeover announcements. IM was selling for about 9x next year's consensus earnings estimates, while RSTI was going for about a 13x forward P/E.

However, the two firms also have some notable differences. For instance:

  • Ingram has a fair amount of debt ($1.1 billion), while Rofin-Sinar has just $23 million of such obligations.
  • IM is a high-turnover/low-margin business and Rofin-Sinar isn't. Ingram earned $215 million last year on more than $43 billion in revenue, which gave the firm just a 0.5% net profit margin. By contrast, Rofin-Sinar bottom-lined $41 million on some $520 million of sales, garnering an 8% net profit margin.

Still, both stocks are fundamentally cheap names, making them attractive to acquirers in a period where there's not a very large universe of low-cost companies out there.

That said, the fact that suitors agreed to buy two double-net stocks in one month was probably just luck, and I don't expect that pace to continue. But in addition to providing updates on the portfolio, I'll use in future columns to highlight some other double-net stocks that aren't currently in the portfolio for one reason or another.

I see a couple dozen such names out there with market caps of $200 million or more, as well as 17 that have market caps between $100 and $200 million. And that excludes unprofitable biotech companies whose net current assets aren't meaningful given such firms' propensities to burn cash.

(Editor's note: An earlier version of this column incorrectly identified RSTI as part of the "Buying Ugly" portfolio.)

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