WebMD's Misleading Results

The quarterly numbers would suggest that WebMD (Nasdaq: HLTH  ) is sending out healthy signals. But is it? Should we call a doctor?

For the fourth quarter of 2004, the company reported a 19% increase in revenue and an 87% jump in net income over 2003's fourth quarter. Going forward, the company upped its 2005 guidance for first-quarter revenue by $7 million and said earnings per share will be one penny higher -- $0.02-$0.03.

Although the numbers do look good, a careful examination provides a somewhat different diagnosis. Total sales for the fourth quarter increased $49.2 million, but $33.9 million of that increase (69%) came from customers acquired in recent acquisitions. As in previous quarters, acquisitions -- not organic growth -- provided the double-digit percentage growth at the top line.

The company likes to trumpet its $620 million in cash, short-term investments, and long-term marketable debt securities, but it doesn't give equal billing to its $650 million in convertible subordinated notes. Either the company is not as cash-rich as it looks (if it ends up repaying the convertibles), or there's going to be a lot of shareholder dilution (if the notes are converted to shares).

Using the company's 2005 net income guidance of $0.15 to $0.18 a share, the company's stock is selling for a heart-pumping 42 times forward earnings -- and that's based on the high end of guidance.

Investors have plenty of health-industry companies to consider. Bigger names include McKesson (NYSE: MCK  ) , Cerner (Nasdaq: CERN  ) , NDCHealth (NYSE: NDC  ) , Quality Systems (Nasdaq: QSII  ) , and Per-Se Technologies (Nasdaq: PSTI  ) . WebMD is getting healthier (hey, the company is making money), but given the stock's high valuation -- at least based on forward EPS -- this observer doesn't see any reason for it to post market-beating returns in the coming year.

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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Clickhereto see the Motley Fool's disclosure policy.


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