Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does WebMD (WBMD +0.00%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell WebMD's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at WebMD's key statistics:
WBMD Total Return Price data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
1.7% |
Fail |
|
Improving profit margin |
(104.4%) |
Fail |
|
Free cash flow growth > Net income growth |
(41.8%) vs. (104.5%) |
Pass |
|
Improving EPS |
(105.3%) |
Fail |
|
Stock growth (+ 15%) < EPS growth |
(31.2%) vs. (105.3%) |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
WBMD Return on Equity data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(105.7%) |
Fail |
|
Declining debt to equity |
883.6% |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
How we got here and where we're going
Things don't look good for WebMD today. The health information services provider earns only one out of seven passing grades, and even that single pass was granted more on a technicality than because of a genuine improvement. Can WebMD push past all of the problems of its recent past and give investors a bit of good news, for once? Let's dig a little deeper to find out.
WebMD has recently entered into a partnership with chip giant Qualcomm (NASDAQ: QCOM) for the expansion of its product portfolio. The new offerings focus on integrating digital health apps with third-party devices. This new avenue of tech-enhanced health care ought to support WebMD's growth in the near future, but the sustainability of that growth is far from a sure thing. Fool contributor Keith Speights notes that a number of other companies have also started building up their telemedicine capabilities using Qualcomm's technology platform.
Athenahealth (ATHN +0.00%) has recently emerged as another potential threat. Early this year, the physician-services company acquired Epocrates for $293 million, which will enable it to establish a strong presence in the health-based mobile applications area. Keith notes that Epocrates' massive customer base (which includes 50% of all physicians in the United States) and strong brand recognition will provide immediate competition when paired with Athenahealth's greater resources. However, neither Athenahealth nor WebMD has a clear financial advantage at the moment -- the two companies are effectively neck and neck in terms of net income, which is more a result of WebMD's continual bottom-line erosion than Athenahealth's strengths.
WebMD has recently announced a $5 million cash-return program for shareholders, which is expected to wrap up by the end of the third quarter. Last year, the company also decided to cut 250 jobs, thereby reducing its overall workforce by 14% to save approximately $45 million in operating expenses. However, the ongoing patent cliff might crimp sales growth, as much of WebMD's revenue comes from the advertisements of major pharmaceutical companies.
Putting the pieces together
Today, WebMD has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
