What's in a name? If you're a Healthways (NASDAQ:HWAY) investor, you're probably hoping for this answer: very little. The company, which dropped the "American" from its name this quarter, is up 26% since being recommended in Motley Fool Stock Advisor one year ago. When the company reports fiscal Q2 2006 earnings after close of trading on Monday, investors will hope the name's the only thing that's changed about this successful business.

Wall Street Wisdom:

  • General consensus. Twelve analysts follow Healthways. Three of them rate the stock a buy, two a sell, and seven a hold.
  • Revenues. Quarterly revenues are expected to come in 28% stronger than last year, at $96.2 million.
  • Earnings. Not so with earnings, unfortunately. Analysts predict those will fall 17% to $0.20 per share.

Margin watch:
Healthways' stock price may be up since we picked it, but it's been sagging over the last few months. One reason: margin weakness. Over the past three quarters, Healthways' rolling margins -- gross, operating, and net -- have all been falling. In fact, at last report, each was below its level of 18 months ago.

Margins %

8/04

11/04

2/05

5/05

8/05

11/05

Gross

36.2

36.6

36.8

36.3

34.3

32.8

Op.

19.1

19.9

20.3

19.7

18.1

16.2

Net

10.6

11.2

11.6

11.5

10.6

9.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
When Healthways reported disappointing earnings last quarter, it was the first time since mid-2001 that the company missed Wall Street's profits estimates. But it was the second time in a row that Healthways had reported netting fewer profits in a fiscal 2005 quarter than it had earned in the previous year's equivalent quarter.

The problem, it seems, is that although Healthways' sales are growing, the cost of those sales is rising even faster. Over the past six months, sales were up 24% year over year. Meanwhile, both the cost of sales and the company's selling, general, and administrative costs rose 38%, first eating away at gross margins, then operating margins. As for Monday's news, the causes of the expected year-over-year decline in profits were explained in the company's last earnings release like so: Stock options for employees account for $0.06 of the per-share decline, investments in Medicare Health Support (MHS) pilot programs will subtract another $0.07, and investments in international programs will take away another $0.01.

The good news: With the possible exception of the employee incentives, these expenses are all investments in the company's future. They'll reduce profitability on Monday, but with luck, they'll increase it in the years to come.

Fool contributor Rich Smith has no interest, short or long, in Healthways.