Deutsche Bank Top LBO Candidates: Guess who is on the list? ($TSRA, $GPS, $AEO)

Deutsche Bank has released its list of Top 50 LBO Candidates. Tessera Technologies (NASDAQ: TSRA) made the cut, along with Lexmark (NYSE: LXK) and two of the clothing retailers I like (The Gap (NYSE: GPS) and American Eagle Outfitters (NYSE: AEO)). Though, notably absent is Aeropostale (NYSE: ARO), which I think is a better candidate than either of the other two.

According to The Financial Post,

The strategists looked at 500 LBOs since 1986 to identify the key attributes of target companies, and selected the 50 “cheapest” candidates in the S&P 1500 based on total enterprise value/EBITDA, next 12-month P/E and price/book.

Firms must have positive free cash flow to support additional debt, net income margins below the industry group median so financial buyers have the opportunity to cut costs and raise profits, and must not require significant investment.

So I am surprised some lightly levered cash flow machines like Gamestop (NYSE: GME) and RadioShack (NYSE: RSH) didn’t make the cut.

LBO Candidates


Author Disclosure: Long TSRA, GME, RSH, ARO, LXK. May buy GPS or AEO within 72 hours.

Talk to Frank about these companies