Targeted by short sellers and investigated by US Attorney
General of Georgia , the stocks of insurance software provider
Ebix Inc. (
) 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
), a leading international supplier of On-Demand software and
E-commerce services to the
, 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.
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
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
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
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
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
"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
There is no margin of safety against fraud, as famous value
investors Benjamin Graham and
have taught. Klarman famously warned, "'Beware of the value
pretenders, those who buy stocks because they are down but not
He could have quoted
. 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 (
) 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.About GuruFocus: GuruFocus.com tracks the
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