Interactive health information provider A.D.A.M. (NASDAQ:ADAM) dropped a pair of bombshells on the markets on Monday. First, it announced earnings results that included 9% sales growth and 43% growth in profits per diluted share versus last year. Then the company announced that it has up and acquired a firm that's roughly twice its size, privately held OnlineBenefits, which provides "benefit management solutions" to small- to mid-sized employers.
Because you can get the details on the earnings release pretty much anywhere (here, for example), today I'll focus instead on the acquisition, whether it looks attractively priced, and what it might portend for A.D.A.M.'s shareholders.
Pre-acquisition, A.D.A.M. as a stand-alone entity took in $10.2 million in sales over the last 12 months. According to the press release describing the OnlineBenefits purchase, the company expects its revenues to rise to $12 million next year (and for OnlineBenefits to contribute another $18 million to $20 million in sales.)
Valuing the two firms based on this forward sales guidance, therefore, we can see that as of Aug. 11, A.D.A.M. possessed a market capitalization 3.8 times as large as its projected fiscal 2007 sales. In comparison, A.D.A.M. is paying $32.5 million in cash and assumed debt for OnlineBenefits. Taking the midpoint of next year's guidance for OnlineBenefits' sales, that values the target firm at just 1.7 times forward sales -- less than half A.D.A.M.'s own valuation.
What about profits?
The press release uses a malleable term in describing both firms' profitability: "adjusted EBITDA," which A.D.A.M. defines as your run-of-the-mill "earnings before interest, taxes, depreciation, and amortization," plus adding back in any expensing of stock options. Not the kind of "let us tell you what we think our profits were" metric that I'd never rely on in determining a firm's absolute valuation, but that works just fine for determining the relative prices of the two firms.
Looking again at the projections for fiscal 2007, we see A.D.A.M. proper predicting about $2.5 million in adjusted EBITDA from its side of the combined firm, and another $6 million coming from OnlineBenefits. (Right away, you can see why the stock price is up, by the way. OnlineBenefits is clearly the more profitable firm, and now A.D.A.M. owns it.) That means A.D.A.M. was valued at roughly 18 times adjusted EBITDA pre-acquisition, while it's getting OnlineBenefits for a multiple of just 5.4.
Long story short, the market has called this one exactly right: Since the deal was announced, A.D.A.M.'s stock is up 17%. Looking at these numbers, I'd say it's worth even more than that.
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Fool contributor Rich Smith does not own shares of any company named above.
