Happy Thanksgiving everyone and thanks for reading! SS&C Technologies is a vertical market software (VMS) business that provides software solutions for a host of mission-critical yet mundane front, middle, and back-end functions across the financial services and healthcare industries.
I am curious to know why you ignored the debt in the valuation. EV/FCF is around 20. I'd argue that it's slightly overvalued for something growing at 5-6%.
No doubt about the moat but would you buy the whole business for $20 billion (including debt) in exchange for recurring FCF of $1 billion growing at 5-6%?
Great question. Equity holders forward returns will approximate the yield + growth that they receive on their "purchase price", or market cap. Because debt holders do not have a claim on the upside of the business, all growth will accrue to equity holders. So, when estimating forward returns for a stock it's best to divide the cash that equity holders will receive (free cash flow) by the price that investors are paying today for the equity (the market cap) and then add growth. If you are right about estimating normal free cash flow and growth, the business returns should approximate the sum of yield + growth.
If you want to take into account debt in the valuation, you want to make sure to add back interest payments, or just use EBIT, for the denominator. When considering the EV you want to evaluate the business based on earnings available to all stakeholders, not just equity holders. In SS&C's case, EBIT is around $1.2B and EV is around $20B, so EV/EBIT is ~16.6x. I'm not sure what the year-end 2022 market average EV/EBIT is but as of early 2022 it was around 26x, so it's probably in the low-20s now. TTM free cash flow (after subtracting SBC) is around $1.1B and net interest expense is $250M, so you get a similar result using FCF + interest as your denominator.
Either way it appears SS&C is an above average business for a below average price.
Great post.
I am curious to know why you ignored the debt in the valuation. EV/FCF is around 20. I'd argue that it's slightly overvalued for something growing at 5-6%.
No doubt about the moat but would you buy the whole business for $20 billion (including debt) in exchange for recurring FCF of $1 billion growing at 5-6%?
Great question. Equity holders forward returns will approximate the yield + growth that they receive on their "purchase price", or market cap. Because debt holders do not have a claim on the upside of the business, all growth will accrue to equity holders. So, when estimating forward returns for a stock it's best to divide the cash that equity holders will receive (free cash flow) by the price that investors are paying today for the equity (the market cap) and then add growth. If you are right about estimating normal free cash flow and growth, the business returns should approximate the sum of yield + growth.
If you want to take into account debt in the valuation, you want to make sure to add back interest payments, or just use EBIT, for the denominator. When considering the EV you want to evaluate the business based on earnings available to all stakeholders, not just equity holders. In SS&C's case, EBIT is around $1.2B and EV is around $20B, so EV/EBIT is ~16.6x. I'm not sure what the year-end 2022 market average EV/EBIT is but as of early 2022 it was around 26x, so it's probably in the low-20s now. TTM free cash flow (after subtracting SBC) is around $1.1B and net interest expense is $250M, so you get a similar result using FCF + interest as your denominator.
Either way it appears SS&C is an above average business for a below average price.
Hope that helps!
That clarifies it. Thanks Dan.
This great information, thank you for the article, follow up.