The Crosshairs

The following article was originally published on May 9 on The Deal Pipeline. Learn more about getting content like this contact Rob Taylor (rtaylor@thedeal.com). A number of new companies are joining our top 10 and watch lists this week while one is going off on improved earnings and an aggressive divestiture program. Actuate (BIRT) makes its debut in the No. 7 slot on our top 10 potential activist target list. The business software provider has been on a turnaround campaign for several years now, trying to move away from its licensing business model into subscriptions. The company reported a first quarter revenue drop in May and an industry source said activists are already checking it out. Herb Greenberg of TheStreet contributes RealPage (RP) to the watch list. Greenberg has had the company on his Reality Check watch list, noting that the rental housing software company's organic growth had slowed to 12% in the fourth quarter, despite the company's assurances that it expected to hit targets of 20% to 25%. While the stock jumped after RealPage's May 6 earnings release, Greenberg remains unconvinced: Target growth and the reality of getting there are two different things, he wrote in his Reality Check report. Checkpoint Systems (CKP) also joins our watch list. Since activist MMI Investments LP dropped its stake in 2011 after pushing the RFID products provider to sell -- the company declined and MMI closed up shop because of what one source called internal fund dynamics -- management has been on a cost-cutting campaign. But first quarter revenues were down 0.5%, and industry observers believe not much has changed since MMI went away. Coming off the watch list this week is Halcon Resources (HK). The oil and gas explorer had a good first quarter earnings report, plus it announced plans for more non-core divestitures in a strong M&A environment for energy deals. Last week's ranking is in parentheses. 1. (1) Approach Resources (AREX) ¿ Independent oil and gas explorer Approach Resources' 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 (VVUS) last year. Simmons & Co. International wrote in a report April 8 that Approach is one of the cheapest Permian players trading at 4.5x enterprise value over debt-adjusted cash flow. UPI: 190% P/E: 21.95 ROIC: 3.15 D/C: 26.03 I%: 10.2 MC: $783.1M 60DMA: $20.83 2. (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. UPI: 174% P/E: 19.80 ROIC: 2.65 D/C: 0 I%: 2.39 MC: $69.8M 60DMA: $21.36 3. ( ¿ ) Titan International (TWI) ¿ Titan International has been under the watchful eye of Carl Icahn protege Mark Rachesky for months now. After CEO claimed Rachesky ¿ whose MHR fund has A 10.9% stake in the tire maker ¿ wasn't interested in a board seat, on April 24 the company said it was expanding its board to add Rachesky shortly before it said sales had dropped 6.8%. UPI: 162% P/E: 37 ROIC: 2.01 D/C: 41.78 I%: 3.99 MC: $878.3M 60DMA: $4.42 4. (3) Zagg (ZAGG) ¿ Zagg, a maker of accessories for mobile and gaming devices, as well as iFrogz branded headphones, could become an activist target as its stock price has declined in line with its revenue and Ebitda. On March 24, The Deal broke the news that Logitech is considering an approach to its smaller competitor. On May 6, Zagg reported 1Q sales were down 5% year-over-year. UPI: 161% P/E: 7.03 ROIC: 8.78 D/C: 12.32 I%: 5.46 MC: $138.3M 60DMA: $4.42 5. ( ¿ ) Rackspace Hosting (RAX) ¿ Over 2013, Rackspace shares lost more than 50%, plummeting from nearly $80 a share into the mid-$30s. Things got worse after Google Inc. announced plans to aggressively slash cloud computing costs. On May 6 Bloomberg reported Rackspace cancelled its May 21 appearance at the JPMorgan Technology, Media, and Telecom conference due to a scheduling conflict, renewing takeover speculation. UPI: 154% P/E: 42.34 ROIC: 8.29 D/C: 5.79 I%: 15.12 MC: $3.8B 60DMA: $32.96 6. (5) Demand Media (DMD) ¿ Internet media company Demand Media has been hurt by changes to Google's algorithm, especially at its flagship website eHow, leading the company to project that revenues would continue to decline this year. On May 8, the company reported that 1Q revenue declined 8% year-over-year to $89.8 million. UPI: 153% P/E: NA ROIC: NA D/C: 16.25 I%: 7.6 MC: $371.6M 60DMA: $4.75 7. ( ¿ ) Actuate ¿ Business software provider's stock took a hit in early May ¿ down 28% after announcing a revenue drop in the first quarter of nearly one-third to $24.1 million. Management said its results would push it to move faster into the subscription business from the licensing business, but an industry source said that activist funds are already looking the company over. UPI: 148% P/E: 35.45 ROIC: 6.16 D/C: 0.69 I%: 7.15 MC: $179.6M 60DMA: $5.71 8. (6) American Eagle Outfitters (AEO) ¿ CEO Jay Schottenstein came back to helm the teen retailer after he helped Robert Hanson out the door in January. Though the company's underperformance and other valuations make it a potential target, sources tell The Deal that Schottenstein is determined to enact his turnaround vision before considering a sale; and shareholders will likely be willing to give him time. UPI: 139% P/E: 16.46 ROIC: NA D/C: 0 I%: 4.36 MC: $2.2B 60DMA: $12.62 9. (2) Gordmans Stores (GMAN) ¿ Midwest discount retailer's CEO Jeff Gordman, grandson of the founder, resigned March 25 as the company reported 4Q comparable store sales fell 7.4%. Gordman's had been in expansion mode for a few years, but now plans to close stores. UPI: 136% P/E: 19.50 ROIC: NA D/C: 55.55 I%: 3.52 MC: $90.8M 60DMA: $5.52 10. ( ¿ ) Contango Oil & Gas (MCF) ¿ Contango's stock was up after a positive fourth quarter earnings report March 3. 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. UPI: 131% P/E: 21.1 ROIC: 4.13 D/C: 0 I%: 3.55 MC: $$882.7M 60DMA: $47.27 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.

Columnist Conversation

This Weekend on Real Money

AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

Selling Some of This Surging AI-Related Stock

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.