Shares of Amdocs Limited (NASDAQ: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.
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