WebMD's Misleading Results

• Email
• Share
• Print

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.

Are you looking for value-priced stocks? Why not take a free trial to the Motley Fool Inside Value newsletter?

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