While Ebix has nearly doubled in price since my initial write up, the stock is just as cheap today as it was 9 months ago due to recently announced incremental revenue from the Infinity division. Despite the fact that this revenue should guarantee at least 20% top line organic growth over the next two years, the stock price hasn’t reacted to the announcement. Furthermore, while the overall payoff for shareholders is little changed since my initial write up, my conviction level in that payoff has gone up dramatically. I will touch on current valuation and then update what has happened since the first write up.

 

Valuation:

 

Ebix is currently trading at 13x my 2007 estimate versus the 12x 2006 estimate from nine months ago. This estimate is conservative as it assumes no growth from recently released 2Q 07 numbers (which Robin described on the call as “nothing spectacular”) and only adds growth from the recently announced Infinity deals.

 

 

 

 

 

 

 

 

 

 

Below are my assumptions for the recently announced Infinity deals. This is all “organic” growth and should have a higher margin associated with it since some of the work will be spread against existing fixed costs. Additional color on the Infinity deal was released this morning that includes the value of the third contract that Robin touched on in the last conference call.

 

 

 

 

  

 

The margin of safety:

 

The beauty of an investment in Ebix, besides price, is the stability of the earnings stream which I think of in the following terms:

 

1)   Lack of customer concentration: Other than Aon and Brit Insurance, which together might account for around 10% of 2007 revenues, the revenue base is evenly spread across hundreds of clients.

 

2)   Insurance IT industry is slow moving/resistant to change: Once you have a customer in this business, you have to really screw up to lose them. While this hurts Ebix on the buy-versus-build front having to acquire to gain market share versus build, it alleviates customer retention concerns.

 

3)   High switching costs: Should an Aon decide to leave Ebix, it would take over 3 years for them to make that switch since Ebix provides the back end IT system to all their subsidiaries around the world.

 

4)   Recurring revenue stream: The revenue base is highly predictable given that over 70% of the revenue is recurring.  

 

5)   Recession proof: There is minimal economic sensitivity to this business. While this hasn’t mattered much over the past 4 years, it could very well matter going forward.

 

Target Price:

 

You can slap a 15x multiple on the next 12 month EPS range to come up with 30%-50% upside, but I wouldn’t be selling my shares at this price. While I think it will be hard for earnings to grow at 60%+ like they have over the past 3 years given that operating margins don’t have as much room to improve (11% to 26% estimated 07), I can still envision significant upside from here if 09 numbers are in the 6 to 7 range.

 

 

Luxor Capital investment: 

 

The hedge fund run by Christian Leone bought 400,000 shares at $33.25 on May 31^st. Given Luxor’s reputation within the investor community and concentrated style of investing, this was/is a big endorsement for Ebix.

 

NOL:

 

Robin disclosed on the last conference call that Ebix had an NOL of $59mm at the beginning of the year.

 

Cash position:

 

Ebix has no debt and over $11mm in cash to make an acquisition. Robin has talked about two potential deals on the last conference call – one in Europe and a potential BPO related acquisition.

 

Robin Raina:

 

   Cost side:

 

I said in my first write up that the cost side of the equation was shaped mostly by “India.” I think it is also shaped simply by Robin. A good example of his thriftiness is the Luxor transaction where Robin could have gone the standard route and used an advisor for the private placement (to potentially get research coverage etc.), but he refused to pay any sort of placement fee. He looks at every cost in terms of EPS and manages accordingly. He distills this cost conscious ethos in all the businesses they acquire which helps explain the significant improvement in net income margins since he took over Ebix.

 

   Leadership:

 

Robin has been able to keep his “core team” intact without diluting shareholders with excessive option grants. I think Robin is very shrewd when it comes to managing his employees which will become increasingly important as his employee base grows.