EBIX – A Bargain or a Trap?
Ebix engages in the business of supplying software and e-commerce solutions to the insurance industry. Its products are used by insurers and insurance agents across five counties. The company has enjoyed tremendous growth under its Chairman and CEO Robin Raina, who took over the helm in 2000. Over the past 10 years the company has grown its revenue by more than 25% a year and its earnings by more than 40% a year. The company has tripled its profit margins in the meantime. For the 12 months ended on March 31, 2013, the company generated sales of $208 million, and net income of more than $70 million.
Because this is a capital-light business, most of the company’s operation cash flow can be used as free cash flow. The company used the free cash flow in acquisitions, paying down its debt from acquisitions, buying back shares, and even paying dividends. It paid 8 cents a share last quarter in dividends, an increase from 5 cents a share in the previous quarters. At today’s stock price, the yield for the year will be close to 3%. Currently the company has $43 million in cash, and $66 million in long-term debt. Most of the debt came from its recent acquisitions and it is less than the cash flow that EBIX can generate in 12 months.
EBIX operates a simple business with solid growth and a strong balance sheet. But it has been the target of the short-sellers. Over 8 million shares were sold short currently, considering the company has total shares outstanding of 38 million.
CEO Robin Raina seems to be a smart guy. When he took over the company in 2000, the annual revenue was $12 million, and the profit was half a million. Today the annual revenue is more than $200 million and net income is $70 million. He does have the vision a value investor would love. This is what he said during an interview with Smart Business last year:
“It’s important to understand that you can’t have a business that is too heavily focused in any one business area or with any one client,” Raina says. “This was a key learning point for us. If you step back a few years, Ebix had a fair amount of customer concentration. If you go back to 2003, 2004, we had a situation where one client accounted for 40 percent of our revenue. Today, our customer concentration is minimal. We deal with hundreds of thousands of users, and our largest client accounts for less than 2½ percent of our revenue.
“I see publicly traded companies today who are doing extremely well — at least in the stock market they’re doing very well — and they have customers accounting for 52 percent of their revenue. To me, that’s a bad business model. It’s too risky. If one customer moves out, their entire business could be at risk. You have to diversify your business.”
“You’ve got to have a very simple financial vision and a simplified way of making money,” he says. “It really comes down to this: If you can figure out that your selling price has to be a lot higher than your cost price — if you can figure out that basic fact — then you’ve arrived, in my book. Many people laugh at that statement, but too many companies ignore this. You’ve got to get down to the basics of the business.”
If everything looks appealing to you, do you dare to buy it at a 40% discount the market offers you today? The company now has a market cap of $440 million, which is 6 times free cash flow and earnings.
Below is what its Peter Lynch chart looks like. The dark blue line is its earnings line (P/E=15). Over the past 10 years, the stock was traded around the earnings line most of the time. But starting in 2011, the stock prices are much lower as the company’s growth slows down. Today the company is traded at 40% of what Peter Lynch chart suggests.
The market is a voting machine. Isn’t it?
Disclosure: The author owns EBIX.