This article on insurance industry software developer Ebix (EBIX) focuses on the financial measures of economic performance. The perspective is fundamental valuation. The context is lack of recognition in the marketplace, as reflected by a significant gap between fundamental value and the price of the stock.
By way of background, the Q 9/11 report highlighted record operating cash flows. Market response was only tepid.
Ebix consistently exhibits robust ROIC. For Q 9/11 annualized ROIC was 21% despite the substantial year-over-year increase in fixed assets (OLTA) due to acquisitions. Management of NOWC results in minimal use of capital. ROIC, well in excess of WACC (10%) represents robust creation of shareholder value.
- ROIC (Return on Invested Capital) = NOPAT / Operating Capital
- NOPAT (Net Operating Profit after Taxes) = EBIT (1- Tax Rate)
- OC (Operating Capital) = NOWC (Net Operating Working Capital) + OLTA (Operating Long-Term Assets)
- WACC (Weighted Average Cost of Capital)
Fundamental Value Metrics
|EBIX Table --Selected Metrics|
|(Amounts in millions of US$, unless otherwise noted)||FYE 12/06||FYE 12/07||FYE 12/08||FYE 12/09||FYE 12/10||5-Yr.Avg. FYE06-10||Q 9/10||Q 9/11|
|Revenue Growth (y-o-y)||21%||46%||74%||31%||35%||42%||28%|
|Revenue per Sh. ($/Sh.)||1.04||1.36||2.03||2.57||3.39||2.08||1.05|
|EBIT / Revenues||23%||30%||39%||40%||40%||34%||39%||42%|
|EBIT per Sh.($/Sh.)||0.24||0.41||0.80||1.03||1.35||0.76||0.44|
|Cash Flow from Ops.||4.15||15.04||26.83||33.88||52.78||10.04||22.06|
|CF f/Ops. / Revenues||14%||35%||36%||35%||40%||32%||30%||52%|
|CF f/Ops.Growth (y-o-y)||-24%||262%||78%||26%||56%||80%||120%|
|CF f/Ops.per Sh.($/Sh.)||0.15||0.48||0.73||0.89||1.35||0.72||0.55|
|Free Cash Flow||2.35||12.44||23.52||29.92||46.74||8.49||20.31|
|FCF / Revenues||8%||29%||31%||31%||35%||27%||25%||48%|
|FCF Growth (y-o-y)||-44%||429%||89%||27%||56%||112%||139%|
|FCF per Sh.($/Sh.)||0.08||0.39||0.64||0.79||1.20||0.62||0.50|
|Cash & Mkt. net of Debt||-6.93||-12.10||-42.26||-39.30||-6.97||-26.92||-0.30|
|Cash Growth (y-o-y)||nm||nm||nm||nm||nm||nm||nm|
|Cash per Sh.($/Sh.)||-0.25||-0.38||-1.15||-1.03||-0.18||-0.60||-0.69||-0.01|
|# Shares Growth (y-o-y)||1%||12%||16%||3%||3%||7%||4%|
The table above shows the following:
- Revenue, EBIT, Cash Flow from Operations, and FCF (Free Cash Flow), grow at a sustained rapid pace
- FCF grew 48% y-o-y to $20.31 million in Q 9/11
- The g (growth) powering the projected growth in FCF is high.
- Despite rapid y-o-y growth in OLTA due to acquisitions, the increase in the number of shares outstanding is minimal; further cash, net of debt showed a y-o-y improvement.
- Operating cash generation is substantial to support organic growth, acquisitions, debt reduction, and dividend payments.
It is difficult to discuss FCF without addressing the risk related to the future stream of FCF, which when discounted to Present Value defines Fundamental Value. Since this has been covered in previous articles, I’ll be brief.
The view is that Ebix’s low business risk is evidenced by reliable growth in EBIT and in Cash Flow from Operations. Explaining such financial measures is Ebix’s development and management of its network.
Ebix’s clients benefit by access to the network as convergence of all the channels takes hold and a growing number of participants in the insurance industry adopt the network as a standard operating procedure. Increased transaction expediency and reduced operating costs are strong motivators.
The network, explained as a utility, can become an essential service with widely accepted standard features. Predominant networks exhibit mutually reinforcing attributes, such as high client retention, high level of recurring revenue, high predictability in gross margins, NOPAT, and FCF, high cost of entry to potential competitors, and synergy in the integration of potential acquisitions.
Combining such network attributes with Ebix’s tight adherence to its purpose and strategy suggest that risks assumed fall well within management’s scope of competence and within the financial wherewithal.
The metrics below are the basis for $32.00 per share, conservative fundamental value estimate.
- FCF = $65.0 million (note quarterly Q 9/11 FCF = $20.31 million)
- g = 5% in perpetuity (note Q 9/11 FCF growth of 139% y-o-y)
- WACC = 10%
- Cash = $15.60 million
- Debt = $19.90 million
- # Shares = 40.45 million
Worth noting is Ebix’s FCF capacity; able to support increases in the regular quarterly dividend of $0.04 per share without upsetting growth, stock repurchases or acquisitions.
Where does this leave us?
One may consider this valuation valid, but remain uncertain about how or when the mispricing will be corrected. Two thoughts attributed to Charlie Munger seem well suited for uncertainty.
….. You are looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.
...and.....you don't make money when you buy stocks. And you don't make money when you sell stocks. You make money by waiting. And so the biggest, the single biggest advantage a value investor has is not IQ; it's patience and waiting. Waiting for the right pitch and waiting for many years for the right pitch.
Disclosure: I am long EBIX.
Disclaimer: The views expressed represent a personal opinion, not an investment recommendation. The methodology of analysis, including financial computations, presentation, and views, also reflect personal preferences. Presentation and computations entail a probability of error, which is entirely possible. Please do not rely on this analysis; do your own due diligence.