Ebix: Niche Business With Outstanding Value Proposition

Summary

• A GARP stock with global tailwinds and a long runway.
• Tethered to several of the strongest emerging markets.
• Secular growth story with reasonable valuation.

Ebix Inc. (Nasdaq: NASDAQ:EBIX)

(Data from Yahoo Finance)

Date of Report	11/16/2017	EV/EBITDA	22.59x
Current Price	$75.75	Cash per share	$2.59
Piotroski F-Score	5	TTM Sales (MM)	$321
TTM Earnings	$98.56 MM	Book Value/ shr in MRQ	$13.92
Price/ CF	29.4x	Market Capitalization (MM)	$2,380
Current P/E	24.1x	Price/Book Value	5.44x
Operating Margin	34.76%	Industry	Tech/Insurance

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Business Description:

"Ebix, Inc. [EBIX] is a supplier of software and e-commerce solutions to the insurance industry. Ebix provides application software products for the insurance industry, including carrier systems, agency systems and exchanges, as well as custom software development. Ebix conducts its operations through four channels, which include Exchanges, Carrier Systems, Broker Systems and Risk Compliance Solutions (RCS). Ebix operates data exchanges in the areas of life insurance, annuities, employee health benefits, risk management, workers compensation, and property and casualty (P&C) insurance. Ebix designs and deploys back-end systems for P&C insurance brokers across the world. EBIX also designs and deploys on-demand and back-end systems for P&C insurance companies. Ebix focus in RCS channel pertains to business process outsourcing services that include providing project management, time and material consulting to clients across the world, and claims adjudication/settlement services." - Google Finance

Investment Thesis:

Unique Business Model Creates Wide Moat - EBIX's core business is building websites and e-commerce solutions for the insurance industry. The number of different types of insurance products that they service speaks to the depth of their experience and the difficulty of replicating their business model. Operating Life, P&C, Annuity, and Employee Health Benefits (not to mention Worker's Comp) are all very different types of insurance products, and the fact that their portfolio is diversified creates a difficult situation for any competitor attempting to copy their business model. In the history of P&L shown below, it's striking to notice the general resiliency of their margins as they continue to grow revenue. (Charts below taken from Morningstar.)

The second chart, below, shows the same thing but in dollars, rather than common-sizing (by revenue).

It's noted in EBIX's most recent 10-K that the slight increase in Cost of Revenue seems to be due to more business being done with the Indian government, as well as additional personnel, service, and consulting costs associated with a recent acquisition (likely one-time). It's also heartening to see the robust growth of the company's Risk & Compliance Solutions Unit (33% YoY revenue growth).

(Above from 2016 10-K page 27)

While "Exchanges" is still the largest source of revenues, its combined subscription-based and transaction-based revenue is down to 76% this year from 77%. In the Risk/ Compliance space, the 10-K mentions that this revenue stream is growing primarily "due to new e-governance revenue associated with our Indian operation…" which meshes well with its recent acquisition of Itzcash, an India-based prepaid travel card business. Overall, with EBIX's strong foothold in the US with a stable source of revenue in its core insurance clients, India provides a nice hedge and a way to capture a secularly superior growth rate. With India's middle-class still building out the way that the US was in the 40s-50s, EBIX has a proven playbook to use to make inroads with Indian clients. Similarly, with India's educated workforce and particularly cheap labor, operating expense growth should be relatively capped compared to revenue growth.

EBIX's 76% Recurring Revenue Base Implies Long Runway - While the recurring portion of revenue lost a little bit of share, as a percentage, the segment still posted strong growth of $16M, highlighting EBIX's affinity to making acquisitions that make sense in order to impose discipline on the target's P&L within a business line that EBIX has expertise in. From a macro perspective, having 16,000 different customers across dozens of countries seems like a logical way to diversify, as well as derive potentially uncorrelated sources of returns. The company recently began deriving a large portion of its operating income from Dubai (lower tax rate), as well as a large chunk from India. While the insurance business is not the most exciting to be in, EBIX's unique foothold as technical conduit between end customer and insurance solution is an idea that isn't going away anytime soon. Since insurance is such an old concept, new insurers are bringing their firms electronic daily, and this just means more demand for EBIX's services. It wouldn't be surprising to see many developing countries like China, or India, entirely leapfrog the physical paperwork aspect of insurance coverage and come up with a government mandate to make everything done over electronic exchanges on the internet.

EBIX Trades Cheap Compared to Peers on Multiple Valuation Metrics - (below from Morningstar)

As shown in the chart above, EBIX's P/E is lower than all but one competitor Check Point Software (CHKP), which I would not call a true competitor since CHKP competes largely in the internet security business. In spite of EBIX's relatively low valuation, EBIX boasts of the second highest operating margins, lowest P/B ratios, and a decent 5-year CAGR of revenue. Sell-side analysts have taken notice as William Blair, who recently initiated coverage of EBIX, had this to say, "The insurance industry is undergoing a systemic technology upgrade," Klauber said, "which presents a sizable opportunity. Technology spending ranges from 3% to 5% of the $2 trillion in aggregate revenue for the property and casualty, life, and health insurance sectors. A number of factors, including a shift toward consumerism, threat of disruption, and the race to use analytics, are increasing demand for improved systems. EBIX is effectively a conglomerate of a wide range of companies that all fit a common theme of insurance and financial technology. The company works in almost all insurance verticals, including life, health, and P&C. Many of these segments already represent a material amount of technology spending, and are likely to grow their relative tech spending levels over time as well." (below from YCharts)

As is customary in my write ups, the above chart from "YCharts" is useful to see how the market has rated EBIX over time. The general upward trend across all valuation metrics seems to suggest that the market is secularly giving more credit to EBIX's business model, staying power, moat, and competitive advantages over time. In general, although it should be pointed out that companies with such a rich acquisition history often end up in the dumps, EBIX seems to have a great history of targeting solid, bolt-on transactions that fit neatly within its business model, and is simply making an acquisition to acquire a client list upon which it will plug in its superior software.

*EBIX is a position in John's Quantitative GARP and Value Portfolio (actual retirement money, available exclusively via Seeking Alpha Marketplace: John's Marketplace Page). The position is up 63% since purchasing in May 2016. Start a free-trial today to gain access to a 110 stock portfolio with similarly compelling and strategic investment opportunities in all-cap equity securities across the globe. Subscription to the service includes real-time trade alerts.

Analyst’s Disclosure: I am/we are long EBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.