NEW YORK (The Street) -- Barington Capital, an activist investment fund that targets undervalued small- to mid-cap companies in need of a management or corporate strategy shake-up, has managed to add value to a number of its investments over the years, and soon it may do the same for Ebix (EBIX) .
Just as Barington's influence brought about changes in Ameron International's management, Dillard's (DDS) board members, as well as Darden's (DRI) sale of Red Lobster, its proposed measures could help Ebix shares reflect the company's positive fundamentals. Then, once regulatory and legal issues are resolved, the company will be able to focus resources on expansion, which may also bolster shares.
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Earlier this week, Barington Capital sent a letter to Ebix Chairman and CEO Robin Raina to call for improved board oversight. Ebix, a software supplier for the insurance industry, has been the subject of investigations and lawsuits over the past two years. The SEC investigation, an IRS audit, an investigation by the U.S. Attorney for Northern District of Georgia and a class action lawsuit brought by shareholders have put the brakes on Ebix stock's growth. Even as markets have reached all-time highs during this time, Ebix shares are far off their 2012 highs.
The Value Barington Sees in Ebix
Barington "owns a significant stake in Ebix," so obviously the activist fund believes it can unlock value for shareholders. Atlanta-based Ebix's strong market position is supported by the company's high customer retention rate of nearly 90%, which in turn leads to recurring revenue streams. Once established in the back-end infrastructure of large insurance enterprises, switching away from Ebix software proves to be a costly hassle.
Another factor in its favor is Ebix's ability to scale growth with modest capital spending -- on average $2 million a year -- thanks to its software-driven business model. Low capital spending means strong free cash flow generation and high operating margins, which hover in the low-30% range, and were 38% for the first nine months of 2014. Despite its attractive business model, however, Ebix has not commanded the same premium valuation as its peers.
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