With Growth Like This, Who Needs Mergers?
By Michael Kaye
As the current spate of merger and acquisition deals shows, some outfits are taking advantage of elevated equity prices by issuing stock to "buy growth" -- namely, companies in the same industry. In theory, that strategy makes a certain amount of sense for players in mature industries, as incremental growth from a company's existing businesses may be hard to come by. (One caveat: Mergers historically have not provided excess returns to shareholders over the long term.)
Still, many outfits don't have to resort to that strategy. Some can fuel their own growth internally (or "organically," in analyst-speak) without having to make acquisitions or obtain substantial financing. That means they don't have to issue large amounts of stock -- potentially diluting earnings per share. And they don't have to burden their balance sheets with significant additional leverage. But how can investors identify companies in that position?
MAKING THE CUT.
That's what we tried to accomplish in this week's screen. We looked for companies with solid financial standing -- those with debt to equity ratios of 10% or lower. Then we sifted for stocks with high return on equity -- in this case, 20% or more. These companies, then, are making efficient use of their existing assets, posting returns which are more than twice the level of their debt.
As a final criterion, each stock had to be ranked at least 3 STARS (hold) by analysts at Standard & Poor's Equity Research.
When we ran the numbers, a dozen names emerged;
Kaye is an analyst for Standard & Poor's Portfolio Services