Slow Growth but SS&C’s Products Are Sticky; Shares Undervalued

Narrow-moat SS&C finished 2022 with an okay fourth quarter. Organic constant currency revenue growth was flat, consistent with management’s guidance and consensus expectations amid a deteriorating macroenvironment and weakness in the healthcare business. Importantly, revenue retention finished the year at 96.3%, up from 95.6%. We view SS&C’s high retention as evidence that its solutions have meaningful switching costs. As we update our model, we are increasing our fair value estimate to $77 from $75 primarily due to time value of money. Based on SS&C’s closing price of about $62, shares are trading at 13 times our 2023 adjusted EPS estimate or 15 times our adjusted EPS estimate, which removes exclusions such as stock-based compensation and organic amortization that we do not agree with. SS&C’s business has many positive attributes, such as moderate cyclical exposure and high retention. We note that this is considerably less than the S&P 500 index forward multiple of 18.7 times and regard shares as undervalued.