We came across a bullish thesis on SS&C Technologies Holdings Inc. (SSNC) on ValueInvestorsClub posted by skimmer610. VIC is our favorite sites because the ideas there are generally posted by aspiring analysts who produce quality research. We find the ideas presented on the site well thought out and deserving serious attention. Click here for the full article. Below we summarized the SSNC bullish thesis:
SSNC is an American multinational financial technology (Fintech) company that sells specialized software, software-enabled services and SaaS solutions for operational excellence to the global financial services and healthcare industries. The company has offices in the Americas, Europe, Africa, Asia and Australia. The full form of SS&C is Securities Software and Consulting.
SSNC is low capital intensive, non-cyclical business with a recurring revenue base. SSNC is able to maintain a 95% revenue retention rate. The fat cash margins of 37% and $ 1.85 billion EBITDA for last twelve months versus capex of $150 million is the result of the staple nature of the software and services SSNC provides its customers.
Despite superior margins, SSNC is trading at a significant discount to the peer group valuations. Hovering around 25x estimated earnings multiples for 2020 and 21x for 2021, SSNC has been undermined by three major concerns from investors. Below are the counter arguments.
- Leverage levels:
Relative to its debt levels, SSNC generates a large amount of cash, and has no major debts maturing before 2025. As per company’s guidance, it ended 2nd quarter, 2020 at 3.7x leverage (net debt/2020 EBITDA), and its free cash flow generation in 2nd half, 2020 will be $500 million. This would reduce the net debt to 3.5x by 2020 year-end.
- Equity market exposure:
The street’s perception about SSNC’s revenue being significantly tied to equity market returns is misplaced. The analyst reckons only <5% of SSNC’s revenue is directly exposed to equity market returns. Even the segment of hedge fund administration business, wherein revenue is typically based on a percentage of AUM (assets under administration), does not have any major adverse impact. The reason being number of portfolios underperforming tend to be negligible. In fact, segment like trading solutions tend to gain from heightened market volatility.
- Low organic growth
For the last 4 quarters preceding 2nd quarter 2020, SSNC’s organic growth registered 3.6% mark vs its 5.0% target. Although the organic growth has been less than exciting yet SSNC’s mid-single-digit revenue growth equates to high-single-digit earnings growth, thanks to the leverage factor.
Founder and CEO Bill Stone built the company he founded in 1986 with $20,000 savings that has now become a high quality business model. He has the reputation of axing the excesses at inefficiently run businesses. Stone’s stake is currently valued at >2 billion.
The SSNC stock is attractively priced here. While low valuation provides downside cushion, a potential combination of resilient business, strong management team, strong earnings growth prospects, deleveraging exercise, and possibly a large scale M&A can boost the stock performance significantly.
See also 10 Best Software Stocks To Buy Now.
