Thinking Outside the Black Box

Black Box (BBOX) offers technical network services and related products to businesses in North America [84% of sales], Europe [13% of sales] and elsewhere [3% of revenues]. They list and sell over 90,000 products in their catalog as well.

In FY 2007 [ended March 2008] revenues grew marginally while EPS grew 11% going from $2.00 to $2.22. Each of the past two quarters showed year-over-year improvement and FY 2008 is projected to come in much stronger. Current FY estimates run from Value Line’s $2.90 to Zack’s $3.36 /share.

That means BBOX shares are now trading at < 12.9x trailing and < 10x even the lower forward projection. This compares with a 10-year median P/E of 18x.

It is expected that sales, cash flow, and book value will all reach new all-time highs in the current FY.

Value Line is using a conservative 15 multiple for their 3 – 5 year projections. Even 14 times their $2.90 estimate for the FY ending next March leads to a target price of $40.60 or 42% above today’s close of $28.56. You get a 0.84% yield while you wait for the rebound.

Is my $40.60 goal too conservative? It might well be. These shares hit highs of $46.40 and higher at some point in each of the nine calendar years from 1999 right through 2007.  If Black box can earn the $3.36 Zack’s estimate, and reverts to a still below average multiple of 16, it could reach $53.76 /share by next spring.

Who else likes Black Box? As of March 31, 2008:

• FMR [Fidelity Funds] ……………….. had 11.31%
• Dimensional fund Advisors ……….. owned 8.43%
• Sterling Capital Management ………... held 5.97%
• AXA Financial ……………………….. had 5.62%
• Barclay’s Global Investors ………... owned 5.26%
• Royce & Associates …………………...held 4.72%
• Fischer Investments ……………………had 4.11%
• Deutsche Bank …………………….. owned 3.49%
• Dreman Small-Cap Value Fund ………held 3.36%
• Officers and Directors …………………had 10.8%

Want a nice six-month combination with BBOX?

Try this one:

At expiration date [December 19, 2008]:

If Black Box is > $30 [which I think is very likely]:

• Your shares will be called [sold] for $30,000.
• Your $30 puts will expire worthless [a good thing for you as a seller].
• You will have received $120 in dividends.
• You will have no option liabilities.
• Your cash balance will be $30,120 for your $21,860 outlay.

That’s $8,260 net profit on a $21,860 outlay or + 37.7% cash-on-cash.

Not a bad 6-month return on shares that need only go up 5.1% from today’s quote.

Risk?

Break-even on the shares would be $28.56 less the $2.90 call premium = $25.66 /share.

Break-even on the puts would be $30 less the $3.80 put premium = $26.20 /share.

Worst case, you would end up owning 2000 shares of BBOX at an average cost of $25.93/ share. That’s lower than the absolute low prices actually touched since February 2003 – more than five years ago.

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

Comments

[JOETRADER:]

IN THE AUTHOR'S CASH OUTFLOW ANALYSIS, HE DID NOT MENTION THE 20% MARGIN REQUIREMENT FOR THE SALE OF THE PUTS.

2008 Jun 26 10:51 AM

[JOETRADER:]

IN THE AUTHOR'S COST ANALYSIS, HE DID NOT INCLUDE THE 20% MARGIN REQUIREMENT FOR THE SALE OF THE PUTS.

2008 Jun 26 10:57 AM

[Paul Price:]

That's becuase a margin requirement is a non-cash expense if you write your puts versus paid up stock that's held in the same account.

That's why I used the term cash-on-cash return.

2008 Jun 26 11:44 AM