Chuck Akre (Trades, Portfolio)'s Akre Capital Management, one of the most successful concentrated long-term value investment funds, reported it has accumulated 7 million shares of CCC Intelligent Solutions Holdings Inc. (CCCS, Financial). This brings its total holding to 1.16% of the company's total shares outstanding. The purchase, which was recorded in the Akre Focus Fund's equity portfolio as of Jan. 31, is a vote of confidence in the company's underlying fundamental and growth prospects going forward.
Year to date, shares of CCC Intelligent Solutions have gained only 6.40%, lower than the S&P 500's gain of 9.60%. Let's dive deeper to see whether long-term investors should follow the firm into the stock.
A SaaS platform with a wide client network
CCC Intelligent Solutions is a leading insurance and repair software-as-a-service platform provider, servicing a network of property and casualty insurance participants, including automakers, part suppliers, repairers and lenders. Its offerings cover a wide range of SaaS solutions, addressing the entire claims lifecycle for insurance carriers and enabling collision repair facilities to enhance performance and operational efficiency. It currently has more than 300 insurers and 29,500 repair facilities on its network, processing more than $1 trillion of historical data. This vast amount of data enables the company to leverage artificial intelligence for advanced analytics and improve the efficiency of insurance and repair processes.
Source: CCC's 10-K filing
The company has three main segments: insurance solutions, repair solutions and ecosystem and other solutions. The insurance solutions business, which supports insurers by digitizing the whole process, generated around 49% of total 2023 revenue. The repair solutions unit helps automotive collision repairers improve facility performance. It represented 44% of the total revenue last year. The ecosystem and other solutions division only accounted for 8% of sales.
One of the key success factors for the company is its high level of recurring software sales, representing as much as 96% of the total revenue. This recurring revenue makes CCC's business more stable and predictable.
Out of total 35,000 customers, CCC Intelligent Solutions has more than 300 insurance customers in the U.S., including 27 of the top 30 automotive insurers based on direct written premiums. The average relationship with these customers has been around 10 years, demonstrating a high level of customer retention and loyalty to its solutions.
Growing revenue and fluctuating profitability
CCC has experienced steady growth in revenue each year, rising from $616 million in 2019 to $886.40 million in 2023. In addition, its already high gross margin has kept improving, from 63.37% to 73.43% over the same period. The consistency in gross margin improvement demonstrates its business has operating leverage. As a result, the company is able to scale profitably with increased subscription rates with the expanding customer base.
Despite rising revenue and improving gross margins, the company's operating income has fluctuated wildly in recent years. The operating losses came in at $166 million in 2019 and $145 million in 2021. The 2019 operating losses were caused by more than $200 million in impairment of goodwill and intangible assets, while the 2021 losses were the result of $262 million in stock-based compensation expenses.
Because goodwill and intangible asset impairment and stock-based compensation expenses are non-cash charges, those do not negatively affect operating cash flow. Thus, operating cash flow and free cash flow have kept rising in the past four years. Its operating cash flow increased from $66.30 million in 2019 to $250 million in 2023. The free cash flow rose from $45.70 million to $195 million over the same period. The free cash flow compounded annual gain reached 43.70%. In addition, its free cash flow margin also improved significantly, from 7.40% to 22.50%.
The improvement in free cash flow margin indicates the company is not just generating higher revenue, but is also managing its operating expenses, capital expenditures and working capital effectively. With higher free cash flow level, I would expect CCC to make more investment in growth initiatives, as well as be more active in mergers and acquisitions. In the near future, the company might even consider returning value to shareholders via dividend payments or share repurchases.
Potential growth opportunities
In its recent quarterly earnings release, CCC Intelligent Solutions highlighted significant metrics regarding its growth and potential. Since 2010, the company has successfully added 10,000 repair facilities, achieving a current total of 29,500 facilities and demonstrating the capability to consistently expand its network. With a total market comprising 40,000 facilities, there is still significant room for it to expand the business. Furthermore, CCC revealed that 50% of its facilities are leveraging at least four of its services, indicating a substantial opportunity for cross-selling its diversified solutions within its client network.
Reasonably leveraged balance sheet
CCC has effectively leveraged its financial position. As of Dec. 31, the company reported stockholders' equity of $1.78 billion, alongside cash and cash equivalents totaling $195.60 million. Its long-term and short-term debt amounted to approximately $775.50 million, resulting in a conservatively low debt-to-equity ratio of 0.44. This interest-bearing debt primarily consists of the Term B loan, scheduled for maturity in September 2028. Until June 2028, CCC is obligated to make quarterly principal payments of $2 million. Given the current cash reserves, positive and growing cash flow and the staggered maturity date, the company is comfortably positioned to manage and settle its current outstanding debt.
Potential upside
CCC has been highly valued in the market. In the past three years, its enterprise value-to-free cash flow ratio has fluctuated from 36.54 to 91. The three-year average of its free cash flow multiple stands at approximately 58. Thus, it is staying toward the low end of the range at 38.59.
Compared to its peers, which include Verisk Analytics (VRSK, Financial) and CyberArk (CYBR, Financial), CCC Intelligent Solutions has the lowest valuation. CyberArk is the most expensive with free cash flow multiples of 172 while Verisk Analytics is valued at nearly 44.60 times its free cash flow. At the current trading price, the company's free cash flow multiple appears to be relatively undervalued compared to its historical valuation and to its peers.
Because of its consistent cash flow generation, we can also use the discounted free cash flow model to value the stock. We expect CCC Intelligent Solutions' free cash flow to grow at an annual rate of 30% for the next 10 years, followed by a terminal growth rate of 3% in subsequent years. Applying an 8% discount rate, CCC's enterprise value would reach around $19.33 billion. After adjusting for current net debt of $580 million, the equity value is estimated at $18.75 billion.
As CCC has a history of rewarding its employees with stock-based compensation, we assume this trend will continue, potentially increasing outstanding shares by 20% to 741.50 million shares. As a result, CCC's intrinsic value would be $25 per share, 116% higher than the current share price.
Source: Author's calculation
Key takeaway
CCC has robust financial health, with steadily growing revenue, strong cash flow and an improving cash flow margin. In addition, the company has a solid balance sheet with reasonable leverage ratio. Based on the DCF analysis, the stock is quite undervalued with potential 116% upside from the current trading price. Along with Akre Capital Management's recent long position, CCC Intelligent Solutions seems to be a good opportunity for long-term growth investors currently.
