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I am always searching for companies that are able to generate growing earnings per share, revenues, and shareholder value. In some cases, these companies trade at higher valuations because the market projects higher-than-average earnings growth. In addition, these companies tend to have higher return on equity (ROE) multiples and increasing profit margins.

I think that Ellie Mae (NYSE:ELLI) is a compelling growth story considering its past growth, growing institutional sponsorship, and shareholder oriented management team.

I like this company because it brings mortgage originator parties together with the help of Internet technology and streamlines the whole process. That saves everybody involved a lot of time and money, reducing the average cost per mortgage by a whopping $3,000, according to a Tom Peters case study. Ellie Mae is a great company that has a proven management team and strong moat. The stock is up 326% YTD and several hedge funds (for example, Renaissance Technologies) have bought the stock in recent quarters.

The company shows a very interesting combination of future growth and cloud exposure. In addition, management is optimistic on the company's prospects in emerging markets.

What are the most important items when analyzing Ellie Mae? I tend to focus on analyzing current and projected earnings/revenue growth. In addition, it is essential to keep track of the company's margins, debt/equity ratios, and ROE. (I detail my key analysis on growth stocks here.)

How Strong Are Ellie Mae's Earnings and Sales Growing?

The first step when analyzing Ellie Mae is evaluating its recent EPS performance. Certainly, how a company has performed in the past is helpful information because it gives you strong clues about how it will handle the future. Barring some unforeseen circumstance, most companies move in a predictable manner.

ELLI increased last-quarter EPS at 289% compared to the same quarter in the previous year. I think the company will improve its quarterly EPS growth in the near future. I like the fact that ELLI generated more than 15% quarterly EPS growth. This shows that the business is growing organically and the company's products generate solid demand. In fact, management sounded optimistic in the last earnings call.

Analysts recently upgraded its estimates for the current year, increasing their EPS projections 329%. This shows that sell-side analysts are confident in the company. In addition, ELLI generated three-year annual EPS growth of 200%. This is an important metric to follow in a growth stock because it highlights how well the stock grew in the past years.

It is encouraging to see that Ellie Mae generated more than 15% EPS annual growth in the past three years.
In addition to analyzing EPS growth, I focus on evaluating ELLI top-line or revenue growth. The value of common stocks is, of course, closely tied to the sales power of the company, so an understanding of the company's growth potential for both the near-term and long-term time frames is required in making a sound investment decision.

The company reported 87% quarterly revenue growth year over year. I require a minimum 15% revenue growth for these kind of companies, and I am encouraged that Ellie Mae generated growth levels above that. When investing in a company, an investor wants to see sales grow or improve over time, not just the last reported quarter. Looking at the financials in comparison to previous years will give participants a much better idea of how well a company is doing. Ellie Mae generated a three-year average annual sales growth rate of 34.

Ellie Mae generated good levels of annual sales growth in past years. This is the result of a continued expansion into emerging economies and success in product innovation.

Evaluating Management Execution

In addition to understanding ELLI's past EPS and sales growth, it is essential to focus on analyzing ROE. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
The company has a ROE of 18%. ELLI has a very good ROE. I consider ROEs above 15% as good performance indicators. This is a good measure that the company used reinvested earnings to generate additional earnings. Also, Ellie Mae has an ROA (return on assets) of 8%. This ratio tells how many dollars of earnings they derive from each dollar of assets they control.

It is also important to check which hedge fund bought the stock in the last quarter and at what price it did so. I assume that if a prominent institutional investor put money into Ellie Mae, the stock will pass strict fundamental standards. It is important to know that both Renaissance Technologies and Driehaus Capital invested in the stock in the past quarter at an average price of $24. I think that investors should track hedge fund holdings every quarter.

Ellie Mae Competitor Analysis

In this step I analyze Ellie Mae's competitors. I track their most important multiples in order to easily understand how the market prices each company in comparison to ELLI. Let's review each company:

  • Lender Processing (NYSE:LPS) competes in several segments. It trades at a market cap of $2.1 billion, earnings multiple of 29x, and a P/S of 1x. In its last earnings call, Lender Processing management explained the continued expansion into new markets, which could be a threat to Ellie Mae's core businesses. As we can see, Ellie Mae trades at a higher earnings multiple than Lender Processing. Could this be evidence that the market places higher expectations on Ellie Mae? In order to answer that question, it is essential to evaluate whether Lender Processing key competitive advantages are stronger or weaker than Ellie Mae.
  • Ellie Mae also competes against Advent Software (NASDAQ:ADVS) in some areas. This stock trades at 22x earnings and 3.4x sales, and it has a market cap of $1.13 billion. I find interesting that ADVS trades at a lower P/S than Ellie Mae. Is this a signal of lower revenue expectations for Advent Software? I am much more confident on ELLI's growth.
  • Fidelity National (NYSE:FIS) is another competitor to take a look at. It trades at a P/E of 21x and a P/S of 1.86x.

Valuation

The final step in any fundamental analysis of Ellie Mae is analyzing how cheap or expensive the stock is in relation to its industry and the S&P 500. For many stock market investors, the P/E is the single most important number when considering the valuation of a company. The market prices Ellie Mae at 33x earnings in comparison to the industry average P/E of 32x and S&P 500 trailing P/E of 15x.

It is important to evaluate why Ellie Mae trades at a premium P/E to the general market. I think that management sounded optimistic in the last earnings call, and investors are pricing a reasonable level of growth for the next two years.

In addition, ELLI has a P/E that is higher than its industry average. This indicates that investors expect higher growth for Ellie Mae. It could come from management's goal of emerging markets expansion or just new product introductions. The company also trades at 3.9x book and 6.3x sales.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ELLI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Analyzing Elli Mae's Growth And Earnings