Why Shares of Benefitfocus Inc. Exploded Higher Today

What investors need to know about earnings and a strategic investment made in the company.

Motley Fool Staff
Timothy Green
Feb 25, 2015 at 1:17PM
Technology and Telecom

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 Benefitfocus (NASDAQ:BNFT), a provider of cloud-based software for managing employee benefits, exploded higher on Wednesday after the company beat analyst earnings estimates and announced that consulting firm Mercer had taken a 9.9% stake in the company. As of 12:15 in the afternoon, shares of Benefitfocus were up 61%.  

So what: Benefitfocus reported revenue of $40.2 million for the fourth quarter, up 33% year-over-year and slightly higher than what analysts were expecting. This revenue was split almost equally between sales to employers and to insurance carriers, with growth from employer sales growing at a faster rate of 47%.

Non-GAAP EPS came in at a loss of $0.39, about nine cents lower than the fourth quarter of 2013. Analysts were expecting far worse, however, with the average estimate sitting at a loss of $0.62 per share. On a GAAP basis, the company reported a loss of $0.54 per share, significantly lower than the loss of $0.34 per share reported during the fourth quarter of 2013.

Along with this earnings beat driving shares higher, Mercer, a wholly owned subsidiary of Marsh & McLennan Companies (NYSE:MMC), has taken a nearly 10% stake in Benefitfocus, with the option to increase this stake over time. Mercer operates Mercer Marketplace, a private benefits exchange which is powered by Benefitfocus technology.

Now what: Benefitfocus's earnings beat was largely the result of low expectations from analysts; profitability deteriorated year-over-year on both a GAAP and non-GAAP basis. However, the strategic investment from Mercer could signal that an acquisition may eventually be in the cards. Mercer parent Marsh & McLennan is a $30 billion company, with Benefitfocus' market capitalization just shy of $1 billion after the big rise in the stock today.

Long-term investors should never buy a stock solely on the hopes of a takeover, however, and with Benefitfocus posting consistent losses and trading for around seven times sales, the stock doesn't look very attractive.