Data storage giant Western Digital, private-label food producer TreeHouse Foods, and tire manufacturer Goodyear are all vulnerable to an attack from activist investors, according to shareholder-activism intelligence firm Activist Insight.
Aluminum producer and mining heavyweight Alcoa and boat group Brunswick could also be exposed to an activist campaign, the second part of a report for MarketWatch by the research firm can reveal.
The firm, which analyses financial data, corporate governance and shareholder registers of companies to determine whether they are vulnerable to becoming activist targets, has produced a 10-strong list.
The results are compared with peers and broad indexes, such as the S&P 500 SPX, -0.05% and analysts provide extra context relating to the sector.
Typically when an activist investor gets involved, a stock soars. In 2018 Activist Insight highlighted 76 companies under threat; of those 16 have already been targeted by an activist, including Papa John’s. PZZA, +2.28%
The pizza company took a $200 million investment from Starboard Value earlier this year and made the activist hedge fund’s chief executive its chairman.
The final five companies identified as vulnerable to shareholder activism are:
Western Digital
The data storage company’s stock WDC, +1.05% has soared 54% so far in 2019, surging after rival Micron’s better-than-expected earnings.
Western Digital’s fourth quarter earnings beat forecasts but revenues missed as flash memory demand slumped.
Last month chief executive Steve Milligan said the flash memory market had reached a cyclical low and expected stronger demand.
The company faces stiff competition from cloud-based products, although it has developed its own hybrid cloud systems.
See also: Sell Western Digital stock because its rally has gone too far, analyst says
Activist Insight highlighted poor five-year total shareholder return of -33% compared with 60% for the S&P 500.
An activist could push for a change of strategy or a raft of cost-cutting measures to boost profitability or even seek a merger or sale.
Goodyear Tire & Rubber
The tire manufacturer’s stock has plunged 43% year-to-date as the company’s sales have gone into reverse amid a challenging global automotive environment.
The ongoing threat of the U.S.-China trade war and fears of an auto slowdown have hit car part suppliers hard in 2019.
Goodyear GT, +1.63% has begun streamlining its German factories in a bid to boost earnings in the coming years.
Five-year total shareholder returns of -49% also fall far below the S&P 500 average of 63%.
Activist shareholders could demand a cost-cutting program or even call for a strategic alternatives process with a view to selling the company.
TreeHouse Foods
The maker of private-label foods THS, +2.04% is midway through a restructuring program aimed at reducing costs and realigning the business.
The food and drink manufacturer’s Ebitda margins have fallen in recent years from 10.7% in 2016 to 8.9% last year.
Total shareholder returns over the past five years of -37% compare poorly to a peer average of 19%.
Earlier this month the company completed the sale of its snack business, which has been underperforming, to private equity firm Atlas Holdings for $90 million.
Chief executive Steve Oakland said the sale would be used to pay down debt and create a “healthier” margin structure.
Activists could call for more aggressive cost cuts to improve margins or a strategic review, while further asset sales and share buybacks could also be on the wishlist, Activist Insight said.
Alcoa
Despite efforts to untangle the industrial corporation’s business structure — spinning off Arconic ARNC, -0.40% in 2016 — Alcoa remains complex.
Arconic was spun off partly due to pressure from activist investor Elliott Management and has recently unveiled plans to split itself into two.
Alcoa ALCA, -3.95% , the world’s eighth largest aluminum producer, has a number of units doing business between themselves and external customers, which Activist Insight says creates economic conflicts and confusion over profitability and the company’s prospects.
It is also undervalued compared with its U.S. mining peers, with a price to earnings ratio of 4.6 against the peer average of 6.26.
Read: Alcoa posts narrower-than-expected Q2 loss
Activists could push for further simplification of Alcoa’s structure, separating its bauxite mining and aluminum production operations from its aluminum smelting unit and selling off its energy generation business.
Brunswick
Boat stocks have entered choppy waters recently, hit by poor weather and turbulent economic conditions.
Brunswick’s BC, +1.73% marine engine unit’s margins—15.5% last year—contrast with its boat business—7% in 2018.
Five-year total shareholder returns of 13% fall below the peer average of 47%, which may tempt an activist to call for improvements.
Brunswick announced a cost-cutting plan to axe 9% of its global workforce – about 400 employees – last month.
Occasional activist Lakewood Capital Management holds a 3.4% stake in the company.
Activist Insight said that while there may be synergies between the two, Brunswick’s boat and marine engine segments should be split.
Specialist boat builders, such as Malibu Boats, have outperformed Brunswick and a split may enable it to refocus.
Other underperforming brands from its wealth of businesses could be sold, while cost cuts to improve profitability may also be on an activist’s radar.
In a statement to MarketWatch, the company said: “Our integrated platform of engine, parts and accessories, and Boats, including the continued expansion of our marine services businesses through the acquisition of Freedom Boat Club, uniquely positions Brunswick to capitalize on current and emerging trends in the recreational marine market to unlock additional value for our customers and shareholders.”
Activist Insight, the provider of shareholder activism intelligence, has identified these U.S. companies as vulnerable to shareholder activism with the help of its proprietary tool Activist Insight Vulnerability and its in-house journalists and analysts.
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