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Steady Technologies

SS&C Technologies: Steady Dividend Growth With Potential M&A Upside (NASDAQ:SSNC)

Overview

We maintain our overweight rating on SS&C Technologies (SSNC), a company developing various software solutions for financial institutions. In our first coverage on the stock last December, we highlighted the company’s strong balance sheet and moat, driven by its presence in a high-barrier and low-switching cost financial industry market. Furthermore, DPS (Dividend Per Share) has also been growing steadily, even during the recent crisis. Against the challenging macro backdrop, SS&C will expect a bit of a slowdown in new sales for the full year. Nonetheless, some catalysts, such as more tuck-in M&As, cost-saving initiatives, and a resilient revenue stream, should allow SS&C to maintain its consistent growth and profitability profile.

Catalyst

SS&C beat its guidance in Q1 and also announced three tuck-in acquisitions, Vidado, Capita, and Innovest. As stated in the company’s presentation, the guidance for the full year has not yet incorporated the revenues from these newly acquired companies.

(Source: Company’s earnings call slide)

Considering that Capita and Innovest generated $42 million and $20 million of revenues in 2019, the full-year revenue should see at least an additional +$62 million upside. Therefore, we think that the revenue outlook for the full year should look even better than the guidance. Despite the lower guidance outlook, profitability for the full year also looks solid across all the recovery scenarios.

Net Income and EPS

(Source: Company’s earnings call slide)

Even under the worst-case scenario, in which SS&C will realize a ~$1 billion net income, the company will still maintain its earnings, EPS, and net margin figures from last year. Furthermore, SS&C can also reportedly take another $50 million to $70 million out of its cost structure, which, in addition to the lowering of its credit facilities’ LIBOR rates from 2.25% to 1.75%, should provide another profitability upside. Nonetheless, we believe that Q3 and Q4 recoveries should look more likely and conservative enough. In June, for instance, SS&C has continued landing key deals such as Mid Atlantic Group, which has chosen SS&C to automate its FINRA reporting.

Revenue Retention Rate

(Source: company’s earnings call slide)

As such, we also believe that SS&C is well-positioned to maintain its resilience during a challenging time. As per the management comment in Q1, the majority of SS&C revenues come from the recurring business, which has been less impacted by the crisis. The ~96% revenue retention rate has also been in line with the historical average, while SS&C’s strong cash flow generation and balance sheet should allow it to reduce its leverage and acquire new companies going forward. In Q1 alone, OCF (Operating Cash Flow) increased by 7.5% to ~$148 million. As the company should expect ~$1.25 billion of OCF for the full year, we think that other acquisitions may be on the map considering SS&C may now have enough room to lever up after paying down its debts. In Q1, SS&C finally completed +$2.1 billion of debt payments related to its takeover of DST Systems in 2018, which ended up reducing its secured net leverage ratio to 2.67x EBITDA.

Risk and Valuation

The lower rates environment is favorable to SS&C, given that it can lever up at a lower cost of capital to engage in potential M&As. However, we think that the situation will also be favorable to both its competitors or potential high-value targets, which should now have an easier time raising growth capital. With that in mind, we believe that key acquisitions will not be as straightforward as expected, despite the potential $5.8 billion dry powder.

SS&C Share Price YTD

(Source: Seeking Alpha)

SS&C share price has been under pressure in recent times, primarily due to the downward revision of the full-year revenue outlook to $4.5-4.6 billion from the previously $4.7 billion. The stock is currently trading at ~$55 per share, down ~20% from its YTD high, which we think presents a good entry point.

SS&C Dividend Growth

(Source: Seeking Alpha)

As we have discussed, SS&C remains a financial software giant with strong bottom line and cash flow profitability, both allowing the company to grow its dividend and acquire attractive M&A targets. SS&C has acquired companies like Intralinks and DST Systems, which provided a significant boost to revenue growth in the past. On the other hand, SS&C also maintains its $0.125 quarterly dividend payment even during the crisis. At ~3x P/S, the price is fair given the catalysts. We feel that the P/S can always retrace the ~4x-6x levels seen in recent times upon the DST System takeover, potentially once SS&C announces another key M&A deal down the line.

(Source: Stockrow)

On a more speculative note, SS&C remains in a good position to do another M&A this year given the $5.8 billion dry powder, though management has indicated that it will only selectively aim for one with a strong EBITDA in addition to revenue to ensure moving the needle on both ends. Conservatively, assuming SS&C can acquire an M&A target that allows it to maintain TTM growth at ~13% (higher than the previous FY 2020 guidance, but lower than the inorganic growth upon Intralinks, DST Systems, and EZE integrations), SS&C will be looking at a potential target with ~$600 million of revenue, which is a smaller business than either DST System or Intralinks. Furthermore, assuming the unchanged ~27x P/E, SS&C should then trade at a forward PEG of ~2x, making it equally attractive from this standpoint.

Disclosure: I am/we are long SSNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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decline Steady

The CDC Has Been on a Steady Decline. We’re Just Finally Noticing.

The once-world-class agency has been surprisingly absent during this pandemic. It’s part of a broader trend for American institutions.

Photo illustration by Slate. Photo by James Gathany, Centers for Disease Control and Prevention/Wikipedia.

