j2 Global: Fax Facts

04/30/2004 12:00 am EST

Focus:

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

Surprisingly, the world leader in fax and messaging services, j2 Global, was formed in 1995 by a rap musician who was frustrated by missing important faxes while on tour. It is now a company with $71 million in annual sales, and a new buy from UnDiscovered Stocks.

"j2 Global Communications (JCOM NADDAQ) was founded with one simple purpose: forwarding phone and fax messages to email. From that simple concept, j2 has grown into a company with $71.6 million in annual revenues. Nowadays, the business is a full-service messaging and communications company, offering products to facilitate conference calls, broadcast faxing, and even the transfer of faxes and phone calls to mobile phones. S ervicing more than 5.6 million customers around the world, j2's network has the most local and toll-free fax numbers in more than 1,100 cities in 20 countries on five continents.

"The firm went public during the dot.com movement in 1999 and—along with many of its Internet brethren—almost toppled in 2001, when its stock price fell below $1 per share. However, j2 didn't just survive the dot.com bust; it has absolutely prospered. Its five-year compounded annual growth rate is an astonishing 82.7%. In addition to the paid services, j2 counts more than five million customers using its free services, which have become so popular that Microsoft has built it into its Windows XP operating system. j2's mission is to then convert its free customers into paying clients. And it has done so very successfully. It's easy to see why: Subscribers can handle their messaging and fax communications less expensively, more efficiently—using digitization—and with a strict level of security and privacy. By the end of 2003, j2 recorded 27 consecutive quarters of revenue growth and eight consecutive quarters of positive earnings.

"Here's where your profit opportunity comes in. Last fall, j2 announced that it would begin to pay income taxes for 2004—at a 35-40% rate. In response, the numbskulls on Wall Street decided to punish the company by shaving 61% off of its share price. I don't know about you, but I kind of like the idea that the company is so profitable that it will have to start paying Uncle Sam. Now, counting its fair share of taxes, 2004's projections are fabulous. It's estimated that j2 will increase its revenues by 45%, passing the $100 million mark, and earn $1.07 per share next year—hardly a crime worth punishing. At first glance, the uneducated will see that as a drop compared to 2003 earnings. But when you look at earnings before taxes, it's a different story. Earnings before taxes for 2004 is an estimated $1.70—a 55% increase from 2004.

"We don't mind—even a little bit—that Wall Street is so short-sighted. Because now you can buy the company's shares at deeply discounted prices. Trading at a price-earnings ratio of just 16.6 (almost one-half that of its competitors), now is the time to buy the shares. Boasting 61% gross margins, plenty of cash, continuing investment in R&D (8% of revenues last year), virtually no debt, and growing at a tremendous pace, what's not to like about this story? The company has a proven track record of prospering—in good times and bad. It has strong insider ownership, at 25% of outstanding shares. And with Wall Street sitting on the sidelines, just a few analysts are currently covering the company. I recommend that the stock up to a price of $24.50. My price target at $45 per share would mean a very nice double."

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