Should you buy these 2 top takeover targets while there’s still time?

Paul Summers takes a closer look at two potential takeover targets.

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While buying stocks just because they are potential takeover targets is never recommended, attention from competitors can often lead to impressive share price gains for companies on the receiving end. Here are two stock market stars that could soon be getting a lot more attention from potential suitors.

“Outstanding progress”

Shares in online gaming company 888 Holdings (LSE: 888) enjoyed a positive 2016. Priced at 182.5p in early January 2016, the stock now changes hands for 44% more at 263p. Based on last week’s full-year results, the good times could be set to continue.  

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Over the 12 months to the end of December, revenue at the £951m cap increased 13% to an all-time high of just under $521m (18% in constant currency). Profit before tax increased “significantly” to $59.2m, with basic earnings per share soaring 74% to 14.4¢.

On an operational level, 888 reported that 60% of its revenue in the UK was now generated from its mobile offering. And the business experienced 27% and 49% increases in active players of its Casino and Sports games respectively.

As far as international trading was concerned, 888 saw an impressive 45% growth in Spain, making it the company’s second largest market. There was also evidence of good progress being made in Italy, Denmark and the company’s newest regulated territory, Romania. 

Those already investing in 888 for income had reason to celebrate following management’s decision to hike the total dividend by 25% as a result of confidence in the outlook and the “strong free cash flow” currently being generated.

With the gaming industry continuing to move online, I suspect 888 is set to become a strong bid target. Its geographically diversified operations, four B2C “product verticals” (Casino, Poker, Sport, Bingo), B2B arm and net cash position should make it highly desirable in a consolidating industry.

Anything but flat

Since Donald Trump’s surprise election win, shares in small-cap laser-guided equipment manufacturer Somero Enterprises (LSE: SOM) have been on something of a roll. Priced at 173p on November 9 — the day after the vote — they’ve since climbed to 300p (+73%) following encouraging comments regarding infrastructure spending from the new president. Given that the vast majority of sales comes from the US, this kind of reaction is hardly surprising. 

But it’s not just political influence that should make Somero’s stock more attractive to deep-pocketed competitors. Its most recent set of annual results confirmed that 2016 had been an “exceptional year” for the company.

Thanks to six of its 11 geographic markets growing in 2016 (led by North America, Europe, Australia and China), Somero is heading towards achieving its five-year goal of becoming a $90m revenue business in just three years. In the 12 months to the end of December, revenue climbed 13% to a record-breaking $79.4m, with adjusted EBITDA rising 23% to $24.6m. Profits before tax came in 22% higher at $21.3m, with cash flow from operating activities rising 17% to $16.9m. 

For those who like robust balance sheets, Somero won’t disappoint here either. It had $20.2m in net cash at the end of the year — a 60% increase compared to 2015. The massive 61% hike to the total dividend over the last year is just another indication of how financially sound this business is.

With its new product pipeline continuing to generate revenue growth and shares still trading on a fairly undemanding valuation of 13 times forecast earnings, I’m left wondering how long it will be before the bids come flying in.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Somero Enterprises, Inc. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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