1. 1
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
Ebix Inc. (NASDAQ: EBIX)
Information Technology Sector
Application Software Industry
Stock Pitch
Price Target: $68.85
Current Price: $62.75
Fall Term 2016
Applied Portfolio Management
2. 2
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
I. Investment Summary
Ebix Inc. (NASDAQ: EBIX) Recommendation: BUY
Valuation Metrics Consensus
Price (11/20/16) $60.30 2015A 2016E 2017E
52 Week Range $28.28 – 61.90 Revenue 265.5 294 319
Consensus Target $66.59 Operating Margin 37.4% 38.1% 38.2%
Market Cap (M) $2,005 EPS $ 2.23 $ 2.83 $ 2.90
Ent Value (M) $2,160 EBITDA 99.3 112 122
Net Debt/Cash 1.98x P/E 14.38x 21.31x 20.79x
Dividend Yield 0.5% FCF/share -0.35 1.08 3.44
LT Growth 10.0% EV/EBITDA 16.0x 11.9x 6.2x
Float 65.5% EV/sales 0.8x 1.5x 1.2x
1.1 CompanyHighlights
Ebix, Inc. supplies software and electronic commerce solutions to the insurance
industry. The Company provides a series of application software ranging from carrier
systems, agency systems, and exchanges to custom software development for all
entities involved in the insurance and financial industries. Ebix offers products,
support, and consultancy to customers on several continents.
The company’s technological vision is to focus on the convergence of all insurance
channels, processes and entities in a manner that data can seamlessly flow once an
entry has been made. The company intends to accomplish this by designing
innovative new products and services that are several years ahead of the competition
and believe profitability and revenue growth must go hand in hand.
Ebix, Inc. has an expansion strategy in the Indian market and is looking for strategic
acquisitions. They illustrated their commitment to invest in India by forming two joint
ventures and pursuing opportunities in the sectors of healthcare, e-governance and
education. Ebix sees the Indian government as potentially one of the largest buyers of
technology in the world over next decade and wants to help the government build a
digital India.
1.2 Industry Highlights
Life Insurance: This segment has lost some ground globally to alternative savings
vehicles in the last few years, and we expect this trend to continue. The pattern is
driven by mature markets, where growth has been extremely volatile and weighed
down by the low interest-rate environment, regulatory challenges (such as
commission bans) and erratic performance of bancassurance volumes in some
European markets. Emerging markets have been performing better. However, the
3. 3
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
rebound in life insurance penetration rates – as measured by the share of life insurance
in personal financial assets (PFA) – may possibly have come to a temporary halt in
some regions, such as Emerging Asia.
P&C (Property & Casualty): Premium growth has been roughly in line with
nominal GDP. In emerging markets, auto insurance has been the growth engine, both
as a result of rapid vehicle growth and a rise in the average value of new cars. In
mature markets recent growth has been helped by a positive cycle, but is under
pressure structurally. Auto insurance in mature markets has been declining relative to
nominal GDP growth; premiums have been falling due to lower accident frequency,
and growth in other lines has not made up for the decrease, leading to a decline in the
broader market.
1.3 Industry impacton EBIX
Over the longer term, the insurance industry has become more global. In the mid- 1950s,
the 40 largest property-casualty global carriers drew 95 percent of revenues from their
home country; in 2013 domestic revenues for the top 40 decreased to 64 percent
(Exhibit below, page 4). Carriers with a diverse global mix have also been shown to
perform better: between 2004 and 2012, the combined ratio of the largest carriers with a
more global footprint was three points lower than that of the largest carriers with a less
global footprint. Global insurers benefit from diversification, increased staff mobility,
and more leverage with distribution partners and other advantages.
4. 4
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
1.4 Industry looking forward
Our latest profit pools demonstrate the change that has been occurring over time. In both
property-casualty and life insurance, global markets (outside of the U.S.) continue to
gain share, particularly due to fast growth in emerging markets. This, combined with the
fact that the U.S. insurance market remains among the world’s most mature and
competitive, suggests that it is only a matter of time before more U.S. carriers seek a
larger presence outside their borders.
