Is FedEx a buyout target?

At the height of the buyout boom, there are few companies whose size protects them from the hands of private equity firms. Michael Santoli of Barron's believes that FedEx (NYSE: FDX) could become a target. He believes that the company "could in theory lure a private buyer at 20% or more above its current $110 share price. Too big, you say? Not these days. Fedex's $35 billion enterprise value ($34 billion market capitalization and $1 billion of net debt) puts it in the zone of larger deals favored by cash-sodden LBO firms. Too cyclical? Not really, given its fairly steady-growth record and increasing exposure to the more-stable ground- and freight-transport businesses. Too tough to finance in a skittish debt market? Probably not, given all the real assets that can secure borrowings, in the form of nearly 700 aircraft and 44,000 trucks."

The stock is trading at 6 times expected EBITDA for 2008, meaning that the stock is probably a solid investment even if it doesn't draw interest from buyout shops.

Santoli's rationale for investing in FedEx is right on. What's the best way to find a company that is a likely buyout candidate? An undervalued stock. FedEx looks cheap right now, and the market may be overestimating the company's cyclicality. Regardless of whether it gets bought out, I'm seriously considering adding adding it to my portfolio.