Tickers in this Article: BBOX, ALU, SI, PLCM, SI, ACN, VZ
Communications service provider Black Box (Nasdaq:BBOX) recently closed out its fiscal year in strong fashion, as sales and profits grew in the double digits. Its future growth prospects look compelling, as it holds a small percentage of the overall market and clients have a need to upgrade their current systems. The current valuation is also appealing, though capital returns recently came in a bit low. TUTORIAL: Managing Risk and Diversification

Full-Year Recap
Revenue advanced 11% to $1.1 billion, with 17.2% of revenue from sales of hotline products consisting of more than 100,000 network infrastructure products. This category reported modest 4.8% growth for the year. The other segment is referred to as on-site services and consists of voice and data services where it installs voice, data and related communications systems for businesses and governments. This unit reported strong 12.6% sales growth to account for the remaining 82.8% of sales. (For related reading, see Steady Growth Stocks Win The Race.)

Operating income jumped 44.4% to $91.1 million, as management was able to lower SG&A expenses. Intangible amortization expenses also moderated. Lower interest expense further boosted the bottom line, as net income shot up 53.2% to $52.9 million. Slightly higher shares outstanding slightly lowered per-share growth, but earnings improved an extremely healthy 50.8% to $2.97 diluted earnings per share (diluted EPS). Free cash flow came in at approximately $50 million, or about $2.80 diluted EPS. (Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery. For more, see Free Cash Flow: Free, But Not Always Easy.)

For the coming year, management projects revenues of just over $1.1 billion for year-over-year growth of as much as 7%. Its earnings projection range is between $3.50 and $3.70 per share for year-over-year growth up to 23.7%.

Diversified Systems and Clients
Black Box remains neutral over the communications systems its clients install, and it is therefore able to offer a wider range of equipment, including offerings from Polycom (Nasdaq:PLCM), Siemens (NYSE:SI) and Alcatel Lucent (NYSE:ALU). It also can be the primary installer or work off contracts from larger providers including Verizon (NYSE:VZ) and Accenture (NYSE:ACN). The mix of business where it serves end users directly and through indirect channels was 75% and 25%, respectively, during the last fiscal year. Black Box is also diversified across industry groups, with government representing the highest percentage of revenues at 27% and most other industries representing less than 10% of sales.

Bottom Line
The company estimates it holds only 1% of the $100 billion global market for communications and networking services. It sees market growth between 3% and 4% and believes it can outgrow this pace by focusing on organic expansion and bolt-on acquisitions of smaller rivals. A shift to voice over internet protocol, or VoIP systems, also means plenty of replacement and upgrade activity going forward.

At a forward P/E below 9, there is ample room for upside in the stock. The trailing free cash flow multiple is only slightly less appealing at over 11, but it also suggests a reasonable and low valuation. The only financial metric lacking is return on invested capital, which was about 5% for the full year based on generated free cash flow. But higher sales could boost margins and overall cash generation going forward. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

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