BBOX: Trading with a 'Black Box' Formula

Jul.10.09 | About: Black Box (BBOX)

Black Box Corp. (NASDAQ:BBOX) July 9, 2009 : $29.60
52-week range: $16.24 (Mar. 9, 2009) - $39.53 (Sep. 19, 2008)
Dividend = $0.06 quarterly = 0.80% current yield


Black Box* is a network infrastructure services provider. Black Box offers one-source network infrastructure services for communication systems. The Company’s service offerings include design, installation, integration, monitoring and maintenance of voice, data and integrated communication systems. The Company’s primary service offering is voice solutions. The Company also offers premise cabling and other data-related services and products. The Company provides around the clock technical support for all of its solutions, which encompass all voice and data product manufacturers, as well as 118,000 network infrastructure products (Hotline products) that it sells through its catalog and Internet Website (such catalog and Internet Website business, together with technical support for such business, being referred to as Hotline Services) and its Voice Services and Data Services (collectively referred to as On-Site services) offices.

*Company Profile from MSN MoneyCentral

Black Box is an excellent company at a bargain price. They have been reporting year after year of improving numbers as the share price has stagnated. Valuation is now near an all-time low level even as sales, earnings and book value are steadily moving higher.

Here are the fully diluted per share numbers from BBOX’s latest annual report. FYs end March 31st.

FY …...… Sales .... C/F …... EPS .….. Div…... B/V ….. Avg. P/E
2005 …. 41.02 ….. 2.92 …. 1.55 ….. 0.22 …30.76 …… 25.8x
2006 …. 57.99 ….. 3.32 …. 1.75 ….. 0.24 …34.22 …… 25.7x
2007 …. 58.05 ….. 3.25 …. 2.00 ….. 0.24 …36.55 …… 20.1x
2008 …. 57.02 ….. 3.77 …. 2.22 ….. 0.24 …36.93 …… 13.5x
2009 …. 57.11 ….. 3.92 …. 2.59 ….. 0.24 …36.99 …… 12.3x

Zacks is expecting FY 2010 and 2011 EPS of $2.85 and $3.27 making the forward P/E about 10.4x this year’s and < 9.1x next year’s estimates. Compare those multiples with all the historical levels from years past to see just how cheap these shares are right now.

The trailing 10-year median P/E was 18x. Value Line is conservatively assuming a long-term multiple of 13.5x in computing their 3- 5 year target pricing. A return to even twelve times the current year’s $2.85 estimate would bring these shares back to $34.20 by next winter.

That would be a 15.5% rise from the quote as I’m writing. Not too bad but perhaps not enticing enough to get your juices flowing. Here’s a buy/write combination from here to December 18th that might get you more excited.

................................................Cash Outlay ............. Cash Inflow
Buy 1000 BBOX @$29.60 ........... $29,600
Sell 10 Dec. $30 calls @$4.00 .....................................$4,000
Sell 10 Dec. $30 puts @$4.10 ....................................$4,100
Net Cash Out-of-Pocket ............. $21,500

If Black Box shares move up at least 1.4% to $30 by Dec. 18, 2009:

  • The $30 calls will be exercised.
  • You will sell your shares for $30,000.
  • The $30 puts will expire worthless.
  • You will have collected $60 in dividends.
  • You will have no further option obligations.
  • You will end up with no shares and $30,060 in cash.


That’s a best-case scenario total return of:

$8,560 / $21,500 = 39.8%

achieved in less than five months on shares that only needed to rise by 1.4% from the trade’s inception price.

What’s the risk?

If Black Box shares stay below $30 on December 18, 2009:

  • The $30 calls will expire worthless.
  • The $30 puts will be exercised.
  • You will be forced to buy another 1000 BBOX shares.
  • You will need to lay out an additional $30,000 cash.
  • You will have collected $60 in dividends.
  • You will have no further option obligations.
  • You will end up with 2000 BBOX shares and $60 cash.


If the shares were unchanged at $29.60 on expiration date, you could liquidate all 2000 shares for $59,200 for a net profit of $7,700 (excluding commissions).

What’s the break-even on the whole trade?

  • On the first 1000 shares it’s the $29.60 purchase price less the $4.00/share call premium = $25.60/share.
  • On the ‘put’ shares it’s the $30 strike price less the $4.10/share put premium = $25.90/share.


Your break-even is thus $25.75/share (excluding dividends).

BBOX could fall by up to 13% without causing a loss on this trade.

Summary:

If Black Box shares rise by 1.4% or more by December 18th you will make a total return of over 39%. If the shares stay completely unchanged you could immediately liquidate your entire position for a nice gain. As long as the shares stay above $25.75 you are protected against loss.

Disclosure: Author is long BBOX shares and short BBOX options.