1.5 3-month Timeline
11/11: Rober Kerris, Ebix’s CFO, sold 1,171 shares of the company at the spot
market price of $59.20. After the fact, the stock dropped to the $58 mark. Since 11/15,
the stock has risen to as high as $62.80. From our understanding, the market may have
overreacted to the news of upper management trimming some its position with the
company.
11/10: CEO Robin Raina announced on the 8-K filing his response to the company’s
inability to acquire Patriot National Inc. “With worldwide cash and cash equivalents
of approximately $111 million, growing operating cash flows and the solid backing of
our banking syndicate led by Regions Bank, we feel that we are well positioned today
to fund all our growth plans, in addition to continuing our investor friendly initiatives
like share repurchases and dividend payments.”
11/06: Patriot National Inc. announced that its board of directors had rejected the
proposal. The $475MM enterprise value valuation was deemed low by Patriot’s
standards.
08/11: Ebix announced the proposal to acquire Patriot National Inc (a leading
provider of technology and outsourcing solutions located in Fort Lauderdale, FL). At
the time, Ebix stock price stood at $53.49 before declining until $51 by 08/03. The
stock price has consequently risen since then.
1.6 Investment Positives Summary
Cloud M&A: A wave of cloud M&A may be sparked by potential cash repatriation
under a Trump administration following recent high-profile deals including Oracle-
NetSuite, Microsoft-LinkedIn, Salesforce.com-Demandware and Vista's acquisition of
Marketo and Cvent. Large technology vendors with huge cash balances held mostly
offshore may be enticed to use that money to boost exposure to the cloud through
acquisitions. High valuations of pure-play cloud vendors may be a deterrent.
Industry Leadership Opportunity by Leveraging Ebix’s Strong Market
Presence: The U.S. insurance IT market is a highly fragmented $60 billion industry.
Ebix’s innovative exchange strategy and its global reach positions it as a possible
leader in the worldwide insurance exchange markets
High Growth and Profitable Recurring Revenue Model: Approximately 80% of its
revenue generated from recurring sources, derived from a 99% plus customer
5. 5
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
retention rate, Ebix has a solid revenue base to build a high degree of visibility to its
growth and future revenues
1.7 Investment Risks Summary
Stronger Dollar: As the US dollar is becoming stronger, the revenue of branches in
other countries has been influenced, which decreased the overall revenue of the
company and will affect in the near future.
Artificial Intelligence: Artificial intelligence software solutions will likely be the top
disruptor in technology in the next decade, such as smartphones and the cloud.
Software's ability to self-learn by processing data may spur consumer and enterprise
applications. Companies embracing AI may get a competitive edge; ones that don't
run the risk of being disrupted and phased out. AI is nascent, but the pace of
innovation and disruptive potential of startups will accelerate as computed costs
shrink and machine-learning algorithms advance.
1.8 Ebix Inc. GeographicReach
77.3% UnitedStates
1.7% Canada
11.5% Australia
1.3% India
2% Singapore
3.2% Europe
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FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
II. DetailedAnalysis of Catalysts and Risks
Source & concentration of revenue
In Millions of USD except Per
Share FY 2011
12/31/2011
FY 2015
12/31/2015
4-Year
Concentration
Change12 Months Ending
Revenue 169.0 100.0% 265.5 100.0%
Exchanges 130.6 77.3% 190.7 71.8% -7.1%
BPO 14.9 8.8% 55.9 21.1% 138.1%
Broker Systems 18.0 10.7% 14.5 5.5% -48.8%
Carrier Systems 5.4 3.2% 4.3 1.6% -48.7%
Source: Bloomberg
Investment Positives
Cloud M&A
Ebix, Inc. has announced that it is going to acquire Patriot National, Inc., a provider of
technology-enabled outsourcing solutions for the insurance industry, with 100% of the
outstanding stock of Patriot National for $9.50 per share.
