Merger mania, but who's next?

October 1, 2009

Merger Mania is back in vogue on Wall Street. Recently, Disney (DIS) snatched up Marvel Entertainment (MVL) in a high-profile merger. And last week we learned that Dell (DELL) will acquire Perot Systems (PER) for $3.9 billion. Then on Monday, Xerox (XRX) aid it's picking up Affiliated Computer Services (ACS) for $6.4 billion, and Abbott Labs (ABT) is snapping up the stock of Solvay SA for $7.1 billion.

Mergers are very healthy sign for investors. It tells us two things. First, that companies are out there willing to spend money if the price is right. Only a few months ago, no one was willing to spend any money no matter what the price. This also tells us that there's plenty of cash out there waiting to pounce.

According to the latest numbers, there's an astounding $3.5 trillion of cash sitting on the sidelines! That's equal to 73% of the S&P 500's assets. This means the market could surge dramatically higher without anyone going into a penny more of debt. What's more, with stock prices trading at reasonably low valuations compared to the peak of the market two years ago, the time is ripe for companies to snatch up competitors at a bargain price.

With all this acquiring going on, the question naturally is, who's next? I think that the health care industry is the best bet for the next deal. Abbott Labs has already picked up a few companies in the health care sector and big pharma already saw a spate of mergers in March after Merck (MRK) joined with Schering Plough (SGP). So it's logical to think the consolidation will continue in this sector.

To uncover the best acquisitions candidates, it's important to seek out smaller companies that are financially strong and ones that can serve as good fits for larger firms. That's why I believe the next candidate for a merger offer is SXC Health Solutions (SXCI).

Delivering a 112% Earnings Surprise

SXC Health Solutions makes information management software applications for the pharmaceutical supply industry. The company provides benefit management software and related IT services to retail and mail-order pharmacies, state and federal government agencies, managed care organizations, and self-insured employer groups.

SXCI's software offerings include its online claims processing flagship product, RxCLAIM, as well as products for pharmacy data warehousing, rebate management and web portal deployment. In other words, this company is in the business of providing patients, doctors and pharmacists with the information necessary to make good decisions and save money. This is a crucial business, especially in an environment like this.

SXC Health Solutions operates primarily in the U.S., but also serves selected markets in Canada. In the second quarter, the company's earnings rose to $12 million or 47 cents per share, compared with $3.3 million, or 14 cents per share, in the same quarter a year ago. Excluding one-time charges, SXC Health Solutions' operating earnings were 53 cents per share.

During the past four quarters, the company's sales are up 41% to $320.8 million. The folks on Wall Street were expecting earnings of 25 cents per share on sales of $301.2 million, so the company posted a whopping 112% earnings surprise and a 6.5% sales surprise. The day after the earnings report came out, the stock jumped 26%!

Don't think you're late to the party. Looking forward, SXC Health Solutions raised its 2009 earnings outlook to $1.62 to $1.70 per share on sales of $1.35 billion to $1.4 billion. This is up from its prior forecast and higher than consensus. The next earnings report is about a month away.

SXC Health Solutions is a great buy because of its fundamental strength. Whether it gets snapped up in a merger bid or not, I expect big things from this company.