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j2 Global Communications, Inc. (JCOM - Free Report) recently delivered its 5th consecutive positive earnings surprise on 40% revenue growth and 41% EPS growth.

Management raised its guidance for the remainder of the year, prompting analysts to revise their estimates higher. This sent the stock to a Zacks #2 Rank (Buy).

The company also recently initiated a dividend that yields a solid 2.6%. Valuation looks reasonable too, with shares trading well below the industry average.

A Niche Business

j2 Global Communications, Inc. provides Internet-based fax, voice, and data services to individuals and businesses. While many investors have written off faxes as a rapidly dying technology, there are still many businesses that rely on them daily.

j2 Global Communications has managed to carve itself out a profitable niche within the industry by allowing small and midsize businesses to send faxes through their computers and receive incoming faxes through their email. The company has also managed to record 15 consecutive fiscal years of revenue growth.

j2 Global Communications was founded in 1995 and has a market cap of $1.4 billion.

Strong Second Quarter Results

j2 Global Communications delivered better than expected results for the second quarter of 2011 on August 2. Earnings per share came in at 62 cents, well ahead of the Zacks Consensus Estimate of 54 cents. It was a stellar 41% increase over the same quarter in 2010.

Revenue surged 40% to $85.7 million, beating the Zacks Consensus Estimate of $84.0 million. Much of this increase was driven by exceptional overseas growth, as revenues soared 238% outside of the United States. Revenue in the U.S. was up 3%.

Gross profit was a remarkable 82.6% of total revenue, although this was down from 83.6% in the same quarter last year. Total operating expenses declined from 36.0% to 34.9% of total revenue in the quarter as the company leveraged its fixed expenses.

These factors led to a 40% jump in operating profit year-over-year.

Raised Guidance

Management raised its guidance for the remainder of fiscal 2011 following strong Q2 results. The company now expects 2011 EPS between $2.46 and $2.56, up from previous guidance of $2.21-$2.42.

This prompted analysts to revise their estimates higher too, sending the stock to a Zacks #2 Rank (Buy). The 2011 Zacks Consensus Estimate is now $2.36, which is below guidance. This represents 31% growth over 2010 EPS.

The 2012 consensus estimate currently stands at $2.46, corresponding with 4% EPS growth.

Dividend Initiated

j2 Global Communications generates strong free cash flow and carries no long-term debt. In fact, free cash flow rose 59% year-over-year to $42.0 million in the second quarter of 2011.

This strong financial position allowed the company to recently initiate a regular quarterly dividend. It currently yields a stellar 2.6%.

Reasonable Valuation

The valuation picture looks very reasonable for JCOM. Shares trade at just 13.1x 12-month forward earnings, a significant discount to the industry average of 21.5x and its 10-year median of 18.0x.

Its PEG ratio is a reasonable 1.1 based on a 5-year EPS growth rate of 11.7%.

The Bottom Line

j2 Global Communications has managed to carve itself a profitable niche in an unassuming industry. With rising earnings estimates, solid growth projections, a strong dividend and reasonable valuation, JCOM offers plenty of upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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