Spruce Point Capital Releases A Strong Sell Forensic Research Opinion On Amdocs Limited (Nasdaq: DOX)
NEW YORK, Jan. 23, 2019 /PRNewswire/ -- Report entitled "Re-DOX of Dot.com Stock Collapse?" outlines how DOX faces 25%-50% intermediate downside risk to approximately $30 to $45 per share as a result of flat to negative organic growth, increasing limitations to M&A, growing evidence of cost capitalization and other aggressive accounting, and clear signs that executives are cashing out.
- Amdocs Engaging In M&A to Manufacture Growth: As IT support for major telecommunications companies, Amdocs' organic growth is ultimately tied to a stagnant industry – AT&T in particular (~30% of sales). Amdocs has purchased a jumble of IT and media businesses through the past decade to support growth where it can't generate its own. Many of these businesses appear to be only tangentially relevant to Amdocs' core services, and are only partially integrated. Without these acquisitions, we estimate that Amdocs now has declining organic sales growth. Management is frequently asked on earnings calls about the contribution of acquired businesses to total revenue. It often writes them off as "small" even when the announced purchase price is relatively sizable – and, when it does give more granular details, it appears to understate their likely contribution, thus inflating implied organic revenue growth.
- Myriad Accounting Gimmicks Materially Distort DOX's Financial Condition: In our opinion, since the financial crisis, DOX has used a playbook nearly identical to that which it used during the dot-com boom to create an illusion of healthy growth – a playbook which ultimately resulted in a shareholder class action lawsuit. Although the 2002 case was ultimately dismissed against the strict standard of securities fraud, DOX investors should be warned that the behavior now being repeated by the Company was previously carried out in direct response to major deterioration in customer demand, and foreshadowed significant guidance revisions and share price declines. Beyond putting these well-worn strategies into play, management now appears to be capitalizing a suspiciously large quantity of costs in geographies and segments which appear at odds with the activity of the business itself, in addition to spending hundreds of millions of dollars on a new campus in Israel at a time when the business is under heavy pressure. At the same time, margins are remarkably steady for a provider of IT services to the telecom sector – suspicious for a company whose management has historically been aggressive in its attempts to meet Wall Street expectations. Notably, the senior management team – which itself is extremely insular and still features holdouts from the dot-com bubble era – fails to sign its own financial filings, amplifying our concern that executives may once again be employing aggressive measures to make the business appear strong.
- Multiple Valuation Approaches Point To 25%-50% Downside Risk: DOX is valued at a premium to midcap technology and business process outsourcing (BPO) peers despite the fact it has a suspiciously complex structure, below average growth, and numerous accounting and governance issues. Lack of active institutional ownership and questionable management behavior, which we believe is being obfuscated, indicates that support for the stock is dissipating. The growing disconnect between GAAP and Non-GAAP results, and evidence that cash flow is struggling (e.g., A/R factoring) merits a discounted valuation. Amdocs' ability to continue to drive growth through M&A while continuing to return capital via dividends and buybacks is dwindling as the company runs up against its self-imposed minimum cash balance. We expect the market to start discounting this coming growth headwind. If DOX received a current multiple in-line with no growth BPO peers (1.0x-1.5x EV Sales), or if we adjust its earnings for aggressive accounting gimmicks and apply a 12x-15x P/E multiple, we can justify approximately 25% to 50% downside risk.
The research report can be found on our website at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
Spruce Point Capital has a short position in Amdocs Limited (DOX) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
