The Long Case for Ebix

Ebix, Inc. (NASDAQ: EBIX) is a real sleeper. The company is a software developer and IT services provider for the insurance industry, with much of its software development based in its low-cost, very high quality India facilities.

EBIX is small, undiscovered and relatively illiquid and as a result it sells for a steep discount to the valuations of other IT services companies - but given its track record since 2000, you have to take this company seriously.

EBIX is profitable, generates substantial cash (typically over $1.00 per share per year) and is growing internally and through acquisitions. At $19.60 EBIX is selling for 11.6X its annualized first half '06 EPS of $0.84 and has approximately $1.00 per share in net cash. By way of comparison, Infosys (INFY) an Indian IT services company currently trades for over 40x earnings.

EBIX earned $1.38 per share in 2005 and seems to be tracking well for $1.50-$1.60 or better in 2006. Note EBIX earnings are lightly taxed, reflecting the benefits of its largely international operations, but that taxation treatment should continue.

EBIX has achieved a remarkable turnaround over the past six years under the leadership of CEO Robin Raina. Mr. Raina took a cash hemorrhaging product-based software business and completely revamped its focus and operating practices, developing an entirely new set of software and services while also launching a state-of-the-art software development capability - one which as achieved the highest in quality distinctions.

Here are the Cliff Notes to the story:

If you've been patient with this stock, you've done well. Take a look at the stock price chart - given the liquidity issues and the size of the company, you really need to be prepared to hold the stock for a few years to ensure you achieve outsized returns - otherwise you just have to be lucky on the timing of your entry.

EBIX 3-yr chart:

Now what's the catalyst? Ebix announced its largest acquisition ever - $13mm in cash and a $3mm earn-out - earlier this week - and the stock has barely budged. The company didn't use any stock, as it feels it is undervalued at current prices. Management gave little color on the size or profitability of what they bought other than it is "accretive" to 2007 results.

Management's very conservative posture on acquisitions, combined with a great track record of making successful, accretive acquisitions in the past few years, suggests that this acquisition is likely similar - but larger. Also, given its price tag, we have to assume the revenue base that will be added is material to a company doing around $25mm in revenue.

A formal audit of the acquired business (the acquisition closes Oct 2nd) is what is needed before EBIX will inform investors on the financial of the acquired company. Suffice it to say that in three prior purchases, management demonstrated great skill in making highly complementary and accretive acquisitions. I'm giving them the benefit of the doubt on this one.

I've owned the stock over 3 years, with an initial cost basis of $3.00 per share and I just averaged UP at $20.00.

Full disclosure: Author is long EBIX. One other note of full disclosure - Author's firm represented the company as its IR counsel for two years, ending in April, 2006.

Editor's note: EBIX is a microcap company with low float -- therefore, investors should exercise extreme caution.

Comments

[David Collins_:]

EBIX Holder Addendum:

Ebix has 3.1mm diluted shares out and 2.7 mm shares outstanding.

Of this, BRiT Insurance Holdings of the UK (a large EBIX customer) owns 930,163 shares (33.7%) and its affiliate, CF Epic (of which BRiT owns a 78% equity interest) owns 222,223 shares (8.1%).

That is a total of 1,152,386 shares or (41.8%). Of note, these shares were purchased from the company in private financings that helped to fund acquisitons by the Company. The placements were done at market prices at the time of the deal, with no discounts or fees.

Add to that position a longtime European Holder - Rennes Foundation, with 347,123 shares (12.6%) and you have well over half the shares out controlled by two/three entities, or a total of 1,499,509 shares (54.4%).

U.S. fundamental holders include:
Kennedy Capital in St. Louis 102,921 shares @ 6/30/06
Wellington Management in Boston 57,500 shares @ 6/30/06
(Perkins Capital shows 15,250 shares so it's hard to know if they are coming or going - and I've not included them in the total below)

For a total of 1,659,930 shares held by these entities. This helps explain the liquidity constraint EBIX faces as little more than 1 mm shares remain outside these holders.

DCC

2006 Oct 04 04:07 PM

[David Collins_:]

11-14-06 Ebix Q3 EPS Rises to a Record $0.53 Per Share;
2006 Nine Months EPS of $1.37 Match Full Year EPS for 2005...

biz.yahoo.com/bw/06111...

2006 Nov 14 03:32 PM

[David Collins_:]

EBIX Q2 EPS of $1.62; 1H EPS of $3.01; declares 3-1 Split.

Company seems unstoppable...

DCC

2008 Aug 01 11:47 AM

[David Collins_:]

at 13x trailing EPS, with internal growth and acquisition growth, and bigger scale paving the way for greater financial leverage and greater market clout/credibility before large insurance companies, the EBIX story still seems in the first inning - despite the amazing performance so far.

David (remaining Long EBIX)

Jun 18 02:00 PM