Ebix: Fast Growth, Low P/E
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The more I look at the shares of Ebix (Nasdaq: EBIX), the more I like it. This just seems like a fast-growing company whose stock is priced cheaply.
With a quarterly earnings call coming up on Monday, March 8, and the stock having pulled back 25% or so from its recent highs, it's a good time to take a look at Ebix shares. It's been perking up into the earnings report, up 10% in just two days.
The stock seems underpriced. For example, the five-year revenue growth rate is 39% and profits have grown 79% annualized. You would think a company growing at these rates would be priced at a premium, but it's not. The forward P/E multiple is 13, though its quarterly profit growth rate (trailing twelve months) has been about 15%. It's got $32 million in cash and $64 million in debt on a $543 million market cap. The most impressive numbers are these: Operating margin, 41% and Return on Equity (ROE), 37%.
Ebix was formerly known as Delphi, but changed its name in 2003. It's focused on selling software and e-commerce software for the insurance industry. Many of its software products are customized, allowing insurance carriers to design systems for policy and claims administration.
Since CEO Robin Raina took over as the CEO of the company in 1999, he's done a great job at growing the company. To put things in perspective, the company was doing just $30 million in business in 2006, but looks on track to do about $90 million in 2010. It has grown in each of the last five years, even through the recession.
Raina, a native of India, has expanded globally and has driven the company into the Indian market, where they recently bought an office building. It also recently acquired a Brazilian tech company, so clearly emerging markets is a focus. The company was number 4 on Fortune's best small business list.
Disclosure: Long EBIX
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Q3 '09 revenue was $23.3mm and net income was $9.4mm and did not include any benefit from the acquisitions of EZDATA Corp. and Peak Performance Solutions Inc. which were effective 10/1/09. EBIX later disclosed a "floor" forecast of $26 million in revenue and $7.5 million in income from the two acquisitions over the next 12 months.
So that would mean - more or less - that we "bolt on" $6.5mm in revenue and $1.8mm in net income beginning Q4 '09 - and from my experience with the CEO, Robin Raina, it's all VERY accretive on an EPS basis as well. That gets my floor forecast of at least $125 top line in 2010 and the bottom line always grows faster than the top-line at EBIX - because otherwise they aren't interested in the opportunity.
Now I know there's some investor distraction on organic vs. acquisition-driven growth, but consider that this business was doing around $12mm in 2002... and the scope, client base, access to capital and overall potential of the business - including its ability to land even bigger contracts and assignments - has been completely transformed by a series of acquisitions and efficient integrations. And someone's got a problem with that?!!!
I think there's more to come - a lot more - and Q4 is just the beginning; and my track record on this stock's been pretty good (as I first wrote it up on SA in Sept '06).
Yes, the company has excellent numbers BUT, the company is in a downward trend. If you look at the last time it bottomed, it re-set a lower bottom before moving up to where it is now. Again, good numbers but, MR. MARKET has it's way of delivering these companies below where the MARKET and R. Scott Raynovich is calling a good entry point. I'll wait.... I remember Delphi and they were a dog. Because you change the name of the dog doesn't mean it still doesn't bite. Same with GM and the rest of the (market over priced) pigs... That's my 2 cents..
Good luck all... see you in the $9 range.....
Your argument doesn't make any sense to me rooney.
The put option is something the CEO would have wanted as insurance. I says nothing about the direction the future direction of the EBIX stock price.
There are tremendous synergies coming from the acquisitions. WTF are you talking about ???
The beauty of an investment in Ebix, besides price, is the stability of the earnings stream which I think of in the following terms:
1) Lack of customer concentration: Other than Aon and Brit Insurance, which together might account for around 10% of 2007 revenues, the revenue base is evenly spread across hundreds of clients.
2) Insurance IT industry is slow moving/resistant to change: Once you have a customer in this business, you have to really screw up to lose them. While this hurts Ebix on the buy-versus-build front having to acquire to gain market share versus build, it alleviates customer retention concerns.
3) High switching costs: Should an Aon decide to leave Ebix, it would take over 3 years for them to make that switch since Ebix provides the back end IT system to all their subsidiaries around the world.
4) Recurring revenue stream: The revenue base is highly predictable given that over 70% of the revenue is recurring.
5) Recession proof: There is minimal economic sensitivity to this business. While this hasn’t mattered much over the past 4 years, it could very well matter going forward.
To understand where Ebix is going, you have to understand where Ebix has been and the inner workings of the man responsible for one of the most impressive turnarounds in small cap land I have seen.
The second manner in which I got conviction in Robin’s ability as a CEO is from speaking to a number of different constituents of Ebix (board of directors, shareholders, employees). What emerged was a picture of a guy who fits neatly into Buffett’s three simple hiring criteria – energy, integrity and intelligence.
