Gamble of the week: A beaten-up set-top box stock

This television set-top box company has had more than its fair share of problems, says Phil Oakley. Now could be a good time to buy in.

Life hasn't always been easy for this company, which is best known for makingtelevision set-top boxes for companiessuch as BSkyB. For much of the lastdecade, it has been struggling withone problem or another.

In the midto late 2000s the company could bestbe described as a mess. It was losingmoney and cash was pouring out of thedoor at an alarming rate. Then, in 2011, itissued three profit warnings which sawits share price come crashing down.

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2012 saw the beginnings of a turnaroundplan which has restored the company togood health. The company's prospectsnow look a lot better.

However, thatdoesn't mean that investors still haven'thad a rocky ride. The shares are downby a third from their 2014 peak andsentiment towards them hasn't beenhelped by the recent departure of thecompany's finance director.

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Yet, I can't help thinking that Pace (LSE: PIC)sharesare looking very cheap just now. It hasstrong positions in the TV set-top boxmarket with customers such as BSkyB,Canal+ and Virgin Media in Europe.

These are complemented by majoroperators such as Comcast, DirecTV andAT&T in the US as well others acrossthe globe. This market is evolving fast,which could be good news for Pace.

Most of Pace's TV customers are nowoffering their customers the ability todo more with their boxes. It is no longerenough just to offer hundreds of TVchannels, the boxes have to becomemedia centres which can access theinternet. This is where Pace's recentacquisition of Aurora Networks couldcome in handy.

710-Pace

Add on the cost savings from integratingAurora into Pace and it looks as if there'spotential for some decent profits growthover the next few years. And Pace hasthe added attraction of being able togenerate lots of free cash flow.

So how does this all stack up? Well, at290p, the shares trade on a prospective2014 price/earnings ratio of 9.4 timesfalling to 8.7 times in 2015. Withexpected free cash flow of over $200min 2014 they also offer a chunky freecash flow yield (free cash flow per sharedivided by the share price) of 12.9%.

Yes, there are risks. The likes of Amazonand Apple want to grow their streamingbusinesses and have lots of firepowerand customer clout. That said, Paceshares look cheap enough for a punt.

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