Mark Perkins sends: Arris (ARRS) is in the cable telephony, video, high-speed data equipment and outside plant construction and maintenance equipment biz.

“ARRIS claims to lead the market in products that allow operators to deliver a full range of integrated voice, video and data services to their subscribers.”1

They are purchasing C-COR Incorporated (Nasdaq: CCBL) for $730 million cash and stock.

“With over 250 customers around the world, the companies collectively reported revenues of over $1.2 billion over the past twelve months and the merged company will be the largest pure-play provider of equipment and solutions to the cable industry.”2 Prior to the acquisition the four largest customers are Comcast, Cox Communications, Liberty Media International and Time Warner Cable.

One of the great things about Arris is they have been growing free cash flow year over year since 2003. Last year they generated about $131 million in FCF. It is always nice to see a company generate free cash for its shareholders. It is especially nice to see them grow free cash because this is what is left for shareholders after all needed spending on plant, property and equipment. A company can save this cash for re-investing, pay dividends or buy back stock decreasing the dilution of the shares and adding value.

The company is very inexpensive given its earnings power. The company has an enterprise value to free cash flow ratio (EV/FCF) of 10.5x on a TTM basis and a P/E ratio of only 8x with likely double digit earnings growth ahead. The balance sheet is solid, as they have total assets of $1.071 billion with $604.33 million of that in cash and equivalents and total liabilities of only $394.87 million.

One hates to see in an acquisition the acquiring company to drown in debt from the purchased company. C-COR only has $36.35 million in long-term debt and the synergy should be great between the two companies. Arris has been investing a lot in a product “known as Fixed Mobile Convergence (FMC) which will allow cable subscribers to use mobile phones in their homes, which connects the MSOs’ VoIP network in the home to the cellular network outside of the home and roams back and forth seamlessly.”3

If they can maintain gross margins as they grow revenue and continue expanding in new markets the stock looks like a great value.

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