Is This Beleaguered Software Company Trading Too High or Too Low?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

A stock that has both an incredibly interesting story and an outsized profit potential doesn't come along very often. Yet, Ebix (NASDAQ: EBIX  ) might fit the bill. The problem is that the company, a software provider to the insurance industry, has had such a bizarre last couple of years that it's difficult to determine whether its stock is worth a lot more than currently bid or significantly less. But one thing is likely; when the dust settles, the shares won't end up being where they are now.

A tale of allegations, lawsuits, and a busted deal

Ebix's share price volatility began in 2011 when a negative online report questioned the veracity of the company's financial reporting. Class action complaints asserting that Ebix inflated its stock price soon followed. In May 2013, it looked like the firm was vindicated when it announced a $20 per share go-private agreement with Goldman Sachs. New lawsuits alleging management had not pushed for maximum value were quickly filed.

Then, in June, the U.S Attorney for the Northern District of Georgia opened an investigation into Ebix. This criminal probe put the kibosh on the Goldman Sachs deal, cutting the stock price in half. In the meantime, a lawsuit by Microsoft for alleged copyright infringement, allegations of SEC and IRS probes into possible misuse of subsidiary tax shelters, and even rumors of a Federal investigation into possible ties to money laundering have also surfaced. 

Is Ebix trading too high?

Does the litany of lawsuits and allegations suggest that Ebix might be overvalued? The company does exhibit some controversial signs that might suggest caution on a too aggressive appraisal.

A major red flag is the company's accounting firm history. From mid-2004 through the 2007 engagement, one major auditing firm resigned and another was dismissed and replaced by a smaller local firm. This local firm resigned for the follow-up 2008 audit and was replaced by another local practitioner who has been active since. This type of frequent change in auditors and use of a small local firm for a listed, complex company is exceptional and proposes some extra analysis of the company's numbers might be prudent. 

Another watchful point is Ebix's operating cash flow versus reported net income and depreciation/amortization ("D&A"). In most cases, especially with software firms, reported profits plus D&A usually do not exceed the amount of operating cash provided. While not a significant amount, Ebix's "excess" profits plus D&A came to about $8 million in 2012, $8 million in 2011, and $13 million in 2010. Lending gravity to this issue is the company's penchant for dispensing cash on acquisitions and investments in small firms. Its $98 million spend, or around 50% of generated cash, over many different entities in the last three years might rightfully be questioned. 

Could Ebix be worth more?

While there may be some legitimate concerns, there are also plausible reasons why Ebix shares may be overly discounted.

The company does have a well-accepted and lucrative product called WinFlex, a software that helps insurance carriers offer and administer their products more easily. The company also has a seemingly solid place in the insurance exchange market, which generates about 80% of revenues. Additional opportunities in this business arising out of The Affordable Care Act's reliance on state-run health exchanges could offer significant upside and looks to be something the company is hoping to cash in on.

In addition, given the short position against Ebix, estimated at over 30% of the float, any surprisingly good news or legal exoneration for the company may spike the share price.

What could Ebix be worth?

In its latest quarter, Ebix reported revenue of $51.0 million, an increase of 7% year-over-year, but earnings per share declined over 25% to $0.35. Cash generated from operations fell to $10.6 million, down 50%, moderately affected by legal and extraordinary operational costs. 

Using a cash earnings times a capitalization multiplier valuation and giving Ebix the benefit of the doubt accounting-wise, fair business value looks to around $15 a share at a conservative 14 times multiple. This calculation, with cash earnings around $40 million and a cash profit margin of 20% on sales of $200 million, looks reasonable based on peer comparisons even considering the lackluster quarter.

Quality Systems (NASDAQ: QSII  ) is not a direct Ebix competitor, but there are parallels. Quality develops software for medical groups and small hospitals. It has also faced some turmoil. Last year, a director agitated for change with an activist hedge fund soon joining in. Quality ended up resolving the dispute by agreeing to let three hedge fund selected directors on the board and creating a five-person committee to evaluate the company's future.

For its operations, Quality reported revenues of $109.5 million for the latest quarter, a 7% drop from last year. Net income came in at $12.9 million, a decrease of 16%. Though the company said it saw significant growth in its sales pipeline for the first time in several quarters and a meaningful reduction in operating expenses, thanks to a restructuring effort. 

With estimated revenues of $500 million, cash earnings at $75 million, and a profit margin of 15%, Quality Systems is currently priced around a 16 times multiple. Reasonably fair given the company's optimistic outlook.

Allscripts Healthcare Solutions (NASDAQ: MDRX  ) , a software provider to physicians and hospitals, has a similar narrative. In December 2012, its former CEO was fired after an unsatisfactory attempt to sell the company, which began due to an earlier board upheaval and shareholder lawsuit that questioned management's leadership. 

In its last quarter, Allscripts reported adjusted revenue of $347.1 million, down around 6% year-over-year. Adjusted operating income came in at $18.6 million, down over 60%. On the plus side, the company achieved its highest quarterly level of new bookings since the fourth quarter of 2011 and grew its contract revenue backlog 16% over the prior quarter.

Assuming sales around $1.47 billion, earnings of $128 million, and a profit margin at near 8.7%, Allscripts shares trade at an aggressive 20 times multiple. This value may be overly enthusiastic even in light of the company's pluses.


Ebix shares are certainly interesting. If most of the concerns about the company are valid, the shares could be vastly overpriced. But if the firm's fundamentals prevail, the shares could be worth a lot more than currently quoted. Which is more likely? Frankly, I'm not sure. But either way, Ebix's share price should be far different than it is today.

The amount of data we store every year is growing by a mind-boggling 60% annually! To make sense of this trend and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.

Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2602718, ~/Articles/ArticleHandler.aspx, 5/26/2016 6:35:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,828.29 -23.22 -0.13%
S&P 500 2,090.10 -0.44 -0.02%
NASD 4,901.77 6.88 0.14%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/26/2016 4:00 PM
EBIX $45.26 Down -0.08 -0.17%
Ebix CAPS Rating: ****
MDRX $13.02 Down -0.28 -2.11%
Allscripts CAPS Rating: ***
QSII $12.57 Down -0.22 -1.68%
Quality Systems CAPS Rating: ****