If this transaction can be successful, it would bring tremendous benefits to Ebix. First,
this acquisition will integrate acquired products, services and companies in a highly
disciplined and efficient manner, with resulting cash flow and earnings per share being
key endpoint metrics. Ebix believes that the combination of the two companies can be
highly accretive for the shareholders of the combined post-merger company.
Then, it may help to build a leading technology and insurance services platform.
Currently, Ebix has established its insurance related products, services and deep
domain expertise that serves over 16,000 clients in 50+ countries with more than 500,000
users. The addition of Patriot National's workers compensation insurance technology and
outsourced services will complement and strengthen a world leading insurance domain
focused company with an unparalleled repertoire of products and services. The merged
company would become the world's largest provider of straight through processing in the
insurance services industry, offering on-demand based front end systems, back end
systems, exchanges, strategic consulting and risk compliance services all under one roof.
Thirdly, this acquisition would help expend Ebix’s global selling opportunities. With
approximately 3,000 employees located in over 40 offices servicing clients in
50+ countries across 6 continents, Ebix provides a truly global platform with "on-the-
ground" presence in major insurance markets worldwide. Global offices are staffed with
8. 8
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
local nationals possessing language skills and a deep familiarity with local customs,
business norms and regulatory frameworks. A merger further enhances this footprint
while providing substantial cross selling opportunities.
Higher End-to-End Demand
For the revenue growth, revenue in Q3 2016 increased 12% from a year ago, to $74.6
million. The revenue improvement reflected growth in the companies exchange channel,
as well as higher revenue from the risk compliance channel. As usual, exchange revenue
continued to be the largest channel for Ebix accounting for 70% of the company’s
revenues.
In the oversea market, the European division Show 156% year-over-year growth in a
nine-month period ending September 30, 2016, by growing $13.5 million from $5.3
million the same period in 2015. This revenue growth is largely associated with PPL
insurance underwriting exchange platform contract. In addition, the revenue growth is
largely associated with the company’s e-governance efforts in India. Quarter-over-quarter
revenues for India grew by over 354% to $3.8 million in Q3 2016, from $0.8 million and
Q3 2015.
In the insurance industry where most revenue of Ebix comes from, insurance agents and
brokers are experiencing a major shift in what their customers and clients have come to
expect. As the millennial generation matured and enters into its peak buying power,
digital and more-automated ways of doing business will become a fundamental part of
daily workflows. In the end, the easier it is to onboard a customer and make agents more
available to prospects and clients, the more insurance entities can grow their clientele,
reduce operational inefficiencies and grow revenue. So, this will create a higher demand
for the services and products of Ebix.
Cost Managementand OperationalDiscipline
Ebix is presently working on a cost rationalization exercise that is expected to deliver
reduced expenses of $1.5 million per quarter beginning in Q1 2017. Actually, the profit
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FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
margin of Q3 2016 has been improved though expense management and operational
discipline. The company pays attention to this part since they want to try and improve the
cost structure of Ebix, which may help the company grow both organically and
inorganically.
In regard to initiatives targeted at enhancing shareholder value, Ebix utilized $8.6 million
of cash during the third quarter towards repurchasing 118,200 shares of their common
stock, for $6.1 million and paying $2.5 million towards the quarterly dividend. As the
ultimate goal of Ebix, it would focus on delivering continued growth in business and
substantial returns to shareholders over the long turn.
Investment Risks
Stronger Dollar
The Brazil, New Zealand and Australian divisions continue to show reduced year-over-
year revenues in a nine-month period of 2016, because of the strengthening US dollar.
Over the last three years, the US dollar has kept strengthening and that is obviously not
helped the reported results of Ebix foreign operation. As the currency continually kept
declining each year over the last few years, cumulatively affecting Ebix’s revenue by
much larger numbers when compared it to three years back. So, stronger dollar is
becoming a more and more important risk, which reduces the revenue of Ebix.
