Ebix – Growth At An Attractive Price


The recent decline in the share price of Ebix (EBIX) is an opportunity for investors to pick up the shares of a software supplier to the insurance industry at an attractive price. Ebix offers a suite of services used by hundreds of insurance carriers in the areas of life insurance, employee health benefits, risk management, workers compensation, and property and casualty insurance. It also provides e-commerce services to the insurance, financial, and healthcare industries. It is an international company with over 40 offices across Brazil, Singapore, Australia, the US, UK, New Zealand, India and Canada.


One of the things we like most about Ebix is the growth potential. The company itself thinks that the market segment it is targeting is worth $60 billion in the US alone. When considering the growth potential, keep in mind the current market cap of Ebix is $1.72 billion so there is still plenty of room for growth. Ebixs stated goal is to be the worlds leading ba ck-end powerhouse of insurance transactions. Its customer base already includes hundreds of carriers, a few hundred corporate clients and hundreds of thousands of brokers. These customers include many of the worlds largest and most respected insurance companies. Overall, based on the future prospects of the company and the analysis that follows, we believe the recent decline in the share price provides an attractive opportunity.


Chart EBIX data by YCharts

Acquisitions

The company sees acquisitions as an integral part of its growth strategy. The most recent example of this came on May 24th when Ebix announced its entry into the digital payments market in India by acquiring an 80% stake in ItzCash. ItzCash is a leader in the prepaid cards and bill payments space in India. When announcing the acquisition, Ebix highlighted the synergies it expects to achieve through the acquisition such as using ItzCash to provide insurance carriers and brokers a gateway to reach Indias vast population with new integrated insurance and finance offerings. ItzCash already serves 35 million consumers annually through over 75,000 franchises in over 3,000 cities and towns. This is just one example of a recent acquisition as the company highlighted 10 acquisitions in 2016 in the US, Brazil, and India in its 2016 annual report.


Revenue Channels

Ebix’s main focus and value proposition is expanding connectivity between consumers , agents, carriers, and third party providers. Operating data exchanges for the insurance industry has been the biggest source of revenue. Their exchanges connect multiple entities within the insurance markets allowing for carrying and processing data. These exchanges provide recurring revenue since revenue is derived from subscription fees associated with accessing the exchange and transaction fees charged for each data transaction processed on an Ebix exchange.


Ebix also provides broker property and casualty systems mainly outside of the US. The reason for this is that the US broker systems do not provide the operating margins the company seeks due to the number of software players already crowding the market. Therefore, the company is focusing on designing and deploying backend systems for international P&C insurance brokers that need a worldwide system solution. Another revenue channel is risk compliance solutions in areas such as project management, time and material based consulting, creation and tracking of certificates of insurance, and claims adjudication and settlement. Its RCS services currently cater to a large number of Fortune 500 companies in the US.


Valuation

Looking at the companys financials, we like the rapid growth as seen in steadily increasing revenue and net income.

Values in U.S. Thousands

Dec-16

Dec-15

Dec-14

Dec-13

Dec-12

Dec-11

Dec-10

Dec-09

Dec-08

Dec-07

Total Revenue

$298,294

$265,482

$214,321


$204,710

$199,370

$168,969

$132,188

$97,685

$74,752

$42,841

Net Income

$93,847

$79,533

$63,558

$59,274

$70,569

$71,378

$59,019

$38,822

$27,314

$12,666

Source: barchart

Cash flow has also been impressive, although there have been large acquisitions in recent years. So far, integration of the acquired businesses has been successful, but this is something to keep an eye on as acquisitions continue.


Values in U.S. Thousands

Dec-16

Dec-15

Dec-14

Dec-13

Dec-12

OPERATING CASH FLOW

$83,748

$48,686

$58,510

$57,062

$72,295

Ppe Investments

-$9,965

-$17,483

-$16,277

-$1,230

-$1,965

Sum

$73,783


$31,203

$42,233

$55,832

$70,330

Source: barchart

If acquisition s are included in the cash flow picture, we see that the company has been very active in this area as discussed previously. However, even after subtracting the cost of acquisitions, we see that the company was able to generate positive cash flow over the last four out of five years.

