2023-05-18 18:21:10 ET
Summary
- Amdocs Limited has proven to be an excellent value creator over the past decade.
- Modest growth and a gradual reduction in the share count, but mostly a valuation re-rating, has driven Amdocs Limited shareholder returns.
- I like this story, but the valuation simply seems fair here with shares trading near their highs, making me cautious on the risk-reward of Amdocs Limited.
Shares of Amdocs Limited ( DOX ) recently surfaced on my radar after the company announced a bolt-on deal in recent weeks, warranting a long overdue investment thesis which goes back ten years. Back in 2013, Amdocs announced a bolt-on deal, when I concluded that a 12 times earnings multiple and strong balance sheet , made shares look attractive, at the time trading in the mid-thirties.
A Quick Look Back
Amdocs is a provider of software and related service to the wider telecommunication and media sector. A $120 million bolt-on deal for Actix, announced in 2013, triggered me to establish an investment thesis on the firm.
At the time, Amdocs generated about $3.3 billion in revenues, posting solid earnings at a rate of around $400 million, as earnings of $3.35 per share translated into a non-demanding 12 times earnings multiple at $37 per share. Moreover, the company operated with a net cash position of around a billion dollars, equal to more than $6 per share, as operating assets traded at less than 10 times earnings.
These were non-demanding multiples, amidst modest growth, although there was some uncertainty in the business model, in part related to the high exposure to large telecommunication companies like Verizon Communications Inc. ( VZ ) and its peers. Large-scale M&A in the sector had the potential to create disruption, besides the risk of customer concentration, of course.
Moving Forward
If we fast-forward a decade in time, we have seen Amdocs Limited shares rise to $94 per share, as shares trade within imminent reach of their highs. These 150% returns translate into returns of nearly 10% per annum, very decent and stable returns, as Amdocs has proven to be an excellent value creator (aided by a low valuation from the get go).
Fast forwarding to November 2022, we can see how shareholder value has been created. The company reported a 7% increase in full year sales to $4.6 billion, marking just 40% cumulative growth over the past decade. The company posted GAAP profits of $550 million, equal to $4.44 per share (with earnings per share growth aided by share buybacks).
Adjusted earnings came in around a hundred million higher, with earnings on that basis improving to $5.30 per share. Realistic earnings come in around the midpoint of both numbers, as the adjustment between both metrics stem roughly fifty-fifty from amortization charges and stock-based compensation expenses.
One thing had changed: while Amdocs Limited continued to hold onto a net cash position, it had shrunk to about $173 million by the end of 2022. Based on the assumption that a near $5.00 earnings per share number is realistic, it is clear that most of the valuation creation came from a re-rating, from about 12 times earnings to 18 times earnings here.
The 2023 guidance is comforting, with sales seen up 6% at the midpoint of the guidance range on a reported basis, as growth is expected to come in two points higher on a constant currency basis, with non-GAAP earnings seen up 10%.
Some Recent Momentum
Early in May 2023, Amdocs announced a typical bolt-on deal. The company reached a deal to acquire the service assurance business of TEOCO in a $90 million deal. For the fiscal year 2024, the revenue contribution is pegged at around half a percent of the revenue base. That suggests about a $25 million revenue contribution, indicating the deal does not really come cheap at more than 3.5 times sales. After all, Amdocs trades just above 2 times sales here. Given the relatively small revenue base of the TEOCO activities, no real impact (dilution or accretion) is seen to near-term earnings.
A few days later, the company announced a 7% increase in second quarter sales to $1.22 billion, as the company continues to be on track to achieve the full year guidance. This suggests that sales are seen around $5 billion, with earnings per share seen at around $5.88 per share. The company ended the quarter with a $216 million net cash position, although that net cash will fall to about a dollar per share upon the TEOCO deal.
Fairly Valued
Subtracting about sixty cents from the adjusted earnings range, I peg realistic Amdocs Limited earnings around $5.40 per share, as operating assets trade around 17-18 times realistic earnings on that basis, amidst an unleveraged balance sheet.
This seems about fair, as the re-rating appears to be complete. While Amdocs Limited is a decent long-term value creator, I am not too impressed with the long-term positioning (given its largest clientele basis) in combination with a largely depleted net cash position and a re-rating towards a market multiple.
For further details see:
Amdocs Limited: Bolt-On Deal, Little Appeal