Is Ebix's Growth Sustainable?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up in our series is Ebix (Nasdaq: EBIX  ) , a supplier of software and e-commerce services for insurers that this week announced a $66 million acquisition of smaller peer A.D.A.M. Everything the company does is aimed at enabling insurance transactions.

Foolish facts

Metric

Ebix

CAPS stars (out of 5)

*****

Total ratings

1,093

Percent bulls

97.8%

Percent bears

2.2%

Bullish pitches

128 out of 131

Highest rated peers

Dynamics Research (Nasdaq: DRCO  ) , AUTONOMY, Sonic Foundry

Data current as of Aug. 30.

If Fools like Ebix it's because the company has proven itself. "They have strong fundamentals which to me indicate long, continued, steady growth. I'm happy to see them move that way," wrote Foolish investor wdobrien recently. "The current volume of shorts is a near term issue. Perhaps we get a short squeeze, perhaps we don't. Regardless, this stock does not have a polar event in the future that will send it way up or way down, and insurance exchanges are not 'sexy'."

Like many, this Fool is holding. Insiders are, too. They still own more than 2% of the business, and large institutional sellers were last seen more than a year ago -- when the stock was trading for more than $25 a share.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

47.6%

41.5%

117.4%

Revenue growth

42%

30.7%

74.5%

Gross margin

77.3%

78.2%

81.1%

Receivables growth

48.8%

68.6%

54%

Shares outstanding

34.8 mil.

34.4 mil.

29.8 mil.

Source: Capital IQ, a division of Standard & Poor's.

The data in this table makes me nervous:

  • Receivables have grown faster than sales for two years in a row. Adding A.D.A.M.'s clients to the mix won't make it easier to reverse this trend.
  • Gross margin is also down. The totals are still high, and that's good, but as an investor I tend to track trends. My favorite businesses demonstrate pricing power. Right now, Ebix seems to lack that.
  • Revenue growth has been good, but lumpy. I'd rather see a consistent uptrend given the minor issues we've just identified.

Competitor checkup

Competitor

Normalized Net Income Growth (3 yrs.)

Aetna (NYSE: AET  )

(6.2%)

CSC (NYSE: CSC  )

3%

Ebix

81.8%

InsWeb (Nasdaq: INSW  )

Not material

Sources: Capital IQ, Yahoo! Finance. Data current as of Aug. 30.

Going by this table, Ebix stands alone as a fast mover in a slow-moving industry, making it an almost picture-perfect example of what results when disruptive technology changes a business for the better.

Grade = unsustainable
Still, there are too many questions and not enough answers from the second table to call this a sustainable grower. Don't read too much in that; I still think the short sellers are wrong about Ebix. This isn't a business in trouble -- it's just not growing as fast as it once did. Selling a good, if unspectacular, grower like Ebix when it's trading for 23 times earnings is premature.

Now it's your turn to weigh in. Do you like Ebix at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

Ebix is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended subscribers open a bull call spread position in Ebix. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Ebix and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2010, at 8:58 PM, Mstinterestinman wrote:

    I vote for 11 O clock stock coverage but thats just my two cents. ;) Although yes their is some pressure on margins at close to 80% nothing to exactly complain about either.

  • Report this Comment On September 01, 2010, at 2:59 AM, tolko wrote:

    When comparing Receivables growth vs Sales growth, is it valid to not use some sort of averaging on the Receivables numbers? It appears that the 2009 Receivables percent (68.6%) was derived by using (End Q42009 - End Q42008)/End Q42008. In other words, using only 2 points of data to represent an entire year.

  • Report this Comment On September 01, 2010, at 9:28 AM, EricLin wrote:

    at current price $18.57, and ttm earnings of $1.23, Ebix is trading at roughly 15 times earnings. If you are talking forward earnings (projected $1.32) then it's trading at a P/E of 14. I don't see how the author could have gotten a P/E of 23. If that was the case Ebix shares should be at $28.29.

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