Values in U.S. Thousands

Dec-16

Dec-15

Dec-14


Dec-13

Dec-12

OPERATING CASH FLOW

$83,748

$48,686

$58,510

$57,062

$72,295

Ppe Investments

-$9,965

-$17,483

-$16,277

-$1,230

-$1,965

Net Acquisitions

-$696

-$18,475

-$62,004

-$7,717

-$62,066


Sum

$73,087

$12,728

-$19,771

$48,115

$8,264

Source: barchart

We should note that the company has been growing its long-term debt balance in the last few years while also growing its retained earnings balance. The current ratio looks fairly strong currently standing at 3.14, while total assets to total liabilities is 2.13, indicating that the company is keeping debt in a comfortable and manageable level. The company does provide a small dividend yield of 0.56% which is associated with a very low payout ratio of 10.02. We consider this low dividend yield acceptable given the growth prospects of the company. We also view it as a positive that the company has actually been decreasing its outstanding share count in the last five years.


Values in Thousands

Dec-16

Dec-15

Dec-14

Dec-13

Dec-12

Common Shares

3,209

3,342

3,619

3,805

3,709

Source: barchart

Additionally, based on the performance ratios provided below such as return on investment and the size of the target market, we think the company can successfully reinvest capital to achieve attractive returns for shareholders through a rising share price.


EBIX

Industry Avg.

Quote

$54.05

PE

17.91

49.75

Div Yield

0.56%

1.98%

Price to Book

4.05

7.33< /p>

Price to Sales

5.56

262.32

Price to Cash Flow

15.57

24.54


Net Profit Margin

32.18

-460.72

Return on Assets (TTM)

13.03

9.04

Return on Assets – 5 Yr. Avg.

12.32

10.27

Return on Investment (TTM)

14.22

14.27

Return on Investment – 5 Yr. Avg.

13.8

14.47

Return on Equity (TTM)

23.43


16.7

Return on Equity – 5 Yr. Avg.

18.36

16.54

Source: Reuters

Analyst estimates for the companys long-term growth are fairly optimistic comin g in at 10%. However, this estimate is not too high relative to exuberant estimates for other computer software and services companies. In fact, the company did have an annual EPS growth rate of 10.3% for the last five years. If we assume an EPS growth rate of 8% and corresponding dividend increases for the next five years using a discount rate of 8%, we calculate a target buy price of $55.86 which is just slightly above the current price. Therefore, we view Ebix as fairly valued at the current price. Of course, if one believes that the company will be able to continue growing at the same rate it has for the last five years, the current price is even more attractive.


Risks

Since most of Ebixs revenue comes from the insurance and financial industry, it would be impacted to a great extent if there is a downturn in one or both of these sectors possibly as a result of an economic downturn. Another risk factor is the rapidly changing technology surrounding its pr oducts. However, Ebix prides itself in remaining a few steps ahead of its competition. Inability to do so could result in it losing market share as the space becomes more competitive. Staying ahead and effectively using R&D dollars is critical for Ebix given that many of its products are complex and require lengthy development and testing cycles. Given the nature of its business, security concerns are also a major issue. Sufficient security features need to be maintained to protect the transactions related to transmissions of confidential information that could expose the company to legal challenges and stall business expansion if confidence in security erodes.


Final Thoughts

We believe that the company will be able to continue to grow revenues and income. Even if this growth comes at a slightly slower rate than the last five years, we believe the company is fairly to slightly undervalued at the current price. We should also note that we think there is a possibility that the company could exceed the average annual 8% EPS growth estimate used in our valuation in the next five years. Therefore, we think now is a good time to initiate a position in the company. For investors who want to consider using options to initiate a position in the company, we think there are also some interesting cash-secured put options which could be sold. Lets consider two time frames for selling cash-secured puts. One with an expiration date a little over two months out and one with an expiration date a little over five months out. Selling the cash secured put expiring September 15th with a strike price of $50 would provide the seller with a p remium of $95 based on the current bid. This equates to about a 1.74% return in a little over two months or 9.21% annualized considering fees if the put option expires worthless. The put option expiring on December 15th with the same $50 strike price provides the seller with a $215 premium based on the current bid. This equates to about a 4.14% return in a little over five months or 9.45% annualized considering fees if the put option expires worthless. If the put options are exercised and the seller of the option has to purchase the shares, the investor would have saved about 9.96% or 12.71%, respectively, compared to buying the same 100 shares at the current price of $54.05. Whether using options or buying the shares outright, we rate Ebix a buy at current levels.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EBIX over the next 72 hours.

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.

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