Artificial Intelligence (AI)
Per a case by Deloitte on AIs, within the next three to five years, an exponential increase
in the number of commercial AI-based applications is expected to unfold. The breadth of
applications for this technology falls within three categories: Process Application, Insight
Applications and Product Application. Although the Product Application may cause less
of a disruption, given that Ebix’s offering is customized for the end user, the remaining
categories may stir the strategy within the company’s management. The Insight
Application of an AI may arguably present the highest risk to the company. By definition,
Insight Application harnesses the analytical capabilities, such as a machine learning, to
uncover insights that can inform operational and strategic decisions across an
organization. For example, better informed insurance recipients may in turn demand
lower premiums given the low risk profile extrapolated by AIs. With lower revenue
streams, although not conducive to eliminate the source of revenue altogether, will
prompt Ebix to become more creative with its efforts of finding new avenues to improve
its top line.
10. 10
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
III. DCF Analysis
WACC = 11%
11. 11
FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
Scenario Analysis
Upside Assumption –TargetPrice $68.25
We calculated the target price using the average of the consensus price, the DCF Value
per Share shown above, $66.59 and the target price $71.12 that was given by the
MarketSmith research platform, which specializes in growth stocks. MarketSmith uses a
complex algorithm that takes into account many different factors some of which are
current market direction, sector strength, stock performance relative to the S&P 500,
historical stock price behavior, institutional support, and common consolidation patterns
recognized using a database of tens of thousands companies dating back to 1881.
Conclusively, we advise that profits should be taken if the share price reaches or exceeds
our target of $68.25, roughly a 9.72% return.
Base Case & Downside Assumption
A Monte Carlo simulation was used to project a base and downside case. The simulation
consisted of 10,000 iterations and replicated at 20-week price path, taking into account
the current spot price, historic volatility, dividend yield, and discounted the future returns
using the risk-free rate of interest (10-yr treasury yield). The base case simulation showed
the price running up to $66.00 the first two weeks and then dropping back to $62.76 in
the third week and trading sideways from there finishing at $62.47 (-0.45%). The price
path of the downside case crept up slowly over the first four weeks and then began to
decline for the remaining 16 weeks of the simulation falling to $58.19 (-7.26%). The
purpose of these simulations is not to show exactly what we think will happen, rather the
cash flows associated with similar cases if the stock goes sideways or executes as bearish
reversal.
The price behavior simulated in the downside case can happen if institutions want to scare
or “shakeout” individual or weak investors from a stock. Sometimes after a breakout
institutional investors in the stock will run the price down temporarily to force out weak
holders who sell their positions so as to not lose any more money. The institutions then
come in and buy these shares for cheaper, which inevitably runs up the share price and
allows them to rake in profit as the stock price continues to rally. However, it is always
smart to have solid sell rules so losing positions can be effectively managed, “The whole
secret to winning big in the stock market is not being right all the time, but to lose the
least amount possible when you’re wrong”(O’Neil, 245). Therefore, we recommend a
stop loss rule of 8% from the current share price.
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FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
IV. Relative Valuation
Key Comparables
Guidewire Software, Inc. (GWRE): “Guidewire Software, Inc. provides software products for
property and casualty insurers. Its software product serves as a platform for transformation
for property and casualty insurance carriers, enabling them to replace their legacy systems
and transform their businesses such as underwriting, policy administration, claims
management and billing.”
Computer Sciences Corporation (CSC): “Computer Sciences Corp. provides information
technology solutions. It operates through the Global Business Services, Global Infrastructure
Services segments. The Global Business Services segment provides technology solutions
including consulting, applications services, and software. The Global Infrastructure Services
segment provides managed and virtual desktop solutions, unified communications and
collaboration services, data center management, cyber security, cloud solutions, cloudmail
and storage as a Service, compute and managed storage solutions.”
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FIN 660: Advanced Portfolio Management
I.T. Stock Report 11/2016
Students: Joel Julio, Greg Hempt and Yifang Guo
VI. Appendix
EBIX INC. COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
