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EBIX Is a Deep Bargain; Announces $100 Million Share Buyback
Posted by: GuruFocus (IP Logged)
Date: June 21, 2013 10:24PM
Targeted by short sellers and investigated by US Attorney General of Georgia , the stocks of insurance software provider Ebix Inc. (EBIX) dropped from $20 to as low as $8 in two days. We wrote “EBIX – A Bargain Or A Trap?” yesterday when the stock was traded at $11. We shared our view that EBIX is a company with solid growth, great cash flow and strong balance sheet. The stock has since dropped another 20%.
In this afternoon, Ebix made a press release, stating that the company will buy back $100 million of stocks over the next two years:
Ebix, Inc., (EBIX), a leading international supplier of On-Demand software and E-commerce services to the insurance industry, today announced its Board of Directors has approved a $100 million common stock repurchase program. Shares of common stock may be purchased under the program from time to time on the open market and in privately negotiated transactions, subject to customary legal, contractual and regulatory considerations. Ebix intends to complete this new $100 million stock repurchase authorization within the next 24 months. The Company will fund the repurchases through cash on hand and future cash flow from operations. Ebix currently has approximately $35.5 million of cash on hand worldwide. During 2012, the Company generated free cash flow of $65.3 million, excluding the cash used to acquire businesses during the year. The decision to authorize this share repurchase program has been made as part of the Company's continuing evaluation of strategic options to enhance value for shareholders.
The Company believes that recent allegations published in the media and elsewhere are without merit, and that a share repurchase program represents an attractive use of its cash resources. The Board of Directors is confident that the Company is executing on an effective business strategy, which is generating both strong free cash flow and a robust contract pipeline.
With a recurring revenue base of approximately 80%, Ebix works collaboratively with clients to develop innovative technology strategies and solutions that address specific business challenges. The Company has a strong balance sheet, a world class sales force, market leading products and is focused on continuing to serve its thousands of customers.
EBIX can certainly afford this $100 million buyback. The company generates $70 million of free cash flow and it’s growing. Being a software company, Ebix needs very little capital to maintain its existing business. Most of the cash flow generated from operations are used for acquisitions, dividends and share buybacks. The company does have a record of buying back shares. Over the past three years, the company spent $90 million in share buybacks. Dividends cost only $2.8 million, a payout of 20% out of its 14 million cash flow quarterly cash flow. We won’t be surprised if the company juices up its dividends soon as it did it twice over the last 12 months. At the current price of $9.5 a share, the dividend yield is more than 3%.
Ebix CEO Robin Raina might not be the most shareholder friendly CEO, but he does have skin in the game. He and his foundation own 7.2 million shares of Ebix as of May 1, 2013, which is 19% of the company.
If you look at the short thesis of the short sellers, you will realize it is so weak and full of manipulations. It just convinces you further that he has no base in shorting. Short seller says “Ebix's valuation at 1x revenue is $5.45/share, valuation at 12x normalized earnings (at a 33% tax rate) is $9.72/share, and its tangible book value/share is negative. A simple average of these estimates gets you below $8.00/share.” EBIX has a net margin of 40%. Can you find another company that has 40% profit margin and is traded at 1x revenue? We don’t know how he came up with the valuation of 12x normalized earnings at $9.72 a share. EBIX earned $1.8 a share last year and showing steady growth. It is now traded at 5x of last year’s earnings.
Short seller continued to say “Ebix owes at least $80 million to creditors, has a negative net cash position, and potentially owes over $100 million to U.S. taxpayers (in back-taxes, penalties, and interest).” EBIX does have a about $80 million of liabilities, but $60 million of that was the borrowing for the acquisitions last year, and Ebix can pay it off with the cash flow in the next 12 months. Ebix has a interest coverage of more than 50. $100 million penalty? Just a random number to scare people off?
He continued to say “True value investors will stay away from Ebix.” He even went to quote Ben Graham and Seth Klarman. “There is no margin of safety against fraud, as famous value investors Benjamin Graham and Seth Klarman have taught. Klarman famously warned, “‘Beware of the value pretenders, those who buy stocks because they are down but not necessarily cheap.’” He could have quoted Warren Buffett. We know Warren Buffett definitely wouldn’t buy Ebix. But the reason is that Ebix is too small for him. He may even like the business. It has high profit margin, low capital requirement, solid growth and great cash flow. It is almost a monopoly in its business. Its business is closely related to Buffett’s favorite business – insurance.
The current EBIX stock price is definitely a bargain. The $100 million buyback is 30% of its current market cap. If the stock stays where it is now, the company can buy back all of its shares in 5 years with its free cash flow.
Robin Raina might well want to do it. He must be tired of being the target of short sellers. This is probably also why he wanted to take the company private (at $20 a share). This reminds me of something Prem Watsa did when Fairfax (TSX:FFH) was attacked by short sellers, he delisted the company from US market and sued the short sellers. The short seller immediately became quiet. Since then Fairfax has doubled its book value and the stock has gained more than 300%.
Robin Raina can do the same. Above all, they are both smart men from India and made it to the top.
Disclosure: The author is long EBIX and bought more shares over the past two days.
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