Why Amdocs Is My Kind Of Stock

There are three main attributes that I look for in a stock and Amdocs is a perfect example of that type of stock

An attractive valuation:

Amdocs trades at 8 times 2013 expected free cash flow to enterprise value, which equates to a 12.5% after tax yield.

Low economic and financial leverage:

Amdocs has $900 million in cash and no debt. Roughly 80% of Amdocs business is recurring. Amdocs creates billing software for telecom and cable companies. In many cases it completely manages this IT function for them. These contracts are typically 5 to 8 years long and the switching costs to a new billing system are very high. It happens very irregularly that customers switch away.

Management that is a good steward of capital:

Amdocs has repurchased 20% of the shares outstanding in recent years and has promised to return at least 50% of  future free cash flow to shareholders.

There are risks to Amdocs in that a small amount of customers make up a large portion of their revenue. However, the earliest of those larger contracts are up for  renewal in 2014 and I believe it is very unlikely that a customer will switch away. Additionally, Amdocs is dependent on the telecom industry where there are not many new carriers so it will be difficult to grow much. I believe that the low valuation and the high visibility are a good trade off for the modest growth.

 

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