Acquisitions can make or break a business. If they are undertaken at a fair price and for a business which adds value to the purchasing company, they can positively catalyse a stock price over a sustained period. However, if the price paid is excessive or integration does not work out as planned, they can cause investor sentiment to decline rapidly. Here are two stocks which have recently made acquisitions that could boost their earnings and lead to higher share prices in the long run.
Improving performance
Reporting on Thursday was global communications company Satellite Solutions Worldwide (LSE: SAT). It specialises in rural and last-mile super-fast broadband. Its first-half results showed a rise in revenue of 261%, with recurring revenue moving 280% higher and now representing 94% of total revenue. The company was aided by like-for-like (LFL) revenue growth of 13.1%, while the gross profit margin was 7.5% higher at 37%. This helped to move the company from loss to profit at the EBITDA (earnings before interest, tax, depreciation and amortisation) level.
Satellite Solutions Worldwide recently undertook an £8m equity placing to fund the acquisition of UK wireless provider Quickline Communications as well as other smaller bolt-on acquisitions. They have the potential to improve the company’s growth outlook and they could help to improve investor sentiment in the stock. And with the company having agreed a £5m revolving credit facility, it appears to have sufficient financial strength to engage in further M&A activity.
The company is forecast to move into profitability at the net profit level next year, and its share price could therefore continue to rise after its 5% gain in the last month. Investors may bid up its valuation in anticipation of improved financial performance.
Sound growth prospects
Also making an acquisition recently has been FTSE 100 consumer goods company, Reckitt Benckiser (LSE: RB). The company has purchased Mead Johnson for $16.6bn and this provides it with access to a new growth area. With Mead Johnson having a strong position within the Chinese infant nutrition market and the country having lifted its one-child policy, there could be a strong growth opportunity in the long run.
Although Reckitt Benckiser trades on a price-to-earnings (P/E) ratio of 21.8, it is expected to report a rise in its bottom line of 13% next year. This means it has a price-to-earnings growth (PEG) ratio of just 1.7. Given its diverse operations and track record of growth, this seems to be a fair price to pay for the stock. It has opportunities for growth not just in China, but also across the emerging world and in developed markets.
This mix of defensive characteristics and growth potential could lead to an even higher premium being placed on the company by investors. As such, now seems to be the right time to buy a slice of the business for the long term.
