Mad Money

Double Play on Private Equity

So this week Cramer’s highlighting companies he thinks are ripe for takeover by private equity. First up is a classic cyclical stock, an industrial products manufacturer: Actuant.

Actuant generates a lot of cash flow. Private equity groups love that because the cash is used to pay down the debt they incur in order to buy these undervalued companies. Cramer says the company has been using the cash to pay down its own debt and buy up small, low-risk bolt-on companies, which makes it attractive for any PE firm looking to make a buy. Not to mention, it has been trading on the low end of its historical range, making it a cheap acquisition.

Interestingly enough, there are a lot of short sellers of ATU, but Cramer thinks they’re crazy. The company’s most recent quarter was at the high end of analysts’ estimates, and they raised guidance. Eight of the nine analysts that cover the stock have raised their estimates. And ATU is trading at just 15.5 times this year’s earnings – it’s not an expensive stock.

One of the reasons Cramer thinks ATU is so attractive to both private equity and plain old investors is that it’s cleaning up its balance sheet and improving its balance sheet. So even if a PE group doesn’t pick up this company, it’s still worth a look by any Home Gamer.

What could investors earn if Actuant does get snatched up? On the low end, eight points, Cramer says. On the high end, 13, though with the average buying premium at about 20%, the number could be closer to 11 points.

Bottom Line: Cramer thinks ATU makes an ideal private equity buyout, one that could possibly make investors money. Even if that doesn’t happen, it’s still a great industrial stock that’s business is improving.

Questions? Comments?