Image Source: Ebix Inc – IR Presentation
By Callum Turcan
Ebix Inc (EBIX) is a leading international provider of on-demand software and e-commerce services to the healthcare, insurance, financial, and e-learning industries. In our latest 16-page stock report covering Ebix, which can be viewed here, the low end of the fair value estimate range stands at $44/share. With shares of Ebix trading well below that at ~$34/share as of this writing, it would appear at first glance that the technology company may be an appealing capital appreciation opportunity.
However, please note that the firm’s techincals are terrible and have been getting worse after staging a short-lived recovery in early-2019, indicating the firm may represent a Value Trap. As of this writing, shares of Ebix are trading ~60% off their 2018 highs and we see that as a sign of the market having little faith in the trajectory of this company. Shares of Ebix yield 0.9% as of this writing.
The Valuentum Process
A key part of the Valuentum process involves finding companies that are both undervalued on our discounted cash-flow basis but also appreciating in price, which indicates shares are beginning to converge to their intrinsic value estimate. After all, the market has to agree with us for us to eventually be right, and the fair value range is but an estimate. The market could know more about the company than we do. If the share price of a company is falling (in Ebix’s case, precipitously), even if the company appears undervalued on our processes, it may take a long time before the market comes to factor that in. Sometimes, the share price may never converge. That’s why technical and momentum indicators are so vital to our process.
We think investors are probably much better off investing in opportunities that are undervalued and already converging towards their intrinsic value estimate. We believe these stocks have an increased likelihood of actually being undervalued, while having an increased likelihood of the market working to correct the mispricing via market action. Deteriorating technical and momentum indicators could be an indication that the company in question could be facing something unexpected (e.g. a major legal liability or paradigm-shifting regulatory change that would adversely impact its future financial performance). Most value traps tend to have truncated long-term performance, where traditional value investors are factoring in sustainable performance into perpetuity (“continuing value”), but the market is truncating the perpetuity calculation (reduced “continuing value”). We think this dynamic is why we’ve gotten situations like CVS (CVS), Gilead (GILD) and Teva (TEVA) wrong in the past. We put too much weight in our valuation assessment.
That’s why we use a combination of fundamental valuation and technical/momentum analysis to find the best capital appreciation and income generation opportunities out there in our coverage universe (we apply our forward-looking dividend processes to identify strong dividend growth stocks, too). Fundamental analysis (i.e. forecasting discounted free cash flows) narrows down the potential list of investment opportunities by identifying undervalued companies (market price < fair value estimate) from overvalued companies (market price > top end of fair value range), while technical analysis (i.e. analyzing historical stock price/chart movements) showcases how the market at-large views those opportunities, which in turn illuminates which investments may be most likely to continue converging towards their intrinsic value in the short- to medium-term.
Please see Brian Nelson’s new book Value Trap for more on the processes we use here at Valuentum and how to put our investment analysis to work in the real world.
Back to Ebix
With that in mind, let’s go over software company Ebix. After posting second-quarter 2019 earnings on August 8, the company’s stock continued to slide lower as its revenue missed consensus estimates. Its sales rose by 16% year-over-year but its GAAP operating expenses climbed at a faster 19% due to rising G&A and product development expenses. Additionally, Ebix’s cost of services grew as a percent of revenue, indicating both its GAAP gross and operating margin declined.
It appears Ebix was forced to accept slightly lower gross margins to support top-line growth, while operating-expense growth was largely the product of the competitive landscape Ebix operates in along with the company moving forward with the IPO of its EbixCash operations headquartered in India (the IPO date is planned for the second quarter of next year). At the end of June 2019, Ebix had a net debt load of ~$0.7 billion, and its market capitalization stands at ~$1.0 billion as of this writing.
The company is very free cash flow positive generating ~$75 million on average over the past three fiscal years while spending just ~$10 million on its annual dividend payments, leaving plenty of excess free cash flow that could be used for deleveraging if needed. Please keep in mind Ebix’s dividend is very small and its yield, as small as it is, is only close to 1% because of the sharp decline in its stock price over the past year or so. Its net debt burden does weigh negatively on Ebix’s growth trajectory on both a fundamental and dividend growth basis (interest expenses siphon off cash flow that could be used for investing in the business, dividend increases need to be balanced out with debt repayments and/or refinancing activities, among other things).
How We View Ebix
Down below is a concise summary of our thoughts on the company from our 16-Page Stock Report covering Ebix;
“Ebix is a leading international supplier of on-demand software and e-commerce services to the insurance, financial, e-learning, and healthcare industries. Its goal is to be the leading provider of insurance and financial transactions in the world, and it is focused on the convergence of all data channels. The company was founded in 1976 and is headquartered in Georgia.Ebix seeks to provide comprehensive, on-demand based solutions that simplify insurance industry transaction processing. Acquisitions will play an important role, introducing identification and integration risk. Acquiring niche recurring revenue businesses at cost effective prices is a key initiative.
We’re big fans of Ebix’s recurring revenue stream, which accounts for approximately 80% of total revenue. Management is working to scale its on-demand model that carries operating margins in the 30%-35% range. Roughly 60% of revenue is generated in the US, and insurance exchanges account for ~70% to total revenue.Ebix is quick to note its first mover advantage in a number of its markets, and it continues to have untapped market potential on top of minimal customer attrition.
Management is continually evaluating software-as-a-service (“SaaS”) and cloud-based acquisitions that can add to its customer base in core verticals that also have low customer attrition rates and 75%+ recurring revenue. Ebix has been active in acquiring remittance-related companies as it works to grow its EbixCash financial exchange business and strengthen its emerging leadership position in financial exchange markets in India, which is an attractive market as the country grows and moves toward a cashless society [keeping in mind Ebix is getting ready to IPO EbixCash].”
Furthermore, please note Ebix agreed to acquire Yatra Online through a deal with an enterprise value of ~$340 million back in July. Yatra Online is India’s leading corporate travel services provider and this was announced as an all-stock deal, largely due to Ebix already having a large net debt load. We caution that the market may be signaling displeasure in Ebix’s acquisitive history via its weak technical performance.
Concluding Thoughts
We think Ebix, even after its fall, has the makings of a value trap, and we caution our readers that there may be better opportunities out there. Why catch a falling knife with a low dividend yield?
Software Industry – ADBE ADSK EBIX INTU MSFT ORCL CRM
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Callum Turcan does not own shares in any of the securities mentioned above. Microsoft Corporation (MSFT) and Oracle Corporation (ORCL) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.