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Wednesday, October 25, 2006

CSG Systems: Any Growth Comes Free

By William Trent, CFA of Stock Market Beat

CSG Systems (CSGS) provides billing services to large cable and satellite operators. It is a boring, slow-growth business, as evidenced by their latest earnings report:
Total revenues for the third quarter of 2006 were $98.5 million, an increase of five percent when compared to $94.1 million for the same period in 2005.

Now, given that we have been berating slow-growth companies left and right, you might think think we aren’t too pleased with this type of result. Au contraire! Unlike those other firms, CSG Systems is a cash cow, throwing off about $100 million in free cash flow each year. With an enterprise value of $1.16 billion, that means it is trading at about 11-12x free cash flow.

Seen another way, the cash available to give shareholders each year is about 8.5-9.0% of the company’s value. Since the company does return that cash (primarily in the form of share buybacks) it is fair to consider this an investment that will pay 8% or 9% return without any growth. Since we don’t expect much more than that from the market as a whole, this stock looks like the market is pricing it for no growth at all. That five percent growth they gave shareholders was free of charge.

Of course, it is possible that the cash flow will actually decline, rendering the above analysis moot. But the same could be said of any company, and CSG has strong relationships with its major customers. While we wouldn’t ignore the possibility, we don’t see it as being any more likely for CSG Systems than for Xerox, IBM or anyone else.

With all the crazy private equity deals being considered, it’s a wonder this company is still public. Of course, with its planned buyback program the company may just go private one share at a time.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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