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SC Capital Group
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Small and micro cap fundamental value investor. Buy high quality businesses trading at deep discounts to intrinsic value in situations where I think I have an analytical edge and line of sight to catalysts to unlock value in the next 1-3 quarters.
  • Why EBIX Is A Double In The Next 3-6 Months 4 comments
    Jun 21, 2013 12:31 PM | about stocks: EBIX, HLF

    EBIX has been getting lots of attention in recent months due to Gotham City's short posts and SEC investigation. However, I think during times like these it is important to take a step back and think about the various scenarios. Fundamentally, EBIX is a high quality business with strong, recurring free cash flow and minimal capex needs. This favorable annuity-style free cash flow stream allows EBIX to return significant capital to shareholders. EBIX currently yields 3.2% and repurchased $118MM of stock since 2008 or 34% of current market cap. At today's price, EBIX trades at just 5x FCF or a 20% FCF yield. Now lets work through some math on the valuation.

    Bull case (25% probability): SEC investigation results in no issues, EBIX fixes corporate governance issues, and management and the board can refocus on organic growth and finding accretive acquisitions. In this case, I expect EBIX to trade back to its historical average P/E multiple of 15x. On 2013 EPS of $1.87, EBIX is a $28 stock.

    Base case (50% probability): SEC investigation finds some corporate governance issues, possibly even Raina departs or is removed from his CEO role. In this case, the strong free cash flow will not be adversely impacted. Corporate governance issues will be repaired over time but the company's reputation with investors will be damaged. In this case, I value EBIX at 10x P/E which results in a $20 stock price.

    Bear case (25% probability): SEC investigation results in material misstatements of financials and the company needs to restate historical financial information. In this case, EBIX will likely trade to 4x P/E while the company is in the restatement period which could take as long as 12-24 months. This values EBIX at $7.50. Even in this case, EBIX's software platform still generates substantial FCF and is a high quality business which could be sold to private equity so there is no chance that EBIX is worth 0.

    I estimate EBIX's fair value based on the above scenarios and probabilities at $19 (110% upside). The margin of safety lies in the strong underlying free cash flow that the business generates and the company's ability to repurchase stock and increase the dividend. Buying at just 5x FCF, over a 50% discount to fair value provides a significant margin of safety.

    EBIX's story is very similar to HLF over the last six months. A short seller created and presented a presentation on why HLF was a fraud, citing some valid issues, but over exaggerated his points. The stock fell 44% to $25. At the trough, HLF traded to 5x P/E, exactly where EBIX is now trading. The company used the opportunity to repurchase stock which was highly accretive to EPS. In the next month, HLF subsequently rebounded 80% back to its price before the short seller's presentation. I expect similar price action from EBIX and recommend investors with a 3-6 month time horizon accumulate EBIX shares at these bargain prices.

    Disclosure: I am long EBIX.

    Stocks: EBIX, HLF
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Comments (4)
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  • Anony123
    , contributor
    Comments (16) | Send Message
    Let's keep in mind that Goldman spent millions of dollars on a big 4 accounting firm and also on a forensic/fraud accounting specialist to go through the books with a fine tooth comb. The result was a clean bill of health. Not only did Goldman do their due diligence, but so did Credit Suisse as they were one of the debt providers. Morgan Stanley advised on the deal and provided the fairness opinion, so they presumably did some due diligence as well. Although likely not as in depth as Goldman and Credit Suisse. The international tax strategy is sound. And that is the only major financial risk to the company. They have transfer pricing reports done by E&Y International. And as long as the money stays overseas, they don't have to pay the U.S. federal income tax rate. And of course the money does stay overseas because they use it to make acquisitions. Since every other software company does the same thing (house the IP in Singapore, India, Australia), they use the overseas money to make overseas acquisitions. Pretty simple.
    21 Jun 2013, 04:28 PM Reply Like
  • ARNA Investor
    , contributor
    Comments (107) | Send Message
    I am with you here my friend. There is a great deal of horse manure being spread about this week with regard to EBIX. Nice close today after the the third major selloff.


    It takes a great deal of manure to produce perfect roses but I smell roses in the near future.
    21 Jun 2013, 04:44 PM Reply Like
  • Afam Edozie
    , contributor
    Comments (255) | Send Message
    I was in EBIX 2010 and 2011, made some money but gave half of it back, somehow dropped off my radar.


    I plan to buy once the price stabilises (no point trying to catch a falling knife no matter how good the fundamental case).
    21 Jun 2013, 06:17 PM Reply Like
  • Anony123
    , contributor
    Comments (16) | Send Message
    It is sounding like the company may hire the big 4 accounting firm and the forensic/fraud accounting specialist Goldman used to provide them with an opinion on their international tax strategy. That's what I think.


    It is also sounding like the main class action lawsuit down in Georgia, which is in the discovery phase, has gone so well for EBIX that they filed to dismiss it two days ago. Does anyone have access to PACER to see that?


    All Gotham has at this stage are a couple of disgruntled employees who Robin fired because they were incompetent and they are spreading lies about the company. They took them to Justice and that is why they initiated the probe. That is where Gotham is getting the quotes he is putting out on Twitter. That Robin doesn't like Americans, etc. Of course what Robin does is buys a company, then fires the execs (aren't needed), HR and other corporate employees (not needed) and all the highly paid incompetent developers that might be in the U.S. Then he replaces them with smarter, harder working developers in India or Singapore who will work twice as hard for half as much. Leaves quite a few disgruntled employees in the wake. And so they say oh Robin just doesn't like Americans. That's all Gotham has left at this point. The word of a few disgruntled employees. Comical. Won't take Justice long to look into the false allegations of these disgruntled past employees to see they are lying about this and that. ...
    21 Jun 2013, 06:44 PM Reply Like
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