SS&C Technologies Stock: Overvalued Serial Acquirer (NASDAQ:SSNC)


Concept of financial technology.

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SS&C Technologies Holdings Inc. (NASDAQ: SSNC) is a serial buyer of software companies in the fintech industry. Founded in 1986 and listed on the stock exchange in 1996, the founder took over the private company in 2005 as a result of the bursting of the technology bubble, only for later. In 2010 it goes public again. They have acquired 59 businesses along the way. In their second act as a public company, so far they have strongly beaten the market.

SSNC share price growth

dividend channel

The companies that are acquired clearly drive both the top result and the end result. The margins are big, FCF and EPS are growing impressively.

The gross margin

47.7%

Operating margin

24.8%

Net margin

15.6%

CAGR income for 16 years

22.1%

CAGR EPS 16 years

43.5%

16-year FCF

27.6%

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Capital allocation

The company relies heavily on the acquisition of companies to drive growth. Its largest acquisition to date was a $ 5.4 billion deal for DST Systems in 2018.

They use an interesting combination of capital allocation. The buyer’s strategy has worked well so far, but they also use a lot of debt and dilution to raise money for acquisitions. They have paid a dividend since 2014, but they also pay the debt every year. This debt repayment is expressed in the debt / equity ratio over time.

Long-term debt / equity ratio of SS&C Technologies

macrotendencies

At first glance, long-term debt levels worried me, but with aggressive debt repayment, they seem to have a formula that works.

I’m often critical of companies paying a dividend when I think it’s not necessary at the time. This is also the case for SSNC, but the dividend payment ratio in free cash flow has never been more than 36%. This is not a serious problem for me in this case because acquisitions are clearly the main engine of returns in this company. Last summer, repurchases of up to $ 1 billion were approved, and again, I prefer that they go more into debt repayment despite consistent deleveraging periods.

Risk

My biggest concern is the relatively low return on capital relative to the intensity of capital.

CAGR income for 10 years

29.8%

CAGR assets at 10 years

30.5%

Average ROIC of 10 years

4.2%

WACC

9%

In addition, there is the return on capital. Although the margins and growth of EPS and FCF have been very high, the returns on capital are not very impressive. Business theory would say that any firm that cannot constantly generate returns on capital invested above its cost of capital is destroying value. This was not the case for SSNC, as the return on shares previously showed that the market has highly valued its performance despite the current 9% WACC being above average.

The largest technology companies are money printing machines and can self-finance virtually any project. The cost of capital means very little to them. Certainly, this is not the case with SSNC, so the cost of capital is important.

While the leverage strategy has worked so far, an era of higher interest rates could change success in the future. It increases the cost of debt, which could slow down the pace of acquisition of new businesses. The amount of leverage that is usually used is still too much for my liking because there could still be an excess of debt used in the future, especially if a larger acquisition doesn’t turn out as expected.

Evaluation

There are not too many exact peers who use the roll up strategy in specific industries like SSNC. Using an extremely conservative DCF, I see that the company is slightly overrated right now.

DCF of SSNC shares

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The current dividend yield is 1.3%, not enough to make me want to participate in the total long-term return.

Conclusion

Companies that can successfully use the serial acquirer strategy are not very common. To date, SSNC has used a combination of debt and equity increases to acquire 59 companies, and has had aggressive debt repayment periods. Despite very impressive EPA growth and free cash flow, the company achieves relatively low returns on invested capital compared to capital intensity.

I don’t anticipate capital returns rising in the future, and the habitual use of debt worries me as interest rates rise again. I value the quality of the business and M&A skills as above average, but at this price it is not a purchase.



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