Ebix (EBIX) may grab the title as the most misunderstood stock in the Nasdaq, and EBIX's Robin Raina the least understood CEO. A host of negative articles (Seeking Alpha's Copper field research, Barrons, and others ) have caused a considerable drop in the stock price.
Let me focus more on the EBIX's growth strategy. The critics major complaints are:
- EBIX is nothing more than a rollup with slash/burn strategy; and
- EBIX has little or no organic growth.
I took some time to compile and analyze all EBIX's acquisitions between 2006 and 2011. The numbers paint a different picture. Between the years 2006 and 2011, EBIX has acquired 17 companies (as publicly reported) spending $277 million. Most of the acquisitions have been done using cash flow from operations. Very little debt was used. The debts are mostly short term bank debt and are repaid within a few quarters. Any additional share issuance for acquisitions have been more than compensated by share buybacks.
The screen shot below gives the cash spent on acquisitions. The revenues of companies acquired are not available for all acquisitions. An assumption is made to account for the revenues (shown in grey fill, revenues = amount spent on acquiring/2.5)
Note: The numbers are in 1000s and are from the SEC filings of EBIX:
What is remarkable is that EBIX spent $277 million to acquire 17 companies, getting $88 million revenue. With 40% post tax margin, assuming zero growth and no synergy, we get a 13% earnings yield (roughly same as the cash flow yield). All this increase in revenue has been without diluting the common stock holders. Take a look at this table:
Let's come to the synergy/organic growth part to understand the value addition by EBIX's management team.
Base 2005 revenues
Total revenues from acquisitions (06 to 11)
Revenue for 2011
Synergy + growth
In many of the quarterly conference calls, CEO Raina talks about up-sell/cross-sell opportunities. The proof of that is in the $56MM value addition. This accounts for up-sell/cross-sell, organic growth etc. EBIX has shown a 7 times jump in revenue over 6 years. If this isn't impressive, then I don't know what is.
And wait, it gets even better. Most of the companies that EBIX acquired had little or no profit. We've bunch of fat cat CEO's and expensive VPs adding little value at the acquired companies. Raina cuts the fat, streamlines the organization and brings in an unheard of 40% post tax margin. The cash flow from operations mirrors the net income, there by showing that there's no funky accounting going on.
EBIX doesn't fit in the traditional mold of a software company. The typical software firm pursues a growth strategy, diluting stock with little or no free/operating cash flow to show for. One needs to have a different mind set to understand EBIX. The best analogy is Teledyne. It took Wall street a decade to understand Teledyne's CEO Terry Singleton's actions. But in the end, the shareholders enjoyed 20% returns (compounded) over two decades.
When Robin Raina became a CEO a decade back, the EBIX (formerly Delphi Information Systems) was a leaking row boat. Now after a decade, it resembles a cruising USS Constitution. In a decade from now, it'll look like the QE2.
I recently read "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success". Robin Raina has the attributes of the CEO's mentioned in this book.
Those attributes are:
- Having a strategy and sticking to it
- Buying back stock when it is cheap
- Acquiring companies at the right price
- Ignoring Wall Street and analysts
- Having significant ownership and acting in the best interest of the shareholders
The future of EBIX is bright, and the patient investor who ignores the market noise will be rewarded.