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Stocks B / Black Box Corporation

URL:  http://boards.fool.com/collected-thoughts-from-yahoo-msg-board-21523799.aspx

Subject:  Collected thoughts from Yahoo Msg Board Date:  10/29/2004  3:55 PM
Author:  jjaym Number:  81 of 83

Here's a few thoughts on BBOX I posted today on the Yahoo! message board

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BBOX spent $13m on stock buybucks the last quarter. With a current market cap of about $700m, that comes nearly 2% of the stock.

Some other things to consider:

95% institutional ownership.
7% insider ownership (really?)
11% of float short

Given this profile, I would not recommend shorting. BBOX is likely going to continue to buy back stock and some shorts will have to cover and the share count will continue to decrease (partially offset by exercise of options). Unless the institutions are selling or there is additional shorting, there is going to be more demand than supply of BBOX stock.

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Based on past actions over the last several quarters, it would appear they plan to continue to use 100% of their cash flow for share repurchase or retirement of debt (or maybe even some acquisitions), depending on which appears more attractive at the time. Now, if the share price were to get up around $60 or so, I would hope they would scale back the buyback program, because I think it would be harder to argue that the shares are obviously undervaled at those levels. At these prices, I'm comfortable with them devoting their cashflow to buybacks.

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Yeah, there are a lot of options outstanding, and I'm not a fan of stock options as compensation. But many of them are above the current price, so the share price would have to increase to make them worth anything. And when the options are exercised, the company does get the money from the option exercise, which results in a cash flow to the company, which can be used to repurchase stock (at higher prices, I realize), retire debt, etc....

I'm looking at the table in the 2004 Annual report. At the end of fiscal year, there were something like 1.5m options outstanding with exercise price < $39.90. For what it's worth, that's less than the short interest and many of those contracts don't expire for 5 or more years. The $9.78-13.30 options are assuredly cashed in (or expired, which would have been incredibly stupid), and probably many of the $13.30-$19.95 options as well. So, there's probably something closer to 1.2m in-the-money options outstanding, with an average exercise price around $30, so worth about $12m (net) at current market prices, if my math is right, which is about equal to last quarter's cash flow.

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Just a follow-up re options. Fred & Kathy exercised all the $10.13 options and over half of the $13.30-19.95 options in May. (See insider trading activity on Yahoo!)

Remaining in-the-money options:

76,000 @ $13.30-19.95 ($14.91 avg)
444,014 @ $19.95-26.60 ($22.32 avg)
757,865 @ $26.60-33.25 ($29.64 avg)
25,083 @ $33.25-39.90 ($34.81 avg)
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1,302,962 @ $13.30-39.90 (around $26 avg)

It would take about $34m to exercise all of the in-the-money options, which would cost about $52m to buy at current share prices. The difference is about $18m. Some of the higher priced options are not yet exercisable and it's doubtful that many would be exercised unless nearing expiration or unless BBOX really goes up a lot. The lower priced options are expiring soon (within the next year or so) and will be exercised prior to expiration, but that's really only the 76,000 options @ < $20.

Based on this, I think they will be able to continue buying more than enough shares to offset any options exercise.

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