Exela automates complicated business payments in a couple of key industries, they break it down into three segments: Information and Transaction Processing Solutions (ITPS), Healthcare Solutions (HS), and (Legal and Loss Prevention Solutions) LLPS. HS is the one mediocre spot on their balance sheet. I would love to call it a bright spot, but the growth doesn’t justify sunshine.
Origins
Excela exists as a combination of a few prior companies, the combination of which has left a lot to be desired. Today, they process paper bills, charge per bill, and offer some ancillary services. The services are priced with different methods, with ITPS and HS based on transaction volume with a markup and LLPS based on time spent. So, from the balance sheet you can tell HS transaction volume is slightly increasing, and ITPS is down overall. Revenues have shrunk by about a third over the last five years, and while the company has cut costs, they’ve been unable to stem the bleeding and have mounting problems and a cash crunch.
Were I major client of theirs, I would taking more of their services in house, and their financial weakness probably exacerbates the desire, leading to a death spiral. I am not sure what might be left of this business at the end. Today it may qualify as a cigar butt, and if management looked competent it may bear further evaluation.
As it stands, management continually issues equity to pay down debt, and their stock price is probably at the limit of what is possible to raise there. They did manage to turn a small profit from operations in ’23, but it’ll be a drop in the bucket compared to their liabilities and insignificant assets to offset. Seriously, Assets are currently about a third of liabilities. It is a small miracle creditors have not come calling.
The amount of NT-10K’s they’ve filed also stand outs – their finance department just can’t seem to ever close the books or file paperwork timely.
Additionally, there has been significant impairment charges to goodwill, meaning really management is just being forced to admit their own mistakes. Most of that goodwill was generated when this company was created out of a few others and went public. It appears most of the benefit of that combination did not accrue to public shareholders and went instead to those who oversaw the combination of companies, creating a highly levered and inappropriately valued monstrosity.
So what lesson do we learn here? Beware of levered acquisitions. There are too many incentives to inflate your own value to look great for a short period of time. The other piece of this that is interesting is how long they’ve managed to stretch out their own existence – about five years since going public, and the stock had a few small rallies in that time.
This is obviously easy to see in hindsight. Here’s some other companies that meet the criteria in my screener (negative revenue CAGR, losing money from operations, and below a 10B Market Cap) today:
AREC, TSQ, BOWL, CFLT, RIVN
It’ll be interesting to see how wrong I am in 10 years.