Amdocs (NYSE:DOX) has the type of strong, recurring cash flow stream that is normally highly valued by Wall Street. However, by looking at the valuation of Amdocs one would never know this. Excluding net cash (Amdocs has over $9 a share in cash), Amdocs trades at a roughly 10% trailing free cash flow yield and a little over 10 times forward earnings estimates.
Amdocs is an orphaned stock as it is domiciled in Guernsey and hence has very little index representation. As a result, passive index investors don't own much of the stock and it is not in most active investors' benchmark. Amdocs is classified as a software stock but its slow and steady growth profile doesn't appeal to the type of growth investors that typically buy software stocks. The reason the opportunity to own Amdocs at such a great price exists is because it is ignored and overlooked.
Amdocs provides software and services to the telecom industry, mainly in the area of billing and CRM. Amdocs is by far the leader in its industry and has continuously gained market share from its competitors. Many telecom companies completely outsource these IT functions to Amdocs. Over 80% of Amdocs revenues come from such customers. Amdocs typically has long term contracts with these customers for managed services that can last ten years or more. It is rare for Amdocs to lose a managed services client as the switching costs are tremendous. The cost of switching providers is highlighted by the fact that Amdocs is typically cash flow negative in year one of a managed services contract with a new client (despite the fact that Amdocs owns the software and already has much of the infrastructure in place).
Amdocs has been a good steward of capital and has returned a lot of cash to shareholders over the past few years. Between dividends and share repurchases Amdocs has returned approximately $2 billion to shareholders over the last four years, approximately all of their free cash flow. Amdocs management said in their most recent earnings call that they plan to continue to be aggressive with share repurchases and raised the dividend by 10%. Amdocs management has been extremely selective with acquisitions. If anything Amdocs management has likely been overly conservative as they are sitting on nearly $1.5 billion in cash. With that said, I would take conservative management over prolific spenders any day of the week.
Outlook and Valuation
Amdocs gave guidance for the current year (September 2015 YE) of about 4% revenue growth and high single digit EPS growth despite a 1% revenue headwind due to the stronger dollar. Amdocs leading position, recurring revenue business model and steady growth make it a very attractive business. At 15 times free cash flow or $63 (adding back $9 a share in cash) Amdocs would still trade at a discount to the broader market.
After a nearly six year bull market value stocks are few and far between. What values are available generally have a lot of hair or are in cyclical industries that can turn on a dime. Amdocs is a diamond in the rough as it is an industry leader that has a strong recurring free cash flow stream for an extremely attractive price.
Disclosure: The author is long DOX.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.