Getty Images (NYSE:GYI) is no doubt glad to close the books on 2006. Getty sells still images and footage (video and film clips) at its cutting-edge website. The problem is, those sales went on sabbatical last year, turning Getty from a growth stock into a still life.

None other than Jonathon Klein, the CEO of Getty Images, called the results for the third quarter pedestrian. In the recent fourth-quarter conference conference call, Klein said: "Our results in the fourth quarter were rather better than we had anticipated. We exceeded our own expectations for both revenue and earnings per share and had record cash flow generation in the quarter."

If we judge the value of a stock by its price movement, we couldn't help but agree that the recent 14% boost since the earnings release and conference call must mean things were indeed looking up -- way up. But that was not the case. By most measures, Getty remains mired in an industry slowdown with negligible quarter-to-quarter revenue growth and half the growth it enjoyed year over year in the halcyon days of 2005. So why the increase in price per share?

Blum Capital goes shopping
On Monday, before the earnings release, private equity investor Blum Capital took a substantial position of 5% in the company. The stock immediately gained more than $2.00 per share. Blum said it wanted to bring about changes in the board or management. Of more interest is the third possibility Blum mentions -- an "extraordinary corporate transaction." Is this a euphemism for a leveraged buyout?

There are no other words for what the price movement looked like in the year before Blum showed some interest: a bowling ball down an elevator shaft. From a high of $94.37 in November 2005, the stock dropped to $41.67 just one year later. This is what often happens to a growth stock that quits growing. So what happened last year?

Quarterly Growth Year over Year

2006

2005

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Revenue

9%

7%

11%

13%

15%

20%

23%

14%

Operating income

-26%

-7%

-28%

11%

33%

41%

39%

25%

Net income

-29%

-4%

-34%

15%

48%

46%

35%

31%

Diluted earnings

-22%

3%

-34%

13%

39%

36%

29%

26%


From SEC documents

Drowning in cash
You may have noticed more than a few publicly traded companies being bought by private equity firms -- Petco, HCA, and Biomet are all recent acquisitions. There is an absolute ocean of cash pouring in to private equity funds with no better place to go than leveraged buyouts, or LBOs. Leveraged buyouts allow private equity groups to use loads of debt to take control of a business.

The prime targets are companies with positive free cash flow, cash on the balance sheet, very little debt, selling at undervalued prices, and ripe for a turnaround.

Getty Images

Free cash flow (FCF)

$207

Cash

$339

Long-term debt

$265

Enterprise value (EV)

$2,816


In millions; from SEC documents

Although Getty's enterprise value-to-free cash flow ratio is 13.6, and private equity buyers normally look for EV/FCF ratios closer to 8 to 9, Getty may still be an attractive target because of its strong balance sheet and potential for turnaround.

We can't know for certain what's in store for Getty, but it may be that the rapid rise in price on rather disappointing growth is fueled by speculation that LBOs are alive and well and shopping for solid businesses.

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Fool contributor Jean Graham owns no shares of the companies mentioned. The Fool has a disclosure policy.