Description

CCC Information Services emerged from a year-long restructuring in Q401, and is now highly profitable and growing nicely. The company provides software products and services that automate the process of evaluating and settling automobile damage claims. CCCG should generate 2002 revenues and EBITDA of $195m and $41m, on operating assets of just $36m. The stock trades at only 8.4x estimated FCF and 12.6x earnings.

The company’s services enable insurance companies, collision repair facilities, and automobile dealers to manage the automobile claims and vehicle restoration process. CCCG’s primary products and services are “Total Loss” and “Pathways” which provide access to various automobile information databases and claims management software.

The Restructuring: In 2001, the company discontinued several unprofitable operations and cut costs in order to focus on its core US operations. The company divested its consumer services division in 9/01, sold its claims administration service in 6/01, wound down its international operations, and exited all but one of its investments and joint ventures. In 2000 (there is no segment information available for 2001), the now discontinued operations incurred an operating loss of ($35m) on revenues of $33m. The results of the restructuring fully showed in Q401: EBITDA was $10m in Q401 versus $4.9m in Q101. Also, in 12/01, the company completed a rights offering of 3.6m shares @ $5.50. The net proceeds of $18.8m were used to reduce debt.

Financials:
2002E
Revenue $195m (5% growth over 2001; Q401 sales $48m)
EBITDA 41 (Q401 EBITDA $10m)
EBIT 31
Int Exp 2
Tax 11.5 (not factored in def.tax asset;see below)
Net Income 17.5
# shares 25.5 (post-rights offering)
EPS $0.69

Assets 36 (excl. G/W $5m and def.tax asset $24m)
Sr. Debt 9
Trust Preferred 13
SHE (7)
Mkt Cap 222
EV 244

Depreciation 10
Cash from W/C 7 (low end of 1999-2001 range;see below)
CFFO 34.5
Capex 8
FCF 26.5
FCF per share $1.04

Price/FCF 8.4x
P/E 12.6x
EV/EBITDA 6.0x
EBIT/Assets 86%

1. The company generates a significant amount of cash from working capital: $9m, $14m, and $7m in 2001, 2000, and 1999, respectively. The company bills its customers in advance and has the ability to operate with a working capital deficit. CCCG has multi-year customer contracts with renewal rates upwards of 90%.
2. There is a deferred tax asset of $24m available. Management expects to be able to use $5.3m ($0.21 per share) of the tax asset in 2002. (I have not factored it into my valuation.)
3. I believe my 2002 estimated capex of $8m is conservative. Capex for the nine months ended 9/01 was only $2.6m. (Q401 capex is not provided in the 8K.) The company wrote off office space in Q401, which is expected to reduce rent expense by about $2m per year.
4. In Q401, net debt decreased by $33.2m to $8m. Debt was reduced by $18.8m from the rights offering and by $14.4m from the quarter’s operating cash flow.
5. The company’s core US business grew 5.8% and 5.3% in Q401 and FY01.
6. CCCG issued $13.4m of preferred that is backed by a note. The securities were issued in 2/01 with a warrant to buy 1.2m shares of common @ $10. The note carries an interest rate of 9% through 2/04 and 11% up to maturity in 2/06.
7. Three institutional investors, White River Ventures, Capricorn Investors, and Winston Partners, own about 56% of the company.
8. The CEO owns about 337,000 shares, or about $3m in value.

Comps and Valuation: There are no direct comps for CCCG. The best comps would be similar-size (in terms of EBITDA) information service/database providers. Like CCCG, these companies have very high rates of return on assets and recurring revenues, but they trade at much higher valuations:

$m FIC BARZ IDCO BSYS
Sales 337 1100 340 778
EBITDA 81 54 109 190
EV/EBITDA 16x 16x 12x 19x
Forward P/E 26x 28x 21x 32x

So even if you don’t buy my computation of 2002 FCF (too many if’s and but’s about working capital and capex), you still have a company with 5-6% organic sales growth (in a recession), north of $40m in EBITDA, and about 90% ROA, that is trading at a P/E of only 12.6x. If the company can maintain its Q401 performance over the next couple of quarters, the stock should be valued at better than 10x EBITDA (15x FCF and 22x earnings) or $15.

Risks:
1. There are class action lawsuits against the company related to its Total Loss valuation product. The company recently settled 14 of the 21 lawsuits for $4.3m and took a charge for that amount. (See 8K dated Feb 7).
2. The company had $10.5m in restructuring charges (mostly non-cash) in 2001. I estimate remaining severance and contractual payments at less than $2m.
3. The company has a potential capital call of $2m, which expires 4/02, to its remaining joint venture (ChoiceParts).
4. Given there’s Enron-itis going around, it should be noted that Herbert Winokur, a director of CCCG, was a director of Enron (per Enron’s 5/01 proxy). He is a managing partner of Capricorn Holdings, which owns about 12% of CCCG and holds the company’s trust preferred securities.

Catalyst

Dramatic turnaround in profitability. Focus on the core US business. Cleaned up balance sheet with low leverage and virtually all discontinued operations, restructuring charges, and investment write-offs behind it.