CSG Systems: Should You Buy It?

CSG Systems (CSGS - commentary - Cramer's Take) is in a rare position for a stock this year, as it's up more than 5% year-to-date. The shares appear inexpensive as well, closing at $15.20, equal to just 9.4 times expected 2008 earnings of $1.65.

With that in mind, I'm here to answer readers' questions: Should you buy it? Does CSG Systems hold value at current levels, or is the stock susceptible to catch up with the declines seen in the overall market in 2008?

The company, which provides customer-service solutions for telecom, cable and satellite providers, posted mixed third-quarter results Oct. 21. CSG earned 40 cents a share, which was 2 cents ahead of the consensus analyst estimate. Revenue grew 9.7% from the previous year to $118 million, which was $1.3 million less than expected.

Most of the top-line growth was driven by the Dataprose acquisition, which the company closed in May. And while management was aggressive in cutting costs, CSG's earnings quality could be called into question, as the 34% tax rate during the quarter was about two percentage points lower than it usually is.

But digging deeper, both the company's operating cash flow and EBIT (earnings before interest and taxes) margin fell year-over-year during the quarter. As a result, it should come as no surprise that CSG's earnings are expected to fall 8% in 2009 to $1.52 a share.

And while CSG has $165 million of cash and short-term investments on the balance sheet, there's also $230 million of 2.5% coupon convertible debt on the other side of the ledger.

But on the positive side, about 90% of the company's revenue is recurring because of service contracts. On the conference call, management said that Comcast (CMCSA - commentary - Cramer's Take) recently re-signed and Dish Network (DISH - commentary - Cramer's Take) should be right behind them. Even so, in this declining economic environment, CSG will likely see lower incremental spending from its customers.

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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