Stock bargains: Takeover targets

Pat Dorsey is the director of equity research for Morningstar.

Buyout candidates? These potential targets are trading at low price/earnings ratios relative to their peers. Industry Target P/E Industry Giant P/E Utilities Westar 10.1 Southern 13.5 Oil Marathon Oil 3.5 Chevron 5.0 Medical Instruments Beckman Coulter 13.9 Baxter International 16.5 Source:Morningstar. NOTE: P/E figures as of March 2.

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(Money Magazine) -- While some companies go into survival mode when times get tough, the strong ones look for opportunities to snap up cheap assets. We're already seeing this take place with Abbott Laboratories' acquisition of Advanced Medical Optics in January. I think it's a safe bet that this trend will continue.

While it's useful to pay attention to the acquirers - since they're the ultimate value investors - it's equally important to keep track of the potential takeover targets. After all, these are some of the market's most undervalued stocks, and their shareholders could be rewarded sooner rather than later.

I polled Morningstar's team of analysts to see which firms are among the likeliest targets. Obviously, it's impossible to predict with certainty which companies will be bought out. So I limited the list to solid businesses that should do well even if they don't get acquired.

Westar Energy (WR). Sleepy regulated utilities like Westar have attracted an increasing amount of investor interest over the past few years. And the largest electric utility in Kansas could be very attractive to a potential acquirer interested in an industry player that has above-average growth opportunities but is now trading at a below-average price/earnings ratio of 10 (see the table).

Granted, Westar has been in fix-it mode in recent years to correct missteps made during the speculative bubble of the late 1990s. But new management has done a fine job returning the company to its roots as a basic provider of electric power. The company has also built a solid balance sheet and strong regulatory relationships. Even if the firm isn't acquired, the stock is trading below the value of the company's assets and sports a 6% dividend yield.

Marathon oil (MRO, Fortune 500). Once almost entirely an oil refiner and marketer, Marathon has expanded aggressively over the past few years into the more lucrative business of oil and gas exploration. But this leaves the company in the odd position of being a mid-size integrated energy firm in a land of giants.

The most likely scenario: Occidental Petroleum (OXY, Fortune 500), a large independent producer, will seek to merge, since the resulting company would have the heft to compete with the likes of ExxonMobil (XOM, Fortune 500) and Chevron (CVX, Fortune 500). Even if Marathon doesn't get bought, it's among the industry's best values, with a P/E ratio of less than 7.

Beckman Coulter (BEC). This mid-size health-care firm is an attractive target for several reasons. For starters, around 80% of its revenue comes from recurring sources, such as the reagents used in the testing equipment Beckman sells to hospital labs. The firm also has a key unit focused on modern diagnostic technologies that's growing 15% to 20% a year, which is considered light speed in this mature industry.

Finally, Beckman, whose shares are trading at a modest P/E of around 14, is one of the last pure-play medical testing firms left standing. So it would be a logical target for a large player looking to enter this health-care niche.

Pat Dorsey is the director of equity research for Morningstar.