Mad Money

Buyback = Buyout?


Cramer’s got a theory. He claims that significant buybacks – those totaling 17% or more of outstanding shares – may lead to takeover offers. In fact, four of the 14 companies with the biggest buybacks – Laidlaw, Tribune, Wendy’s and Affiliated Computer Services – all are being taken private. Cramer thinks the other 10 could be in just as likely a position.

Buyout Target: USTR

Companies that initiate aggressive buybacks tend to be the types that will do anything to bring out value, Cramer says, such as putting themselves up for sale. These are companies that think they’re too cheap to be public, and a sizable buyback just might be their tender offer to willing acquirers.

So which of the 10 remaining companies from the list have the most to offer? Cramer picked three for tonight’s show. Just to note before we start, though, Home Gamers should know that Cigna was on the list with a 20% share buyback, but that company already was covered on Mad Money not that long ago. Sonic also made the list with a 22% buyback, but Cramer’s concerns about consumer spending and gas prices kept it from making the cut.

United Stationers did make the team, though. This company, the biggest wholesaler of business products, bought back 20% of its shares outstanding. More importantly, though, the fundamentals are there. Remember: Cramer never speculates on takeovers if the fundies are weak.

Cramer thinks USTR could see its margins expand in the near future as it buys more products from China. Those margins are only at 4% right now, but only 5% of its products are coming from that waking Asian giant. As the percentage of its Chinese business grows, costs should come down, Cramer says. Investment technology, global sourcing and new products should also help the margin situation.

USTR isn’t getting much coverage either, with only three analysts rating the stock. Cramer says this usually means there’s a lot more room for upside.

A buyback is always a good thing, according to Cramer, because it shows the management’s faith in the business. But it’s also a good play if the market’s due for a bit of a pullback, maybe from profit-taking, which is what Cramer thinks is going to happen.

Bottom Line: Cramer’s new thesis says that stocks with the biggest buybacks could also be stocks with big chances of being taken over. He’s going through the top 14 buyback stocks, picking out the best three, and telling them to you out of the goodness of his heart. The first name worth looking at is United Stationers.

Questions? Comments?