Why I Love Ebix's $75 Million Buyback Program

After a shorting report labeled Atlanta-based Ebix (Nasdaq: EBIX  ) a "house of cards," the software and e-commerce solutions provider's stock has been on a severely downward trend.

The stock plunged more than 26% after the report was released and has since been quite volatile. And Ebix's efforts to contain the drop via share buybacks has failed to bear fruit. Nonetheless, in an attempt to rub it in the face of bears, the company plans to raise its buyback to $75 million after revising it to $45 million this year.

The repurchase
Most American firms big and small alike have turned to share repurchases lately to return value to shareholders. In the past, such big names as Intel and Pfizer have announced buyback plans that ran into the billions. However, in Ebix's case, things are a bit different.

Since March 29, Ebix has bought back more than a million shares, spending more than $20 million. It plans to use an earlier $45 million authorization to buy back its shares before seeking the approval of the new $75 million buyback. The company is strongly placed financially, so funding shouldn't really be a problem as it looks to bring in more money as the year rolls on.

For such a relatively small company ($800 million in market cap), this is a pretty aggressive strategy. But I'll be darned if I'm not impressed. Clearly, the folks in charge think they're better off keeping those shares out of your hands. And that's precisely the type of management team I want to invest into.   

What's its value?
There's no small amount of method to this madness, however. Ebix's stock is way undervalued compared with the industry average multiple, which might provide some rationale behind the buyback. The company's P/E stands at 13.0, way below the general business software and services industry P/E of 39.5. Its closest competitor, InsWeb (Nasdaq: INSW  ) , also has a much higher P/E of 36.3.

Considering this, there is no question that something is amiss, especially as the company's revenues and earnings have both been on the rise and it has affirmed expectations for further growth. There is clearly a fundamental disconnect between the market and the company's stated potential.

The Foolish bottom line
This massive buyback is a fascinating strategy, and if you believe in Ebix's management, you may consider getting in while the getting's good. Then again, if you're not convinced, this could be just a ploy to generate confidence in a company that is already overvalued.

Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Ebix. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Pfizer, Intel, and Ebix, as well as creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 18, 2011, at 1:29 PM, jhaw wrote:

    I agree completely. The aggressive pace and substantial increase in the stock buyback program is very impressive. Equally impressive is the fact that the CEO recently purchased over half a million dollars worth of stock on the open market and now owns nearly 4 million shares.

    This is exactly what I want to see from a thriving business that generates a lot of cash but is selling at a very low price due to market forces unrelated to the actual business.

  • Report this Comment On June 22, 2011, at 4:33 PM, pstoimenov wrote:

    Could somebody do analysis of how exactly EBIX does business?

    I read the accusing letter and the rebuttal and honestly the rebuttal did not make me feel better.

    EBIX thrives on acquisitions: how come that every acquisition is so successful and keeps on growing the company so fast? It may mean that either EBIX is genius at buying or the sellers are dumb and they ask too little for their hot businesses. Also I pretend to understand insurance but reading through EBIX documentation I still do not understand how they make such ridiculously good margin and earnings.

    I believe that there is a lot of uncertainty and will not touch it until it becomes clearer.

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