Are Shire plc, SABMiller PLC And Imperial Tobacco Group plc Set To Drop Like A Stone?

I do not dislike Shire (LSE: SHP), SABMiller(LSE: SAB) and Imperial Tobacco(LSE: IMT), but how much risk do these three defensive businesses carryright now?

Aside from fundamentals, lets focus on how they have performed since takeover talk or just takeover rumours emerged in the last 12 months.

M&A Premium

M&A stands for mergers and acquisitions. When deal talk springs back to life, the valuation of takeover candidates, or M&A candidates, receives a big boost but also tends to become morevolatile.

Thats been the case forShire,SABMillerandImperial Tobacco since early 2014, whichdoesnt mean they are not investable now: in fact,there are several reasons why they may well deserve your attention.

Shire, in particular, offers plenty of upside, in my view.

Shire: Buy

Shire traded around 3,500p in early 2014 before takeover rumours emerged. When takeover talk with AbbViecollapsed in mid-October, Shire essentially gave up most of its gains and it plunged to about 3,700p. The group has grown ever since by acquiring assets, and has also shown it can grow earnings at a fast pace.

Its quarterly results were released on Thursday: they were good, although guidance was unchanged, and the shares have risen less than 1% since.

First-quarter revenues were broadly in line with expectations (up more than 10% year on year), but earnings per share surged 20%, as Shire confirms to be a very efficient machine with regard to capital allocation and costs.

Based on fundamentals, comparable quarterly figures for the upcoming quarters, trading multiples, new product launches and a few other variables, my suggested price target to the end of the year is 6,000p for an implied upside of 13%, which would yield an annual performance of +30%.

SABMiller: Hold

SAB reported a trading update a couple of weeks ago, which made for a decent reading.

Its market valuation has hovered around the 3,100p-3,700p range over the last 16 months,and it clearly benefited from takeover speculation most of the times it got closer to the low end of that range.

I doubt a deal with Anheuser Busch Inbev, its most likely suitor,is around the corner, although such an outcome may be inevitable over the long run.

SAB currently trades at 3,460p, which is slightly higher than fair value (at 3,240p, according to my estimates) in spite of appealing trading multiples, strong fundamentals, solid cash flow prospects and decent income/balance sheet metrics.

In order to boost its own valuation, SABs growth rate mustaccelerate and that isnt a very easy thing to do.

Signs of better growth prospects in the fourth quarter were encouraging, but depreciation of key currencies against the US dollar may continue to adversely impact its performance.It trades about 8% below consensus estimates from analysts, and its forward yield is in the region of 2%.

Imperial Tobacco: Hold

Imperial reports quarterly figures on 6 May. I dont expect any big surprise from the announcement also in the wake of British American Tobaccos recent results.

Most of the gains that could be attributed to M&A talks in 2014 have vanished, Id argue. The stock hit a low of 2,500p last fall,after a rally that was not based on fundamentals, essentially returning at a price that was line with its valuation at the beginning of the year. Its share price currently stands at 3,182p.

Since mid-October, the shares have appreciated by 27% as investors seems to have decided to bet on Imperial rather than on British American Tobacco, which has risen only 4% this year and has been outperformed by Imperial by almost 10 percentage points.

Trading multiples clearly indicate that Imperial whose 4.4% forward yield is higher than that of British American Tobacco is still about 10% to 15% cheaper than its rival, which is a good enough reason to add its shares to your wish list.