As some of you may recall, a couple of years ago I recommended Black Box Corporation, a company that mainly performs IT installations and maintenance for companies and government entities that don’t have the resources to handle such a project in-house. Well, unfortunately the company encountered a decline in sales and margins owing to weakness in capital expenditures and the sequester affecting many of its government clients, and so the price action has been disappointing.
However, there are indications that the decline in sales and margins are moderating, and the shares still produce a substantial free cash flow that meets our 10% rule of thumb. Moreover, it appears that management sees no alternative than to deploy its free cash flow into repurchases, and given the company’s high interest coverage, there may even be scope for the company to swap debt for equity by borrowing money to fund further repurchases or even special dividends.
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