According to a report in today's Australian Financial Review Domino's Pizza Enterprises Ltd (ASX: DMP), M2 Group Ltd (ASX: MTU) and Macquarie Group Ltd (ASX: MQG) have been fingered by an academic study as among the best businesses on the ASX to create value via mergers and acquisitions.
Macquarie group's presence on the list should not come as no surprise given its entrenched position as Australia's leading corporate M&A advisor.
Although the appearance of the other two businesses is notable given their growth potential.
Both stocks are approaching record highs, but as a long-term investor price is what you pay and value is what you get. That's why the best stocks always seem expensive, although if accumulated at sensible prices they will generally deliver market-thumping returns.
So is there value in either of these acquisitive growers?
Domino's Pizza
Many investors will be understandably put off by the fact that the pizza franchisor trades on a trailing price earnings around 72x. Analysts' forecasts are for the group to grow earnings around 31% this year, which would still place it on around 54x forward earnings.
So is there any value in Domino's Pizza when selling for $38.34? Whichever way you cut it a slice of Domino's looks expensive. It will have to execute its acquisitive growth strategy in Japan to perfection, while any hint of a slow down in an Australian market that is likely to get more competitive will spell trouble.
Overall, despite the positive outlook it's hard to argue Domino's shares represent good value at current levels.
M2 Group Ltd
Is an acquisitive telco and budget internet services provider that is now also branching out overseas and into utility services.
This time last year the stock traded around half its current value as the market doubted its organic growth potential in a competitive environment. However, the latest full and half-year results appear to have put the doubts around organic growth to bed and the share price has responded accordingly.
The group acquired the iPrimus and Dodo internet services brands in 2012 and 2013, and the stronger-than-expected organic growth from them is what's now driving the share price gains.
The group's management will now attempt to repeat the trick with its $245 million acquisition of a New Zealand internet business named Call Plus Group, and even attempted a move on iiNet Limited (ASX: IIN).
M2 said its Call Plus acquisition would be funded by bank debt and result in it having a net debt amount around double FY16's forecast earnings. This is significant but manageable for a cash generative business and given the acquisition is expected to be 15% EPS accretive on 5.6x Call Plus's earnings it has the makings of another good acquisitive deal.
Indeed, deal structures like this are probably why M2 Group made it onto the academic study's list of the best merger and acquisition operators.
Selling for $11.15 the group is on around 22x estimated forward earnings and looks reasonable value given its potential. Although the M2 growth story is no secret anymore and the really eye-watering gains are made by finding the M2 Group of tomorrow not today!
The Motley Fool has fingered two such technology stocks with potential to be tomorrow's big winners that are still flying under the radar of the big end of town! But for how long?
