Why Maverick Capital Owns Amdocs (DOX): Stock of the Week ~ market folly

Tuesday, March 20, 2012

Why Maverick Capital Owns Amdocs (DOX): Stock of the Week

Continuing the stock of the week series, this time around the focus is on why Lee Ainslie's hedge fund Maverick Capital owns Amdocs (DOX). If you missed last week's, be sure to also check out why George Soros owns Comverse Technology.

The following is written by Tsachy Mishal, portfolio manager of TAM Capital Management:

It often happens that when owning a company, I stumble across one of their competitors or another company in their industry and end up owning them as well. I came across Amdocs (DOX) when researching last week's stock of the week, Comverse Technology (CMVT) as they are competitors. Amdocs is a large position for tiger cub Lee Ainslie's Maverick Capital.

Amdocs makes billing and customer relationship software for telecom companies. They are the leader in their industry with 28% market share, three times the share of their closest competitor. Amdocs generally signs 5 to 8 year contracts with their customers so revenue visibility is high. These long term contracts account for 75%-80% of their business.

DOX trades at less than 10 times this year's expected free cash flow and less than nine times next year's (EV/FCF). Profit growth is expected to be in the mid single digits but with share repurchases EPS growth is expected in the mid teens.

What I Like:

- The valuation is very attractive for a company with such high earnings visibility.
- Amdocs repurchased approximately 10% of their shares outstanding last year and is set to do the same again this year.
- No major contracts are set to renew until 2014, making visibility especially good for the next 2 years.
- There are high switching costs to move to a competitor.
- Amdocs is by far the leader in the industry.

What I Don't Like:

- A single customer, AT&T, accounts for 29% of revenue.
- The business is tied to a single industry, albeit a good one.

I originally looked at Amdocs in order to get a comp for Comverse Technology (previous analysis here) but after studying the company I had little choice but to buy a position in it. A market leading company, with high visibility, that is returning cash to shareholders should not be trading at a single digit multiple (EV/FCF).

For past stock of the week entries, check out why Carl Icahn owns WebMD and why George Soros owns Comverse Technology.

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