Note: This is a position that we have exited now and was originally recommended to premium members. Please also note that subsequent to our exit, the Goldman Sachs acquisition fell through causing major declines in the stock. At this time Ebix is not recommended even at low price due to waning faith in the management (updated Jun 23, 2013)
It is quite straightforward to value Ebix. It is a growing company in the right place at the right time and can be bought at a very good price today. However, there are a few considerations that we all need to be aware of and I list them towards the end of this post.
Brief Background on Ebix
Ebix Inc (EBIX) runs insurance exchanges across a variety of insurance lines (Life, Health Care, P&C, etc) and also offers related services. Essentially, the company provides the technology infrastructure that connects brokers, insurance companies, employee benefits administrators and other market participants. As you are aware, insurance exchanges are a big part of the new health care regime in the US going forward and this presents an excellent growth opportunity for the company as the states ramp up their deployment of insurance exchanges. Revenues come from charging a transaction fee for every transaction made through its platforms.
The following breaks down Ebix channels of revenues and its geographic mix.
1. Insurance Exchanges
- Life Insurance Exchange – Ebix runs 2 exchange platforms in US: Winflex and LifeSpeed. Winflex is an exchange for pre-sale life insurance illustrations between brokers and carriers, while LifeSpeed is an order entry platform for life insurance. The company is beginning to deploy these platforms outside US. Competition includes Blue Frog and iPipeline.
- Annuity Exchange – Ebix runs Annuitynet in US. This is an order entry platform for brokers, carriers and other entities involved in annuity transactions. Annuitynet transacts the largest amount of premiums on any single Annuity exchange in US. Competes with Blue Frog
- Employee Benefits Exchange – Ebix runs 3 different exchanges: Facts, LuminX and EbixEnterprise. These platforms are sold to health carriers and third party administrators and are used for employee enrolment, claims processing, accounting and employee benefits accounting. Trizetto is the largest competitor along with Benefit Mall and Health Axis. It is currently offered in US and Africa and is being marketed in Asia, Middle East, Australia, New Zealand and UK.
- P&C Exchanges – Currently being offered in Australia, New Zealand and US. There are no competitors in Australia and New Zealand while in US it competes with IVANS.
Insurance Exchanges provide approximately 80% of revenues for Ebix.
2. Broker Systems
Ebix offers 3 different broker systems to P&C brokers across the world: eGlobal, WinBeat and EbixASP. eGlobal is sold around the world and supports multiple languages and currencies. WinBeat is targeted to small and mid sized brokers in Australia and New Zealand. Between eGlobal and WinBeat, Ebix has 85% market share in Australia and 80% in New Zealand.
EbixASP is for the US market and competes with Vertafore, Applied and XDimensional.
3. BPO Services
Ebix offers BPO services to Fortune 500 companies in the areas of insurance certificate creation and tracking. This is a highly fragmented part of the industry with many smaller competitors.
4. Carrier Systems
Ebix offers systems for P&C carriers in the US and international markets. These systems are deployed in Brazil, UK and US. Competition is generally large players like CSC, GuideWire, Xchanging and Duck Creek.
Over the years, Ebix has grown by acquisitions as it has sought to add new capabilities and expand geographically. Making accretive acquisitions is a core part of Ebix strategy. The company operates out of its headquarters in Atlanta Georgia. It manages its international operations from Singapore office and has a product development center (technology) in India. Singapore and India have offered Ebix the benefit of low taxation (in case of India a tax holiday until 2015) which is an integral part of Ebix managing its tax liability.
The company reported its Q4 and full year 2012 financials today. At the end of 2012, the company had $362.2 m in shareholder equity (up from $316.1 m at the end of 2011). With the current market cap of $601.5, this implies a P/B ratio of 1.66. This is reasonable for a technology company, however a deeper look shows that this includes $410.2 million in goodwill and intangibles giving it a Tangible Book Value of $(48) million.
Years of relentless acquisitions have ballooned the goodwill and intangibles. As value investors, we are accustomed to zero out these lines in the balance sheet but I feel this is not always appropriate. For example, a good portion of these intangibles are the customer accounts and relationships acquired when Ebix made their acquisitions, and these accounts and relationships continue to produce revenues for the company.
There is also a need to consider the business model of the company. Majority of the assets used to produce the revenues for Ebix are its technology platforms that only have value because they generate revenues. Unlike real assets such as land or a plant, these technology platforms can not be detached from its use and retain value. Consequently, while the balance sheet is still important to assess the financial strength and operational flexibility of the business, it is not a good indicator of value of the company’s operations.