Energy – Born in India, Robin has displayed a strong worth ethic his entire life. Before becoming CEO of Ebix at an early age (mid 30’s), he quickly rose through the ranks at Mindware – an international technology consulting firm. Common words references used to describe Robin were “passionate” and “driven”. One member of the board said that he worries that Robin will someday get hospitalized from working too hard (on the typical day you can reach Robin up until 3am).
Integrity – While Robin works long days, he will be the first to tell you that it doesn’t all involve Ebix. He spends a great deal of his time on charity issues regarding India.
He has set up a foundation that takes up good deal of his time.
See www.rainafoundation.com/
Intelligence – Robin has an engineering degree from Thapar Univeristy in Punjab, India. References described him as very bright. Most importantly, I think the intelligence extends to how he effectively handles and motivates his employees (i.e. not just book smart) which is extremely important given his growth by acquisition strategy. The fact that there has been little senior management turnover under Robin (note – other than the CFO who is nearing retirement age and will be retiring very soon) is extremely important. Robin doesn’t like to have contracts with his employees and tries to build trust and empowerment through a pay for performance culture.
Arguably, the best testament to Robin’s ability was the fact that about a year ago, he was offered the CEO position at a $1 billion company that was in need of a turnaround. Robin thought about it for less than a day and declined the offer. As the second largest shareholder of Ebix and with a board that is now fully conflict free (research indicates it was somewhat dysfunctional until the last few years), I think the decision to remain at Ebix was an easy one.
How would you like to be handed the reins in late 1999 of a company whose P&L looked like this?
1994: (8.9mm)
1995: (1.6mm)
1996: (11.8mm)
1997: (5.0mm)
1998: (3.4mm)
1999: (19.0mm)
You get a collection of high margin, sticky revenue stream businesses that could probably be run by a dummy, all the gluing and growing is being driven by the vision and execution of one man.
Insurance itself constitutes around 15% of the U.S. economy and IT spending within the industry is estimated to be around 8%-9% of its overall revenue so we are talking big numbers. Ebix estimates that the insurance industry wastes an estimated $50 billion on paper-based processes every year. So the first big challenge is to get paper out of the process. The second big challenge is convergence. Ebix wants to get all the different insurance entities data (agent, broker, carrier) to flow seamlessly from end to end. Today, data entry happens five or six times during the end to end process which leads to inefficiency and ultimately higher prices for the consumer. Finally, the insurance industry tends to be slow moving in response to adapting new technologies. Decisions that should take three months can take three years and entrenched legacy architecture, hardware, and software takes time to replace.
So the challenges are there for Ebix but the opportunity set is large. The goal for Ebix is to be eventually regarded as “the Cisco” of the insurance industry - providing products, services and support that help’s move data back and forth among the insurance players (agents, brokers, carriers). This is a good business because of the recurring nature of it – Robin thinks around 70% of his current revenue stream today is recurring. The rest he would classify as more one off in nature like a consulting project.
What ultimately give’s me comfort in this growth strategy is Robin’s conservative nature (extremely conservative guy who is very willing to walk away from a deal) and his ability to control costs and keep the management teams he acquires intact. It is also worth noting that Robin decided not to use stock for the last two acquisitions. This, coupled with the recently announced stock buyback program, tells you what he thinks about the future prospects of the company.
You can't grow from a $12mm to a $125 run rate in ~ 8 years - and enter several exciting new lines of business - if the CEO "strips down the new acquisitions for cash flow and lets them fade away as deteriorated assets. So, there are no synergies and no growth coming out of the acquisitions..." That comment crosses the line of ridiculous and I trust the sage readers see that a mile away.
Sometimes someone's undocumented "2 cents" are worth even less than that - but this is a free country. Fortunately, dissent creates liquidity and tempers the share price as it continues to appreciate over the long term so that the stock never gets to a place where it's overvalued and you feel compelled to sell!
If EBIX's growth strategy via acquisition is bad business, I hope they please keep it up - because over the past 7 years it has transformed the business in every way - and loyal, long term shareholders are laughing their way to the bank.
Ebix split 1 to 3 few weeks back. Yahoo Finance shows valuation with new share price and old share count.. so its under called.
See Morningstar valuation shows $1.8B.. post split share count slightly more than 100M at $17+ price today.
Do your manual calculation.. for 2009 net income is $38.8M which at $17.12 a share and $1.8B market cap translates into trailing PE of 47 which is not cheap by any means.
Do your due diligence on valuation... I am waiting for better valuation before loading up.
Google finance: $17.35 / 0.95 split-adjusted EPS = 18.34
www.google.com/finance...
For a company growing at more than 40% per year with a moat and a strong recurring revenue base this is cheap.
You do YOUR due diligence
This makes EBIX extremely attractive.. even if you count 25% options overhang, EBIX certainly looks cheap at current price.