Ebix Inc

EBIX Inc (EBIX) Investment Valuation

July 9th, 2013 Posted by Investment Valuation No Comment yet

EBIX Inc (EBIX) is an international supplier of software and e-commerce solutions to the insurance industry have been on and off; accusing of dishonest practices in accounting which have caused the stock to drop by 57 percent from 2011. 

I think you have the idea that this investment valuation report will iterate the know-how of the company when it comes to the market side and how the news mentioned above will greatly affect Ebix Inc. Let’s dig down into the details.

Value Investing Approach on EBIX

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value on EBIX

  EBIX EV

Explanation

The market capitalization of Ebix Inc was trending at a rate of 36 percent average. During 2012, the market cap drops by 25 percent from 2011 but managed to rise by 23 percent in the trailing twelve months. The total debt was averaging 7 percent and the cash and cash equivalent was averaging 4 percent. If buying the entire business of EBIX, the investor would be paying 97 percent of equity and a 3 percent total debt because cash was less than debt. The market price had decreased by 42 percent from that of last year 2012.n:

The takeover price of the EBIX’s entire business to date, June 29, 2013, was $349 million at $8.95 per share. The market price to date was $9.26 per share. 

Net Current Asset Value (NCAV) Approach            

Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20 percent. And not only that, an outside study showed that from 1970 to 1983, an investor could have earned an average return of 29.4 percent by purchasing stocks that fulfilled Graham’s requirement and holding them for one year.

Net Current Asset Value (NCAV) Method    

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

EBIX NCAVPS

The stock price of EBIX was trading at an overvalued price in 2008 up to the trailing twelve months because the market price was greater than the 66 percent ratio. It indicates that the stock was above the liquidation value of the company.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation    

If the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

  Ebix Inc

The MC/NCAV valuation shows that stock price was overvalued in the last five years because the ratio exceeded the 1.2 ratios. The price is considered expensive.

 The margin of Safety (MOS)          

The margin of Safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. This formula is used to identify the difference between company value and price.

EBIX MOS

Explanation

The above table shows that the margin of safety was averaging 85 percent. The enterprise value was averaging $15, while the intrinsic value was averaging $97.  This means that if you are buying the stocks of EBIX you have the security of 98 percent, further it means that the stock was trading below the real value of the stock. And intrinsic value is the real value of the stock. The formula to be used is:

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)

For instance,

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth company  and
  • 2: the average yield on high-grade corporate bonds.

   EBIX IV

Explanation

In the calculation of the intrinsic value, we factor earning per share and the growth of the company. The result of the calculation shows that the earning per share was averaging $1.60 and the annual growth rate was averaging 64.15 percent. The term earnings per share (EPS) represents the portion of a company’s earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

Sustainable growth

Sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know how profitable the company is as measured by its return on equity (ROE). You also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio. To cut this short, we have the formula: Sustainable growth rate = ROE x (1 – dividend-payout ratio)

     EBIX SGR

The table shows that the return on equity was averaging 28.45 percent, while the payout ratio was averaging 4.17 percent.

  ROE

Return on Equity shows how many dollars of earnings result from each dollar of equity.  Now, there are two approaches to calculating the sustainable growth rate, these are the relative ratio approach and the average ratio approach. Since sustainable growth rate is the factor of intrinsic value, whatever approach you will use might affect the result of the margin of safety and the intrinsic value depending on the result of the average return on equity. To better understand.

Summary represented in the table below

EBIX Relative

To sum up the result of these two approaches, it shows that the margin of safety has both of the same percentages which are 83 percent. However, the growth produces a higher ratio.

Intrinsic Value

EBIX Graph

Explanation

As we can see, the intrinsic value line was much higher than the enterprise value line. And the margin of safety was averaging 98 percent. To explain further, the space in between these two lines is the margin of safety which is the difference between the intrinsic value and the enterprise value. Remember, the intrinsic value is the true value of the stock of the company. The graph means the market price was lower than the true value of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)  

EBIX PE EPS

The P/E*EPS valuation shows that the stock price was undervalued in the last five years. On average, the market price was 83 percent of the P/E*EPS ratio, meaning the stock price was cheap.

This valuation shows the relationship between the stock price and the company’s earnings. The price to earnings is the price that the market is willing to pay for the company’s earnings. The price to earnings of the company can change daily as the market price changes. Analysts use the price to earnings ratio more often because it shows if the company is in the growth phase or if the company is mature and how the market is willing to pay. Price to earnings varies as to economic changes, different industries and other factors that affect the market price.

The Enterprise value (EV) /Earning Per Share (EPS) or (EV/EPS)   

EBIX EV EPS

The result of the EV/EPS valuation tells us that the price (P/E) that was separated from the enterprise value was averaging 64 percent and the earnings (EPS) was averaging 36 percent. The result depends upon the analyst’s own discretion.  It is either over or undervalued.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)  

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

EBIX EV EBITDA

Explanation

The EV/EBITDA valuation is one measure of the company’s profitability because EBITDA represents the cash earnings of the company exclusive of expenses that has no cash outlays. It will take 10 years to recover the cost of buying.  In other words, to recover the cost of buying the entire business it will take 10 times of the cash earnings to cover the costs.

It will take a long period of waiting because the company was not generating sufficient cash revenues from its operation.

The Summary 

The market capitalization was moving at a rate of 36 percent average. On the other hand, the total debt was averaging 7 percent. And the cash and cash equivalent were averaging  4 percent. Buying the entire business of EBIX, the investor would be paying 97 percent of equity and 3 percent total debt. Because cash was less than debt. The takeover price of the entire business to date, June 29, 2013, was $349 million at $8.95 per share. The market price to date was $9.26 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was trading at an overvalued price. Because the market price was greater than the 66 percent ratio. On the other hand, the MC/NCAV indicate an overvalued price because the ratios exceeded the 1.2 ratios.

Margin of Safety

Further, the margin of safety was averaging 85 percent and also, the enterprise value was averaging $15. Intrinsic value, on the other hand, was averaging $97. In addition, the earning per share was averaging $1.60 and the annual growth rate was averaging 64.15 percent. Furthermore, the return on equity was averaging 28.45 percent, and the payout ratio was averaging 4.17 percent.

P/E*EPS

The P/E*EPS valuation shows that the stock price was undervalued in the last five years.  On average, the market price was 83 percent of the P/E*EPS ratio.  In other words, the stock price was cheap. The price (P/E) that was separated from the enterprise value was 64 percent and the earnings (EPS) was 36 percent.

EV/EBITDA

The EV/EBITDA valuation indicates that it will take 10 years to recover the cost of buying the entire business.  In other words, to recover the cost of buying it will take 10 times of the cash earnings of EBIX.

Overall

The stock of EBIX has dropped 57 percent from 2011 due to allegations of inaccuracies in its financial statements.  Goldman Sachs Group Inc plans to buy Ebix at $743 million at $20 per share. Ebix might have difficulty in winning back the trust of its shareholders and the public. Therefore, I recommend a SELL in the stock of EBIX Inc.

Research and Written by Criselda

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