Is it time to sell Ebix
However, re-evaluating a highflier like Ebix every now and then makes sense for investors. The stock might be nearing its top after a great run. Then again, Ebix could be poised to continue its winning ways. Which view is on target? Let's look at both sides.
Some might say to sell simply because the stock has risen so quickly. However, Foolish investors examine the company's underlying business rather than just stock prices to determine the best course of action.
Probably the main business concern for Ebix is how well the company will be able to integrate its recent acquisitions. Ebix bought PlanetSoft and Fintechnix in June. PlanetSoft focuses on streamlining processes such as underwriting for life and property and casualty insurance companies. Fintechnix is an information technology company that provides products to improve front- and back-end operations for Australian financial services companies.
Due in large part to acquisitions like these, Ebix carries an extraordinarily high amount of goodwill and intangibles on its balance sheet. Fellow Fool Rex Moore recently pointed out the potential dangers with Ebix maintaining a high ratio of intangible assets to total assets. Since that article was published, the intangible assets ratio for Ebix has increased to 82%. The risk for investors is that if the company ever writes off large amounts of these intangible assets, shares could plummet.
Ebix also faces competition in several areas. Since the company receives around 80% of its revenue from its exchanges, rivals in the exchange markets present the greatest challenge. Privately held Aplifi (formerly known as Blue Frog) is a primary competitor in the life insurance and annuity exchange markets. IVANS is the Ebix's main rival in the U.S. property and casualty exchange market.
Earlier this year, Aplifi announced that Genworth Financial
On a positive note, the rest of the company's financials are solid. Solid revenue and earnings growth? Strong cash flow? High profit margin? Low debt? Check them all off the list.
Perhaps the best reason to buy Ebix is its customer relationships. Major insurance companies such as Manulife Financial
These customers tend to stay with Ebix. The company claims a 99.5% customer retention rate. Since Ebix generates around 80% of revenue from recurring subscriptions, this high customer retention results in predictable cash flow.
Growth opportunities exist in the U.S. and internationally. Ebix estimates that 89% of life insurance applications and 78% of annuity applications in the U.S. are still processed via paper rather than electronically. The world insurance market is significantly larger than the U.S. market, yet Ebix only receives 30% of revenue from international customers.
Second-quarter results reflected only one month of revenue from newly acquired PlanetSoft and Fintechnix. These additions should boost revenue going forward. Ebix CEO Robin Raina says that the company expects to make a few more accretive acquisitions this year with a focus on growing exchange business across the world. These could present positive catalysts for the stock.
In my view, Ebix should continue its upward momentum. The high intangibles ratio is somewhat concerning, but the company's other strengths are compelling.
The stock appears to be valued attractively at current levels. The forward P/E of 13.52 seems cheap considering the consensus analyst estimates of 20% annual growth over the coming years.
It wouldn't be surprising if some big players might eye Ebix as a potential acquisition target. Computer Sciences Corporation
Sure, Ebix has shot up a lot in a short time. Investors probably couldn't be blamed for taking some profits off the table. If you're patient, though, this stock looks like it has more room to run.
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Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool owns shares of Ebix. Motley Fool newsletter services have recommended buying shares of Ebix. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.