WebMD Isn’t Dead Yet
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
To say WebMD (NASDAQ: WBMD) took it on the chin yesterday is a monumental understatement. A 30% drop in share price in one day has many investors wondering what’s next for the beleaguered $1.5 billion online health information firm. And rightfully so.
What Happened
Before we tackle what’s on the horizon for WebMD, a quick look at what started all the commotion is in order. Mondays are rarely good, but Tuesdays are supposed to be a step up. Not for WBMD. The market greeted the company’s announcement of the end of buyout talks and the resignation of CEO Wayne Gatinella with an immediate sell-off. The stock had been buoyed by these same talks of selling to the likes of Yahoo (NASDAQ: YHOO) for a while now; rolling along around $38 a share.
The discussions, as so often happens, seemed to be the impetus for investors to abandon fundamentals, instead betting on a premium from a new suitor. Even for a growth-oriented internet firm, a P/E of 30 is steep, but that’s exactly where WebMD was sitting as of a couple of days ago. They essentially had everything riding on the sale, and the reality was a painful one for the company and for investors.
Adding to the chaos of a failed sale and disappearing act by the CEO was the announcement that 2012 net income numbers were not going to meet expectations. In fact they’re not even going to be close as pharmaceutical companies and health-related firms cut back on marketing costs. Add to that increased competition from networking sites and WebMD’s outlook for the year looks pretty bleak; particularly the first half of 2012.
A Look Ahead
It’s interesting to see today's reaction after yesterday’s sell-off; things seem pretty stable rather than picking up where investors left off. A sign of some resistance at a more reasonable price point of $26 a share? Well, let’s not go too far too fast, but it is mildly encouraging for bottom-fishers. Options activity also took an unexpected turn with more calls than puts in the past 24 hours, a bullish sentiment for a WebMD recovery. The majority of the calls were for January with a $30 strike price. Hmm. And there are a couple of additional components to this story contrarian folk may find intriguing.
If you haven’t as yet, take a look at WebMD’s financials -- they’re not something you see everyday. Cash-flow pundits will be less than impressed, and as the company has stated, the dearth of incoming revenue isn’t likely to change anytime soon. But the balance sheet is off the charts. This $1.5 billion company is sitting on $1.1 billion in cash and total liabilities are less than $1 billion; what? One could argue with that kind of cash position another suitor may not be too long in arriving.
But if Carl Icahn has his way, and he often does, WebMD may use that cash to try and dig themselves out of their own hole and soldier on. Icahn is using his 10% stake in the firm to strongly suggest a stock buyback of up to $1 billion. Now, that seems a bit extreme to essentially deplete all their cash, but it does offer investors something to ponder.
If the company can maintain something close to its current $26 support level, along with its more reasonably priced P/E of 20 and a ridiculously strong balance sheet, it’s possible WBMD is worth a look for those willing to take on a bit of risk. That’s a lot of cash; maybe even enough for another suitor to come calling.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.
