Exited position in Ebix (EBIX)
I wrote in an earlier blog that I would likely exit my position in Ebix if the company had not repurchased shares in the 3rd quarter following their announcement of a $100 million share repurchase program. They apparently did not repurchase any shares, and with end-of-year short covering lifting the share price above my average cost I thought it prudent to sell all my shares. The rationale is that I can’t find a satisfactory reason why there were no repurchases made. My thinking goes along these lines.
They announced a $100 million share buyback in June after the cancellation of the Goldman Sachs buyout. The company had around $35 million in cash at month-end June. The share price drifted between $10 and $12 during the 3rd quarter. At an average price of around $11 a share, if the company used all of that cash (not a completely plausible scenario, but perhaps by adding a bit more leverage…) they could have repurchased 8% of shares outstanding and increased EPS by 9%. So why didn’t they repurchase any shares? The possibilities are many but let me lay out my thinking.
- They never intended to repurchase shares in the first place, they just wanted to announce something positive to counteract the negative announcement of the GS deal falling through. This in itself should be reason enough for me to sell, or
- They intended to repurchase shares but something happened subsequent to the announcement that prohibited the company from repurchasing shares, such as having material inside information (say, regarding the SEC investigation), or
- They intended to repurchase shares but something happened subsequent to the announcement that made management change their minds. This could have been a negative change in the outlook on the company’s operations, the possibility of a better return from another acquisition, an increase in the uncertainty surrounding the SEC investigation or an increase in the estimated settlement costs related to the SEC investigation.
Only the possibility that management had found a better investment than their own shares would encourage me to retain my position. How likely was that? Well, we know that management believed in May that $760 million ($20 a share) was the minimum value of the company; Raina obviously thought the value was greater because he elected to be part of the GS buyout at $20 per share. This means that any acquisition would have to be able to be made at less than 55% of intrinsic value. In other words, the acquisition itself would have to offer a better than 90% return in the first couple of years to beat out a repurchase of shares. How likely is that? So my conclusion is that even if Raina proves to be a good operator, it is unlikely, under this scenario, that he is a good capital allocator. Given this, all indications point to Ebix being an investment I shouldn’t hold.
Note that I don’t say Ebix won’t go to $30 a share or higher, perhaps on a short squeeze or perhaps just because EPS leap forward. Nor do I think that you should necessarily come to the same conclusions as I have about holding the shares. My purpose in this post is simply to outline why I feel it is no longer prudent for me to hold the shares; I have simply lost faith in management.
Long Term Value Blog 
Your rationale for selling makes sense. The only thing I would counter with is that the stock is still very cheap, so my biggest reason for buying is still valid. If EBIX were trading closer to a market multiple then I’d put more weight on management’s capital allocation skills.
ZBRA is a good example of a company with questionable capital allocation priorities that the market nonetheless has awarded a respectable multiple to.
Thanks for commenting Garrett. I hear you about the ‘cheapness’ of Ebix. It still could turn out to be a great investment. My approach to these things is probabilistic; the lack of share buybacks in Q3 leads me to reassess upward the probability that future (and perhaps past) capital allocation decisions will be (or have been) poor. And it is this higher probability of poor capital allocation, and by extension possibly higher probability of overall poor management decisions (possibly associated with accounting treatments), that leads me to eliminate the security from my portfolio. Please note this is just my assessment of probability!
Jay,
Appreciate your posts on EBIX. I’ve been following this stock since you first discussed it in 2011. Never took a position during the 3 “bear-raids” that occurred since 2011 except the last one during the panic-induced meltdown and forced sell-off by arbs.
I bought a substantial position in EBIX around $11 (and bought more at $9) on a simple thesis that if Raina was a crook, he wouldn’t have opted to increase his stake in the GS buyout at $20/share – he simply would’ve taken the money and ran. The stock hit a rock bottom of $8 but I found no reason of selling. What I should’ve done was fully hedged my long with ATM or OTM puts (in case the sucker was going to zero for reasons that I hadn’t imagined – black swan type).
I sold all of my stock around $13/share as I was hoping tax-loss will push the stock down (which didn’t happen) but I still came out with a small profit.
Anchoring bias is now preventing me from paying $1/share more (than my sell price) and jumping back in but I still believe that EBIX’s intrinsic value (even in a non-growth and even after fines are paid, lawsuits are settled) scenario remains far, far higher than $14/share. It may take YEARS before the market agrees with me or the catalyst of settlement materialize, but EBIX will continue to add cash to its balance sheet. The litmus test was the fact that they aren’t losing customers which I believe the case as per the last quarter results.
Going forward, I will definitely add if it goes below my sale price or even add at this price and pair it with OTM puts. Time will tell the truth and of course – when everyone thinks EBIX is “safe” – the opportunity will have passed.
Cheers.