What happened
In response to reporting its fourth-quarter earnings and issuing guidance for the year ahead, shares of Diplomat Pharmacy (DPLO), a specialty pharmacy chain, rose by 12% as of 3:15 p.m. EST on Wednesday.
So what
Given the stock's pop, you'd naturally assume that the company beat expectations. However, that wasn't the case at all. Here's a look at the key highlights from the fourth quarter:
- Revenue grew by 16% to $1.14 billion. However, when stripping away the effects of acquisitions, revenue only grew by 4%. That was a bit light of the $1.18 billion that market watchers were expecting.
- Gross margins contracted by 50 basis points year over year, coming in at 7.3%.
- Expense growth outpaced revenue growth yet again, which caused the company to show a net loss of $1.1 million. However, adjusted earnings per share came in at $0.08. That was down sharply from the $0.21 recorded in the year-ago period and came up short of the $0.17 that analysts were looking for.
Management blamed the weak sales results on a decline in revenue from Hepatitis C drugs and a change in the mix of oncology drugs.
Image source: Getty Images.
As for guidance, here's what management expects to happen in 2017:
- Revenue is expected to land between $4.3 and $4.7 billion. By contrast, Wall Street was expecting more than $5.1 billion.
- Adjusted EPS is projected to come in between $0.54 and $0.70. Once again, this is quite a bit shy of the $0.76 that Wall Street was looking for.
And yet, despite posting disappointing results and issuing tepid guidance, shares still popped today.
Now what
While it is hard to pinpoint why shares are jumping today, a potential reason could simply be short-sellers looking to book a profit. After all, this stock has fallen by nearly 60% from its 52-week high. Given that this weak earnings report didn't cause shares to crater, it could be a smart time for shorts to head for the exits.
As for the business itself, it makes sense that Diplomat is forecasting a tough year ahead. After all, Hep C giant Gilead Sciences is also forecasting that its top line will tumble this year. Given that Diplomat is quite sensitive to Hep C sales, it is natural that it is going to feel the decline as well.
While the near-term outlook for Diplomat looks challenging, the longer term outlook for this company looks a bit better. Plenty of biotech companies are working on bringing new specialty drugs to market, which should provide a long-term tailwind for Diplomat. This company also has a history of making smart acquisitions that increase its footprint and raise its bargaining power. Those factors could help to return the company to growth mode in time, so bulls might not want to give up on this growth story just yet.
