Why HMS Holdings Corp. Shares Soared

The healthcare service provider is riding high after reporting earnings, but the nuts and bolts look a little bit loose for investors.

Alex Planes
Alex Planes
Nov 8, 2013 at 4:11PM
Health Care

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of HMS Holdings Corp. (NASDAQ:HMSY) gained more than 22% today following the release of the company's earnings report, which was actually a little bit disappointing.

So what: HMS Holdings reported third-quarter revenue of $127.8 million, a 13% year-over-year improvement and slightly ahead of Wall Street's consensus estimate of $126.6 million. However, the company's earnings of $0.20 per share came 9% below the $0.22 consensus. Additionally, the company's forward guidance for the full year has been adjusted significantly lower on the bottom line and modestly lower on the top; HMS now expects a revenue range of $495 million to $510 million (reduced from $495 million to $525 million) and expects earnings to fall in a range of $0.72 to $0.85 per share, well below the earlier $0.89 to $0.95 range.

HMS CEO Bill Lucia also refused to provide guidance on the upcoming 2014 fiscal year, citing "the impending Medicare RAC procurement and the ongoing audit scope and rule changes by CMS [the Centers for Medicare and Medicaid Services], [which will] create a wide range of negative outcomes with probabilities that are so varied that we cannot provide meaningful guidance for 2014 until CMS has clarified its intentions related to the Medicare RAC procurement and program."

Now what: Lucia's statements closed the earnings release by saying that the Affordable Care Act should position his company "for a return to robust growth and enhanced profitability across the core of our business." CFO Walter D. Hosp also mentioned in the earnings call that Medicaid expenditure growth should be in the 10% to 12% range, but warned that the company's forecast falls below that due to the lag between enrollment and expenditure. It's worth noting that HMS' free cash flow for the past three quarters is twice that of its GAAP net income, and that this number has grown year-over-year even as net income has remained stagnant. However, today's monster pop doesn't make sense in light of what was actually reported. I'd tread cautiously around this volatile stock, which remains in the red for the past year despite this pop.

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