Fargo Electronics (NASDAQ:FRGO), which shares the U.S. market for security card-printing systems with Zebra Technologies (NASDAQ:ZBRA), issued its 2003 earnings report last week.

Sales for the year fell 1%, due in large part to an 11% decline in the fourth quarter. Gross and operating margins held steady for the year, with a slight decline of 4% in the fourth quarter for operating margins. While net income rose 7.5%, stock dilution of 3.8% cut the per share gains in half.

The company blamed a lack of large government projects, which it has come to depend on for revenue boosts, for the year's lowered revenues.

Despite the tough revenue year, Fargo is keeping tight reins on inventory flow and on cash collection. Inventory and receivables fell 9% and 23%, respectively, at the close of 2003 versus the end of 2002. Moreover, cash levels increased dramatically; the company now has $13.5 million in cash and no long-term debt.

FCF generation increased a pleasing 14.5%, reaching $0.82 a share -- considerably more than the $0.57 in GAAP earnings reported. This gives the company an enterprise value-to-free cash flow ratio of roughly 12, and analysts are predicting that it will increase earnings up to 17.5% per year over the next five years.

In the near term, Fargo predicted that EPS in 2004 would be $0.60 to $0.70, representing a broad range of growth between 5% and 23%. Now before you get too excited, remember that in 2002, this same company predicted it would earn $1.25 in 2003. That did not happen. In fact, it did not even come close to happening.

Still, taking the 17.5% number as a proxy for free cash flow growth, Fargo scores an 0.7 on the EV/FCF/growth-meter. Now, that is roughly one- third the ratio of the market at large, making Fargo worth a serious look for value hunters such as the merry band of Motley Fool Hidden Gems prospectors.

What are the prospects for Fargo Electronics in 2004? Is the company revving to go or running out of stream? Talk it over with other Fools on the Fargo Electronics discussion board.

Motley Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.