Why EBIX Is A Double In The Next 3-6 Months
EBIX has been getting lots of attention in recent months due to Gotham City's short posts and SEC investigation. However, I think during times like these it is important to take a step back and think about the possible outcomes. Fundamentally, EBIX is a high quality business with strong, recurring free cash flow and minimal capex needs. This favorable annuity-style free cash flow stream allows EBIX to return significant capital to shareholders. EBIX currently yields 3.2% and repurchased $118MM of stock since 2008 or 34% of current market cap. At today's price, EBIX trades at just 5x FCF or a 20% FCF yield. Now lets work through some math on the valuation.
Bull case (25% probability): SEC investigation results in no issues, EBIX fixes corporate governance issues, and management and the board can refocus on organic growth and finding accretive acquisitions. In this case, I expect EBIX to trade back to its historical average P/E multiple of 15x. On 2013 EPS of $1.87, EBIX is a $28 stock.
Base case (50% probability): SEC investigation finds some corporate governance issues, possibly even Raina departs or is removed from his CEO role. In this case, the strong free cash flow will not be adversely impacted. Corporate governance issues will be repaired over time but the company's reputation with investors will be damaged. In this case, I value EBIX at 10x P/E which results in a $20 stock price.
Bear case (25% probability): SEC investigation results in material misstatements of financials and the company needs to restate historical financial information. In this case, EBIX will likely trade to 4x P/E while the company is in the restatement period which could take as long as 12-24 months. This values EBIX at $7.50. Even in this case, EBIX's software platform still generates substantial FCF and is a high quality business which could be sold to private equity so there is no chance that EBIX is worth 0.
I estimate EBIX's fair value based on the above scenarios and probabilities at $19 (110% upside). The margin of safety lies in the strong underlying free cash flow that the business generates and the company's ability to repurchase stock and increase the dividend. Buying at just 5x FCF, over a 50% discount to fair value provides a significant margin of safety.
EBIX's story is very similar to HLF over the last six months. A short seller created and presented a presentation on why HLF was a fraud, citing some valid issues, but over exaggerated his points. The stock fell 44% to $25. At the trough, HLF traded to 5x P/E, exactly where EBIX is now trading. The company used the opportunity to repurchase stock which was highly accretive. In the next month, HLF subsequently rebounded 80% back to its price prior the short seller's presentation. I expect similar price action from EBIX and recommend investors with a 3-6 month time horizon accumulate EBIX shares at these bargain prices.