Fructivore Investments

Black Box Corporation (BBOX) is a provider of network infrastructure services, which embraces design, sourcing, installation, and maintenance of network. Roughly 60% of the company’s income is from voice communications, but the data infrastructure portion has been slowly increasing and represents 23% of income based on the latest two quarters. The company also has a technology product division that sells technology products and support services and warranties on these products.

Black Box offers a free cash flow yield of 12.3%, which is attractive. Moreover, the cash flow yields have been robust, with earnings even in the 2009 period offering a free cash flow yield of nearly 10%. Black Box has also been acquiring smaller private competitors, having accomplished at least nine acquisitions in the last four years. As the acquisitions are of private companies I have no means of making an independent assessment of the acquisitions, but they seem to be at least paying for themselves.

Black Box’s clients include government departments as well as businesses of all size. 88% of the company’s total revenues come from inside the United States. However, a significant portion of the company’s revenue comes from new installations, so it is necessary for the firm to continually find new customers.

Turning now to the figures, Black Box’s current market cap based on current prices is $497 million. For the 2011 fiscal year, which ends in March, sales were $1068 million, operating income was $91 million, and depreciation and amortization in excess of capital expenditures was $13 million, producing operating cash flow of $104 million. Interest expense was $5 million, producing pretax free cash flow of $99 million, which results in free cash flow of $61 million after an estimated 38% tax rate. As stated above, this results in a free cash flow yield of 12.3%.

In fiscal year 2010, sales were $961 million, operating income was $63, excess depreciation was $21 million, producing operating cash flow of $84 million. Interest expense was $9 million, producing pretax cash flow to equity of $75 million, or $47 million after estimated taxes.

In fiscal year 2009, sales were $1 billion, operating income was $80 million, excess depreciation was $18 million, producing operating income of $98 million. Interest expense was $10 million, producing pretax cash flow to equity of $88 million, or $55 million after estimated taxes.

The first two quarters of fiscal year 2012 are consistent with these results. Sales were $556 million, operating income was $39 million, excess depreciation $5 million, producing operating cash flow of $44 million. Interest expense is $2 million, producing pretax cash flow to equity of $42 million, or $26 million after taxes, or $52 million on a full year basis. The free cash flow figure for the same period last year was $31 million. The difference is largely attributable to decreased margins, as sales are up slightly, but the free cash flow yield is still above 10%.

Now, what drew my attention to Black Box may be seen in its fiscal year 2010 results. This was the year that embraced the bulk of the 2009 recession, and this company, although it is active in the business infrastructure market, not only produced a profit but produced a profit that would almost be an adequate 10% free cash flow based on current prices. This gives me confidence that there is robustness in the company’s earnings power. As Hugh Hendry said, when commenting on one round or another of stress testing of European banks, “There is another form of stress testing, and that is what happened in late 2008-2009.” And in this case, what happened seemed to be not particularly troubling.

I do also reserve a criticism for what the company does with its cash flow. Apart from the acquisitions previously mentioned the company has been using its free cash flow to pay down debt, which is not really that necessary based on interest coverage. There have been no buybacks in the last few years, and the firm pays a fairly small dividend that yields roughly 1% at current prices.

As a result, I would describe Black Box as an interesting candidate for portfolio inclusion, particularly in the event that overall capital expenditures increase or a significant pullback in price.

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Investing by grocca