Profitable Companies With High Insider Ownership (Last Part)

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In the previous article, I wrote about two profitable companies that have high insider ownership. One was Oracle, the global leader in both hardware and software for enterprise solutions. The other was Papa John’s, the pizza chain operator with more than 4,000 restaurants. In this article, I would like to highlight two more stocks that fit the screening criteria: (1) market capitalization higher than $1 billion, (2) the return on invested capital higher than 15%, (3) insiders hold more than a 20% stake, and (4) EV/EBITDA is less than 10x.

Significant Growth on High ROIC

Quality Systems (NASDAQ: QSII) is a provider of healthcare information system in the US market. The Company has several business segments, including QSI Dental division, the NextGen division, the Hospital Solutions division, and the RCM Services division. The majority of its revenue was generated from the NextGen division, accounting for around 75.7% of total revenue in fiscal 2012. Quality Systems has been a story of growth with significant returns. In the past 10 years, its EPS has grown from $0.14 in fiscal 2003 to $1.28 in fiscal 2012, an annualized compounded growth of nearly 24.8%. In the same time frame, it has consistently generated double-digit returns on invested capital. For the trailing twelve months, the ROIC was 23.18%. Interestingly, the high return was generated on the debt-free operation. As of September 2012, it had $312 million in total stockholders’ equity, $122 million in cash, and no debt.

Proxy Battle and Margin Call 

The story of Quality Systems’ proxy battle was quite interesting. It was the fight between the second largest shareholder, Ahmed Hussien, and the company headed by the founder and chairman, Sheldon Razin. Ahmed Hussien has repeatedly tried to elect seven out of total nine board members. However, he was forced to sell over 3.5 million shares because of a margin call. The company has dropped significantly from the $40s level in the first quarter to only $18 per share currently. Even with the margin sale, Hussien still owns nearly 5.69 million shares in the company. Sheldon Razin, the Company chairman and CEO, owns nearly 10.2 million shares. Collectively, they both hold more than 26% of the total company. At the current price of $17.97 per share, Quality Systems’ market cap is $1.07 billion, with only 7.83x EV/EBITDA.

Cheap and Highly Profitable IT and KPO Provider

Syntel (NASDAQ: SYNT) is the global IT and KPO (Knowledge Process Outsourcing) service provider. The majority of revenue was generated from its Applications Outsourcing services, accounting for around 75% of the total revenue in 2011. Syntel’s services were to help clients to improve productivity, manage operations more effectively, and lower operating costs. Syntel had the customer concentration, with its top ten customers accounting for 77% of the total revenue. Its two largest insider owners are Neerja Sethi, the VP, Corporate Affairs and Bharat Desai, the Chairman of the Board.  Sethi owns more than 10 million shares of the company, whereas Desai holds more than 5 million shares. Collectively, their stakes represents more than 35.7% of the total company. 

The business has consistently generated above 20% return on invested capital for the last 10 years. Trailing twelve months, its ROIC was 32.14% with the net margin of 25.34%. Syntel is trading at $54.59 per share, with the total market capitalization of nearly $2.3 billion. It is valued at only 7.77x EV/EBITDA. The company’s valuation is cheaper than one of its bigger peers, Infosys (NYSE: INFY). Infosys is worth nearly $25.5 billion in the stock market, with the enterprise of more than $19.9 billion. For the trailing twelve months, Infosys generated around $2.24 billion in EBITDA. Thus, the market is valuing Syntel at nearly 8.9x EV/EBITDA.

Foolish Bottom Line

With the single digit EV/EBITDA, significant insider ownership, and high returns on invested capital; Quality Systems and Syntel could be decent stocks to hold in the long-term portfolios of patient investors. 


hoangquocanh long MAR 2013 $15 call on QSII. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Quality Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

 

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