The Crosshairs

The following article was originally published on April 25 on The Deal Pipeline. Learn more about getting content like this contact Rob Taylor (rtaylor@thedeal.com). A new company from the energy sector joins the top 10 potential activist target list this week: Gulf Island Fabrication (GIFI), which makes oil and gas offshore drilling and production platforms. On Thursday, the Houston company reported net income for the first quarter was up 25%, to $3.5 million, or $0.24 earnings per share, as compared to a year ago net income of $2.8 million ($0.19 per share). However, revenue dropped 10% to $134.7 million from $150.4 million year-over-year. More important, its backlog is down from last year. There has been a dust-up on the board: one director resigned because he wasn't happy with changes in the compensation structure. But because the company was trying to get directors to use more of their compensation for stock purchases, investors would likely view that program positively. It could also be a way to fend off an activist. There's also an update on apparel retailer Perry Ellis International (PERY), this week's No. 6 on the list. Though there would have been a time when the Feldenkreis family's sizable stake in the company would have been an effective deterrent to dissidents -- together father George and son Oscar hold about a 17% share -- that time has come and gone. Activists have taken a look at the company, according to sources, and if it continues to underperform, it may be vulnerable. Last week's ranking is in parentheses. 1. ( ¿ ) Mantech International (MANT) -- Mantech primarily provides IT solutions to the government, a problem in these days of shrinking defense spending, and its fourth-quarter and full-year results announced Feb. 19 reflect that. Fourth-quarter revenue was $491.5 million compared to $621.8 million the year before; full-year 2013 was $2.31 billion compared to $2.58 billion in 2012. UPI: 105% P/E: 19.70 ROIC: -9.57 D/C: 15.00 I%: 0.34 MC: $1B 60DMA: $29.12 2. ( ¿ ) US Cellular (USM) -- On March 27, activist investor Mario Gabelli filed a 13D with the Securities and Exchange Commission telling the telecom's majority owner, Telephone & Data Systems, to but into its minority interest. On April 21, he followed by nominating two directors to the TDS board. UPI: NA P/E: 19.70 ROIC: -3.25 D/C: 20.48 I%: 0.25 MC: $3.3B 60DMA: $40.65 3. (7) Dawson Geophysical (DWSN) -- Some think Dawson would be better off as part of one of the three largest oil services giants. On March 25, it expanded its board to six directors and added Mark Vander Ploeg, a former banker at Evercore Partners. UPI: 136% P/E: 22.32 ROIC: 1.93 D/C: 5.73 I%: 4.65 MC: $230.8M 60DMA: $29.14 4. ( ¿ ) Gulf Island Fabrication (GIFI) -- The fabricator of offshore drilling and production platforms on April 24 reported higher net earnings on higher sales for first-quarter 2014, but its backlog is down from this time last year. Gulf Island's No. 2 shareholder, with a 10.65% stake, is value investor Heartland Advisors, while Dimensional Fund Advisors has a 6.47% stake and chairman John Laborde's family trust has a 6.38% stake. Company director Ken Tamblyn quit in November over a compensation dispute -- Gulf Island wanted more of director's pay to be tied into stock purchases. UPI: 122% P/E: 22.74 ROIC: 2.65 D/C: 0 I%: 2.38 MC: $341.7M 60DMA: $21.28 5. ( ¿ ) Orthofix International (OFIX) -- The spinal and orthopedic medtech company whose stock bounced March 27 after the company issued its restated financials the day before also reported that fourth-quarter net sales decreased 10%, to $106 million. UPI: 119% P/E: 29.35 ROIC: 3.08 D/C: 4.78 I%: 3.29 MC: $580M 60DMA: $25.67 6. ( ¿ ) Perry Ellis International (PERY) -- The Feldenkreis family continues to own a sizable stake in the apparel company -- about a 17% stake between George and Oscar. But, in today's heightened activism environment even a sizable insider stake might not be a deterrent; sources tell The Deal that there has been activist interest in the company. On Feb. 24, Perry Ellis said fourth-quarter revenues would decline 16%, to $216 million from $258 million during a similar period last year, putting more pressure on the company. UPI: 116% P/E: 17.48 ROIC: 3.15 D/C: 34 I%: 22.03 MC: $230.6M 60DMA: $14.42 7. (1) Approach Resources (AREX) -- Independent oil and gas explorer's largest shareholder, First Manhattan Co., is a value investor that has been known to take an activist stance ¿ the fund won a bitterly fought proxy fight with biotech Vivus last year. A sector investor said that activists, perhaps First Manhattan, perhaps others, are involved with the company. Simmons & Co. International wrote in a report April 8 that Approach is one of the cheapest Permian players, trading at 4.5 times enterprise value over debt-adjusted cash flow and that while short interest remains high, continued operational execution could help reduce it. UPI: 216% P/E: 22.16 ROIC: 3.15 D/C: 26.03 I%: 10.20 MC: $779.2M 60DMA: $20.74 8. ( ¿ ) Stage Stores (SSI) -- After the retail store operator reported Jan. 13 that comparable store sales were down 1.5% for the holiday season, on March 6 it sold discount chain Steele's & Deals brand to Hilco Global. Its remaining portfolio includes Bealls, Goody's, Palais Royal and Peebles. It could shed more brands and properties, or pull a Macy's (M) -like move and bring them all under one brand, getting rid of underperforming or nonessential locations. UPI: 52% P/E: 15.52 ROIC: 3.64 D/C: 12 I%: 4.49 MC: $692.5M 60DMA: $21.87 9. (-) Five Star Quality Care (FVE) -- On April 15, the senior living communities operator filed its restated financials for which its lenders had waived defaults under its $25 million and $150 million secured revolving credit facilities. UPI: 57% P/E: 28.79 ROIC: 3.98 D/C: 17.17 I%: 3.19 MC: $242M 60DMA: $5.42 10. (8) Contango Oil & Gas (MCF) -- Contango's stock was up after a positive fourth-quarter earnings report March 3, under new management after its CEO died last year. Some analysts upgraded price targets and ratings, though others have been concerned the company isn't getting value for the onshore assets it picked up with its acquisition of Crimson. Could still be encouraged to sell its offshore assets to get a better stock price. UPI: 133% P/E: 22.02 ROIC: 4.13 D/C: 0 I%: 3.55 MC: $925.8M 60DMA: $46.47 KEY: UPI: Underperformance Index (Percentage by which the company underperformed its sector) P/E: Forward Price/Earnings ratio ROIC: Return on invested capital D/C: Debt to capital ratio I%: Percentage of insider shares outstanding MC: Market capitalization 60DMA: 60-day moving average -- written by Paula Schaap This is an excerpt from The Deal's weekly Activist & Regulatory Newsletter detailing the latest activist situation stories from the week as written by our senior journalists. Each issue features an exclusive top 10 list of potential activist targets as compiled and tracked by The Deal newsroom; articles featuring top activist situations across M&A and arbitrage, capital & legal and financial services; top insurgencies of the week; and, a weekly calendar of upcoming issues impacting private equity, hedge funds and the financial services sector. For a complimentary trial please contact Rob Taylor (rtaylor@thedeal.com).

The Crosshairs

The top 10 potential activist targets from The Deal Pipeline.

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