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It is always nice when management thinks like owners. While earnings have been flat at CEC for a couple of quarters, yesterday management announced a large scale recapitalization to buyback a significant amount of the outstanding shares.

With less than a 1:1 debt to equity ratio and only 1.2x Debt to EBITDA ratio, the company has the ability to utilize debt to significantly reduce the share base outstanding and enhance shareholder value for the remaining owners. Yesterday they increased their share buyback by $200 million to a total remaining of $346 million. This represents about 40% of the outstanding shares.

They also indicated that they intend to use a new credit facility to increase the debt to EBITDA ratio to 2:1 to buyback shares. In essence they are doing their own prudent LBO in lieu of letting a PE group buy them cheap.

Given the lack of recent growth in their earnings, I applaud management's desire to enhance shareholder value in other ways.

With a PE ratio of about 12.5x this year and 11.5x next year the company trades around its growth rate -- without the buyback effect.

Using the ratios that management has outlined, I estimate that the company will be able to retire between 15% to 20% of the stock over the next 12 months with should put some growth back in the shares.

Disclosure: long CEC

Source: CEC Has Its Valuation Catalyst