There are few things more exciting in stock investing than buyout rumors.
Since the stock market runs on an anticipatory mechanism, just the talk of a buyout can light the bullish fire under the shares. The old “buy the rumor, sell the fact” mantra can be very right when it comes to these situations.
One of the best things about buyout rumors is that they can last quite some time in the marketplace. This is particularly true when multiple companies are said to be vying for a particular target firm. This can spawn a bidding war that has the possibility of pushing the share price even higher.
And speculation can run even more rampant when the company rumored to be taken over is silent or even coy with reporters and analysts trying to get information about the company’s plans.
There is a buyout situation happening right now that still has high upside potential. Several possible suitors, combined with pressure from an activist hedge fund, has sparked the Wall Street rumor mill, sending shares higher by over 23% already.
Kate Spade & Co (KATE) describes itself as primarily operating under two separate global, multichannel lifestyle brands: Kate Spade New York and Jack Spade. Perhaps best known for handbags and ladies accessories, the company is much broader than many imagine.
The company’s four category pillars — women’s, men’s, children’s and home — span demographics, genders, and geographies. Known for crisp color, graphic prints and playful sophistication, Kate Spade New York aims to inspire a more exciting life.
The Kate Spade New York collection includes the Madison Avenue, Broome Street, and On Purpose labels. Jack Spade, on ther other hand, offers a timeless, rugged, and versatile assortment of bags, sportswear and tailored clothing founded on the aesthetic of simple, purposeful design. The company also owns Adelington Design Group, a private jewelry design and development group.
Kate Spade boasts a market cap of just over $2.3 billion. It posted better than expected third-quarter earnings in 2016, with $0.13 earnings per share for the quarter, crushing the average analyst estimate of 8 cents per share by a full 5 cents and also last year’s third-quarter earnings of 6 cents per share. The company is forecasted to create 64 cents in earnings per share in 2017.
Revenue was $317 million for the quarter, compared to the consensus estimate of $310.64 million, representing a 14.1% gain over the same quarter last year. The company is also efficient, booking a return on equity of 27.34% and a net margin of 9.67%.
Despite the better results in the last reporting quarter, the company has suffered a downturn in sales since the summer of 2014. Hedge fund Caerus Investors has been pressuring management for a sale since November 2016.
Stating that the market has lost faith in management, Caerus wrote a scathing letter to the company focusing on $3 billion of equity lost in the last 24 months. The letter reads, in part, “We are deeply concerned about the precipitous decline in the share price of Kate Spade over the last two and a half years brought about by management’s inability to meet their own stated goals… We firmly believe that a strategic, industry player would be willing to pay a substantial premium to add this growth business to their portfolio.”
It goes on to point out that EBITDA margins are sharply below competitors and that the current valuation shows no growth despite a 20% revenue and 42% EBITDA CAGRs.
And shares are fairly priced for a takeover, according to Bank of America Corp (BAC), making the company compelling to a pending suitor.
There are multiple companies interested in Kate Spade, according to Bloomberg’s unnamed sources…
A total of six companies have expressed a desire to acquire the company per insider sources.
The formal auction process is starting in January, but only time will tell if a bidding war erupts.
Risks To Consider: Should the interest in acquiring Kate Spade lose momentum, the stock may plunge in value. While this is unlikely, investors are urged to keep the potential in mind.
Action To Take: Buy Kate Spade near $18.00 per share. Stops are suggested directly under support at $17.43 per share. My target price is $24.00 per share.
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