Ebix has $37.4 million in cash and short term investments. Its current ratio stands at 1.44, which is lower than what I generally look for. However, the company also has good access to capital (lines of credit, term loans and possibility to issue equity) and more importantly, robust cash flow generating operation that is able to support sundry acquisitions, pay a good dividend, repurchase shares and still add to the balance sheet. It has approximately $70 million in total debt (mostly long term).
The interesting aspect of running an exchange is that once it is set up, apart from minor maintenance expenses, it takes very little incremental cost to generate revenues. As a result, Ebix is able to enjoy 81% gross margins and 35% net margins, which is extraordinarily good. Additionally, the company actively manages its operation to minimize taxation. For example, it low (or zero) tax centers in Singapore and India allows them to roll up certain revenues in those jurisdictions (as appropriate) and enjoy lower tax burden. The company had an effective tax rate (worldwide operations) of 10.35% in Q3 2012.
Additionally, Ebix has $53.5 million of Net Operating Losses available to offset future federal and state taxes. $35.9 million of these tax loss carry forwards were obtained when Ebix acquired ADAM in 2011. NOLs are an asset that do not show up on the balance sheet and has real “cash” effect on the earnings by reducing taxes.
Ebix earned $1.8/diluted share in 2012. At the last closing price of $16.17/share, this gives it a PE ratio of 8.98 or a 11% earnings yield.
If the company stopped growing today and we freeze the current run rate for eternity and demand a 10% annual return on the stock, the stock will be valued at 1.8/0.1 = $18/share (value of a perpetuity)
In reality, the preferential tax treatment in India and Singapore will expire sometime in future and NOLs will eventually be exhausted.
However, the company has grown at 30% annually for the past 5 years and will continue to grow for the near future with accretive acquisitions and the new state health insurance exchanges coming on line. Current expected growth rate (Wall Street) for the next 5 years is 21%. The following table shows the Net Present Value of the EPS (currently $1.8/share) at various levels of growth rate discounted by 10% (required rate of return). Please note that the model assumes Ebix grows at these rates for 5 years and after 5 years it stops growing completely.
|NPV of EPS||$20.81||$25.36||$37.06|
(In the long term, cash flows and eps converge. Although the time shifts due to accounting rules may create variances in the NPV calculations, generally NPV based on the eps is more conservative as expenses are stretched out over the years)
There is a significant concern about the stock that we should consider
- If you have been following EBIX since I added it to the watch list, you probably know about an anonymous posting on Seeking Alpha that has claimed accounting irregularities at the company. Among the concerns raised were a) Intra-company loans have not been disclosed on the company financials (refutation: Consolidated financials remove intra company transactions and there is no requirement to foot note any such transactions), and b) Ebix is aggressively managing its tax (refutation: all companies do this as part of their fiduciary duty towards their shareholders). I have held off posting this recommendation until I got on to the management call today and spent some time updating with the latest numbers.
- Excessively high amount of shares shorted (41.4% as of Feb 28, 2013). There seems to be a systematic campaign of misinformation being pushed through the media to pressure the stock downwards. Part of this comes from the fact that Ebix until 1999 (when it was known as Delphi Information Systems) had 23 years of continuous losses. Robin Raina took the helm of the company in 1999 and mounted a turnaround (Ebix was named as the 4th fastest growing company in the world by Fortune in 2009). Another reason for the high short interest maybe the fact that a global business with so many operating entities creates a good opportunity for an enterprising investor on the “short” side to nit-pick and sow seeds of doubt.
- While this has created a great buying opportunity for us right now, the stock will most likely stay volatile for the near future and this will only change when the company continues to generate cash forcing the hand of the investors on the wrong side of the trade.
- There is of course a possibility that something is indeed wrong in the accounting. There are 3 things that help mitigate this risk. Cash on the books cannot be faked and the said cash is increasing. The company also raised its dividend payout by 50% last November and continues to buy back its own stock in the open market. Secondly, a similar article was posted in 2012 which led to an SEC enquiry and nothing came of out it. Finally, if we are buying the stock under $18, we may be getting it at more than 50% discount to its intrinsic value and that adds a cushion (although future earnings are technically unpredictable)
Bottomline and Recommendation
Buy EBIX as follows
- Initial position at 3% of your portfolio up to $18/share. Currently the price is in $16s so we should be able to start our positions way below $18/share.
- If the volatility continues I will be looking to increase the position if the stock falls below $15/share.
- Target price is $30 (a little over 10% eps growth rate in the model above) and estimated holding period is 1 year or less.