I have followed the company for a while and concluded that the financials presented by the company are believable, that Ebix Inc. (EBIX) management is consistent, capable and truthful; that growth is sustainable, and that the market price of the stock is severely undervalued relative to its fundamental value.
Previous articles presented the business as a compelling combination of attributes – a network that delivers critical value in the core activities of clients, a history of strong economic returns, and management effectiveness in the deployment of resources that grow shareholder value.
More recently, I find it sensible that the company is strengthening its sales force to beef up organic growth, expanding the product suite, continue to repurchase stock, and continuing to seek accretive acquisitions. All this contributes to strengthening “the value of the network.”
The CEO’s equity position and the company’s own stock repurchases are substantial and in line with the belief that being long connotes attractive investment returns. A father’s advice to her teen-age daughter regarding the sincerity of solicitous boys seems to be applicable here – “focus on what they do, and pay less attention to what they say.”
Having said this, I would be remiss if I fail to acknowledge the polarization of opinion in the marketplace -- controversy regarding non-organic growth, taxes, outsourcing, legal disputes, and substantial short-selling come to mind. These have a significant dampening effect on the image of the company and on the price of the stock.
While one could argue that stock repurchase is a tax efficient way to return capital to shareholders, the polarization of opinion involving this stock provides impetus to a review of the dividend policy. In my opinion, a dividend would significantly raise the standing of the stock in the marketplace. A $0.20/share annual dividend would amount to less than $8.5 million a year, or less than 9% of annual FCF. This amount appears manageable among the moving pieces involving free cash flow, prospective growth requirements, and capital structure.
With such background, the chart below presents EBIX performance by the numbers. Complementing such view is an updated estimate of fundamental value.
|EBIX Table -- Selected Metrics|
|(Amounts in millions of US$, unless otherwise noted)||FYE 12/06||FYE 12/07||FYE 12/08||FYE 12/09||FYE 12/10||5 Year Avg.||Q 6/10||Q 6/11|
|Revenue Growth (y-o-y)||21%||46%||74%||31%||35%||42%||31%|
|Revenue per Sh. ($/Sh.)||1.04||1.36||2.03||2.57||3.39||2.08||1.00|
|EBIT / Revenues||23%||30%||39%||40%||40%||34%||40%||44%|
|EBIT per Sh.($/Sh.)||0.24||0.41||0.80||1.03||1.35||0.76||0.44|
|Cash Flow from Ops.||4.15||15.04||26.83||33.88||52.78||23.80||29.87|
|CF f/Ops. / Revenues||14%||35%||36%||35%||40%||32%||74%||71%|
|CF f/Ops.Growth (y-o-y)||-24%||262%||78%||26%||56%||80%||26%|
|CF f/Ops.per Sh.($/Sh.)||0.15||0.48||0.73||0.89||1.35||0.72||0.71|
|Free Cash Flow||2.35||12.44||23.52||29.92||46.74||20.92||26.00|
|FCF / Revenues||8%||29%||31%||31%||35%||27%||65%||62%|
|FCF Growth (y-o-y)||-44%||429%||89%||27%||56%||112%||24%|
|FCF per Sh.($/Sh.)||0.08||0.39||0.64||0.79||1.20||0.62||0.61|
|Cash & Mkt. net of Debt||-6.93||-12.10||-42.26||-39.30||-6.97||-25.9||-3.13|
|Cash Growth (y-o-y)||nm||nm||nm||nm||nm||nm||nm|
|Cash per Sh.($/Sh.)||-0.25||-0.38||-1.15||-1.03||-0.18||-0.60||-0.66||-0.07|
|# Shares Growth (y-o-y)||1%||12%||16%||3%||3%||7%||8%|
The metrics focus on free cash flow growth, a principal determinant of fundamental value.
- Free Cash Flow (FCF) for Q 6/11 was 62% of revenues, reflecting growth of 24% y-o-y. Two operating elements contribute to FCF performance; strong operational after-tax cash generation (NOPAT) and effective management of operating capital (working capital and long term assets). Here, again I cannot help but recall the words of the wise father; “Watch how FCF does.”
- Growth of FCF for the last 5 years ending on FYE 12/31 averaged 112%. This means that growth, organic or by acquisition, was fruitful.
- ROIC for Q 6/11 was 19% (annualized) vs. 22% in Q 6/10, and vs. 20% for FYE 12/10. ROIC has been consistently higher that cost of capital, conservatively estimated at 10%.
Updated fundamental value estimate, taking into account Q 6/11 results, is $35/share. In my opinion, this is conservative value based on conservative assumptions -- $70 million in annual FCF growing at 5% per annum, at a cost of capital of 10%.