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Ebix Inc (EBIX), Solera Holdings Inc (SLH): Market Overraction on This Insurance Software Solution Company

Ebix Inc (NASDAQ:EBIX) has fallen off a clip, dropping significantly from nearly $20 per share to only $9.50 per share within just two days. The free fall was mainly due to the termination of Goldman Sachs Group Inc (NYSE:GS) affiliate, caused by the letter of the U.S. Attorney for the Northern District of Georgia investigating the allegations of intentional misconduct to falsify the company’s financial statements and SEC filings. Should we avoid Ebix Inc (NASDAQ:EBIX), or should we consider the recent huge drop as an investment opportunity? Let’s find out.

Growing via acquisitions

Ebix Inc (NASDAQ:EBIX), founded in 1976, is the international leader in providing software and e-commerce solutions, specifically for the insurance industry, with around 80% of its total revenue, $159.7 million, coming from on-demand insurance exchanges. The Broker Systems and Business Process Outsourcing contributed only $18.6 million and $16.1 million, respectively, in 2012 revenue.

In the past five years, Ebix Inc (NASDAQ:EBIX) has managed to consistently grow its revenue and net income. Revenue increased from $75 million in 2008 to $199 million in 2012, while the net income rose from $27 million to $71 million in the same period. The business could be considered a cash cow, with an increasing cash flow. The free cash flow consistently increased from $26 million to $70 million during the past five years. Ebix Inc (NASDAQ:EBIX) seems to grow its business mainly from acquisitions–since 2008, Ebix Inc (NASDAQ:EBIX) has spent the total amount of $171 million to acquire businesses. Ebix generated only $10 million in free cash flow, including the acquisition amount.

Ebix has quite a conservative capital structure. As of March 2013, it had $377 million in equity, $44 million in cash and only $48 million in both long and short-term debt. However, because of a lot of acquisitions, the goodwill and intangible assets were huge, at $408 million. Consequently, Ebix had negative equity of $(31) million. After the drop, Ebix is trading at $9.52 per share, with a total market cap of $353.8 million. The market values Ebix at only 4.46 times its trailing EBITDA.

Solera has a much weaker balance sheet

Compared to Solera Holdings Inc (NYSE:SLH), Ebix has a much cheaper valuation. Solera Holdings Inc (NYSE:SLH) is trading at nearly $52.10 per share, with a total market cap of nearly $3.6 billion. The market values Solera at 12.54 times its trailing EBITDA. Recently, Solera Holdings Inc (NYSE:SLH) has expanded its footprint in the Australian market by acquiring Eziworks Pty, which operates as Car Quote. Solera Holdings Inc (NYSE:SLH)’s founder, Tony Aquila, felt bullish about this acquisition. He said The Car Quote solution platform and its strong management team are a great addition to Solera Holdings Inc (NYSE:SLH). This acquisition will accelerate our delivery of an end-to-end claims management platform in Australia, driving value to a market that processes more than 1 million annual collision repair claims.