The board game Pandemic probably isn’t the best choice for those looking for a bit of escapism while on lockdown, but if you want to try your hand at saving the world from an outbreak of a deadly disease, set up the map and put your character—scientist, research technician, quarantine expert—on the starting point: Atlanta, home of the Centers for Disease Control and Prevention. Where else could possibly be home base? Since shortly after the end of World War II, the CDC in Atlanta has been the axis mundi of the infectious disease world, head and shoulders above any other national public health agency. And yet, now that a pandemic has actually struck the United States full force, the CDC seems baffled—bumbling, cowed, and, above all, silent. Veteran science and health journalists are stunned by the CDC’s lack of leadership in the very sort of crisis it was born to combat. As one said to CDC head Robert Redfield early last month: “You’re invisible now, sir. Your agency is invisible.”

The problems at the CDC run much deeper than the bungled rollout of coronavirus test kits or sloppy procedures that led to contaminated labs. As serious as these mistakes (and their public health consequences) are, they are not the only reasons that CDC’s reputation has taken such a precipitous tumble. It’s sometimes hard to see the forest fire for the burning tree, but the fall of the CDC is part of a broader trend of exceptional, world-leading American agencies abdicating their preeminent positions. The CDC isn’t even the first example.

A bit more than a year ago, the Federal Aviation Administration was the agency in crisis. After two high-profile plane crashes, a mainstay Boeing airplane, the 737 Max, seemed unsafe to fly. However, the FAA, the most renowned agency on the planet for ensuring airline safety, was slow—and seemingly reluctant—to ground the planes. As Italy, Poland, Oman, and essentially every other country around the world suspended flights of the 737 Max, the FAA tried to reassure the public that the 737 plane was perfectly safe. The acting administrator of the FAA declared that the agency’s extensive review had found “no systematic performance issues and … no basis to order grounding the aircraft.” Unlike every other airline regulator around the world, the FAA was seemingly blind to an enormous safety issue. A scathing review by a House committee declared the agency had “failed in its duty” and that its oversight of Boeing was “grossly insufficient.” But that was nothing compared with what Boeing’s own employees were saying behind the regulator’s back: “This airplane is designed by clowns, who are in turn supervised by monkeys,” wrote one. The debacle was a clear sign that the agency could no longer be relied upon to make hard-nosed decisions founded on engineering evidence; politics, economics, industry ties, or some combination thereof had trumped the FAA’s scientific judgment.

These slipping standards are having a very real effect on our lives right now.

Sometimes an agency doesn’t decline from the zenith like a falling star, but its reputation slouches, bit by bit, toward mediocrity. Since the early 1960s, the Food and Drug Administration has been approving drugs and medical devices based upon their safety and efficacy—an objective, scientific assessment that makes benefits and harms to patients the criterion for whether a pharmaceutical can come to market. But in the past two decades, the agency has shown signs of surrendering objectivity under political pressure. In the early 2000s, for example, FDA leadership overruled the decision of its rank-and-file scientists to put up roadblocks limiting the over-the-counter sale of the Plan B emergency contraceptive. Generally, though, external pressures have led the agency to approve questionable drugs rather than block them. It’s seldom as spectacular as when leadership overrules the scientists (as happened in 2016 with a drug for muscular dystrophy); more generally, it’s a loosening of standards, accepting lesser and lesser support for a drug’s safety and efficacy. “There has been a gradual erosion of the evidence that’s required for FDA approval,” the author of one study in the Journal of the American Medical Association said earlier this year.

These slipping standards are having a very real effect on our lives right now. Even given the need to relax certain standards in the face of the coronavirus crisis, the FDA has faced (warranted) criticism for letting ineffective COVID-19 antibody tests on the market without sufficient scrutiny and for authorizing the use of the president’s favorite COVID treatment, hydroxychloroquine, with scant evidence of efficacy. “I understand the desire to find hope, but we need more evidence than is currently available before we encourage widespread use,” warns former FDA commissioner Margaret Hamburg.

Not all American government agencies are internationally recognized for their excellence, but the ones that are have a lot in common. They attempt to base their decisions on scientific or engineering data or, at the very least, objective criteria that leave little wiggle room for political interference. They invite scrutiny; a high degree of transparency keeps them from departing from their standards on the fly. And above all, they maintain and nurture a pool of expert staff that is as good as or better than anything one can find in the commercial sector on a scale that no private company could ever hope to match. These are the attributes that make an institution healthy enough to resist the crushing political pressure that bears on all high-stakes regulatory agencies.

Yet transparency is under attack seemingly everywhere in government. The CDC has forbidden its scientists from speaking to journalists without clearance from headquarters. I’ve had to take the FDA to court to get it to release certain basic information about clinical trials—information that its European sister agency, the EMA, releases as a matter of course—deeming the records confidential. In-house experts are gainsaid by leadership or even made entirely irrelevant as their duties are passed off to the commercial sector. The FAA was dependent on Boeing employees to vouch for the 737 Max rather than independently verifying the plane’s safety itself. The FDA’s dependence on test manufacturers to vouch for the accuracy of its coronavirus tests is unlikely to have much better results.

The forces weighing on these great institutions aren’t new—the CDC, for example, got a taste of the politicization of science in the mid-1990s when Congress functionally forbade the agency from studying gun violence as a public health problem. In previous administrations, experts pointed to possible signs that the agency was losing its way; since the beginning of the Trump administration, the scorn for science and transparency has further taken its toll. But the public only noticed the agency’s malaise when a crisis came and exposed its weakness.

Unless we figure out how to reverse the course of this institutional disease, government agencies that once served as models for the rest of the world may soon cross into the nether realm of bureaucratic mediocrity. At that point, there won’t be much left to mourn if activists finally succeed in drowning what remains in that proverbial bathtub.


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