It's inevitable that some of the names that hit my deep-value radar will become acquisition targets. This is not all that surprising, especially within the ponds I typically fish for value: Companies sometimes become "stupid cheap," and ripe for the picking.
So far this year, two "double-net" stocks (trading at between 1x and 2x net current asset value) that I've followed, Ingram Micro (IM) and Rofin-Sinar Technologies (RSTI), have agreed to takeovers, and it appears as though a third name may be headed that way, as well.
When I wrote about headphone distributor Skullcandy (SKUL), in late January, it was a net/net company -- or a company trading below net current asset value (current assets minus all liabilities). The stock had been hammered over the previous year, falling from the $11.50 range in March 2015 to $3 the following January. While profitable, lowered earnings guidance scared investors away, and sent the stock plummeting.
When a company's market capitalization falls below net current asset value, as in this case, you have a potentially interesting situation at the extremes: Either it is ridiculously cheap, and the market is mispricing it, or it is headed for the scrap heap.
In Skullcandy's case, despite declining profitability, it was still in decent shape, with no debt and a moderate amount of cash on the books. Better-than-expected fourth-quarter earnings, and perhaps the realization by investors that a $3 share price represented an excessive punishment that did not fit SKUL's crimes, pushed shares to about $4.00 by early June.
Then, on Jun. 8, shares jumped another 16% when it was announced that company founder Richard Alden, who controls 12.7% of the company, was potentially interested in taking the company private.
It will be interesting to see what the takeover price will be, if this potential bid develops. SKUL ended its first quarter with $46 million, or $1.60 a share, in cash and no debt. Even with the recent price jump, it still trades below tangible book value per share -- and sits at just 1.08x net current asset value (which puts it within my definition of a double-net stock). With those metrics in mind, as well as the fact that it is trading at 14x next year's consensus earnings per share, you'd expect that any bid should include a decent premium to the current price.
We shall see.
With value-land being so barren the past few years, devoid of much opportunity, this type of activity at least helps keep things interesting. It also strengthens the drive to identify other potential takeover candidates.
