Is Ebix's Stock Cheap by the Numbers?

Before you go, we thought you'd like these...
Before you go close icon

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Ebix (NAS: EBIX) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Ebix has a P/E ratio of 8.8 and an EV/FCF ratio of 10.8 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Ebix has a P/E ratio of 17.2 and a five-year EV/FCF ratio of 19.9.

A positive one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

Ebix has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.

Ebix8.810.817.219.9
Delphi Financial Group (NYS: DFG) 6.64.110.34.3
Ultimate Software Group (NAS: ULTI) 366.263.5191.374.4
Towers Watson (NYS: TW) 24.39.032.222.9

Source: S&P Capital IQ; NM = not meaningful.

Numerically, we've seen how Ebix's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Ebix's net income margin has ranged from 22% to 46.5%. In that same time frame, unlevered free cash flow margin has ranged from 17.6% to 37.9%.

How do those figures compare with those of the company's peers? See for yourself:

anImage

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, Ebix has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you willoverpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Ebix has put up past EPS growth rates of 59.3%. Meanwhile, Wall Street's analysts expect future growth rates of 20%.

Here's how Ebix compares to its peers for trailing five-year growth:

anImage

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

anImage

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Ebixare trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 8.8 P/E ratio and the initial numbers look pretty amazing all around with low price multiples, and strong margins and growth. However, Ebix has its share of skeptics. As my fellow Fool Ilan Moscovitz pointed out, "Part of the reason for Ebix's cheap stock relative to its past growth and future prospects is that the company is a favored target of skeptics and short-sellers, who are concerned about the company's internal controls, specifically alleging that it overstates organic growth, uses its acquisition strategy to hide weakness, and has an eccentric CEO."

However, Ilan ended up buying shares for his real-money portfolio. You can see his analysis here. If you find Ebix's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

To see the stocks that I've researched beyond the initial numbers and bought in my public real-money portfolio, click here.

At the time this article was published Anand Chokkavelu doesn't own shares in any company mentioned. The Motley Fool owns shares of Ebix. Motley Fool newsletter services have recommended buying shares of Ebix. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners