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Buy Xyratex (XRTX) - no debt, 90M in cash, 427M market cap

|Includes: Xyratex Ltd. (XRTX)

Xyratex (NASDAQ:XRTX) closed at $14.10 on January 10th, 2011.  Over the past year, shares have traded in a range of $10.50 to $20.45.

XRTX reported its 4th Quarter and fiscal year results on January 6th.

Free Cash Flow generation:  During the fiscal year, XRTX generated 40M in free cash flow (60M Operating, 20M capital spending).  As XRTX sales are cyclical, account receivables and inventories increased by 170M while account payables increased by 59M.  To ignore the effects of changes in working capital, another way to look at FCF is to calculate using Net Income + Depreciation - Capital Expenditures.  Using this calculation, FCF is 137M (139M + 18M - 20M). 

Valuation: At today's closing price, XRTX current market cap is 427M.  The company has 90M in cash and no debt.  Using the two FCF valuations above, the market is valuing XRTX between 2.460 and 8.425.  With 8.5x valuation at the top end of the range, XRTX could move to 10x without being expensive.  Since XRTX is cyclical, valuation should not exceed 10x. 

XRTX has a strong margin of safety with a current valuation of 8.5x the high end of FCF generation.  The stock could increase significantly as cash generation increases.  

Long XRTX (I am looking for a double)