Value Discipline: Broadridge Financial Solutions

There seems to be a surfit of spin offs lately. Next up is TYC three way and later MS with Discover Card. I wonder if with all these spin offs, if some might be mispriced?

The author says: "On an EV/EBIT basis this is a valuation of a modest 5 times trailing EBIT."

I believe this is incorrect and that the name is trading at over 10x trailing 2006 pro-forma EBIT!

This does not seem modest to me at all even given post spinoff dynamics, etc.

I haven't really looked into this situation, but based on the investor presentation available at the company's website operating profit for the last full year (ended June 30, 2006) would work out to $303 million.

Since June 30, 2006 is quite a long time ago - we probably should look at the $330 - $345 million estimate for fiscal year 2007. That would leave us with an enterprise value of something like 9.37x expected EBIT.

However, all of this seems less important than looking at the pro forma numbers. They show that trailing pro-forma EBIT would have been $229 million. You could argue over these numbers, because the pro forma numbers I gave are old in the sense that they use fiscal 2006 as their starting point (and then adjust it). But, still, I can't find a way for expected pro forma earnings for this fiscal year to top more than about $260 million.

So, unless I'm way off base here (and I may be because I really haven't looked at this situation) we have an EBIT range of around $230 - $260 million.

Using the most recent quote I've seen of $18.91 a share, we have an enterprise value of about $3.23 billion. So, if we divide by the middle range of my $230-$260 million estimated EBIT range we get an EV/EBIT of 13.20.

That give us a pre-tax yield of about 7.58%. So, yes, my numbers are very different from Rick's here. Like I said, I may be totally wrong, because I just glanced at the filing after reading the above comment.

By the way, an EV/EBIT of around 5 isn't just modest, it would be a complete steal. Only a business that's clearly peaking or about to go extinct should ever sport that kind of EBIT. A growing business shouldn't be priced to yield over 20% pre-tax. Even an EV/EBIT of 10 would be really attractive for a solid, growing business. I have no judgments to make about this business, because I haven't analyzed the situation - but, an EV/EBIT of 13.20 which equals a pre-tax yield of 7.58% is not necessarily an inappropriately high or low yield. The debt burden here is light relative to equity, so that shouldn't skew things too much.

I look at an EV/EBIT of 12.5 as the baseline. Obviously, it depends on the business. But, at over 12.5x EBIT you are saying there's something special - at under 12.5x EBIT you're saying there's something unattractive about the business. Obviously, you have to try to normalize the numbers. But, basically, a 12.5x EBIT baseline is a good starting point for viewing both public and private transactions.

If you want bargains in the stock market you usually look for less. I think even Berkshire's negotiated transactions have often been done at closer to 10x EBIT, but I'm not sure about that. Regardless, 13.20x EBIT doesn't jump out at me as either clearly overpriced or clearly underpriced - I think you have to look at the business. Personally, I would need to understand the business really well - and love it to pay that kind of EBIT. My own favorite spin-off of the last year or so was (and still is) Hanesbrands (HBI) - a business I understood at a price I liked.

I'm glad you pointed out the problem. I hope Rick addresses it. Again, I may be totally off here - but, I'm coming up with numbers closer to 13x expected EBIT. Am I completely lost here? Does someone else want to try to figure this one out?

Thanks.

I look forward to seeing your numbers. I was surprised by how different the numbers looked from what is mentioned in the post.

These are the numbers we used. Based on this we decided that even if we were off by some million there still did not exist a decent margin of safety or significant mis-pricing for us to be involved at the moment.

If it traded down to 7x EBITDA we would definately reconsider our stance.

2006 Pro-forma
EBITDA $275.6
EBIT $272.6
Net Debt + Minorities $605
Diluted Shares Outstanding 139.5
Mkt Cap @ $19.06 $2,658.9
Enterprise Value $3,264.0
EV/EBITDA 11.8x
EV/EBIT 12.0x

Be sure to check out my own take on Broadridge. My numbers are similar to random_walker but my conclusion is different.