Can Health Grades Inc. Compete With WebMD For a Share of the Health Information Industry?

The Stock Masters submit: Let me know if this sounds like you: Last week after boozing it up at the local pub, you somehow find yourself in the red light district looking for 'adult' entertainment. The next morning, your wallet is short $200 and you have an uncomfortable rash where the sun doesn't shine.

Another scenario: you just saw Jackass 2 and try a Knoxville-like stunt, jumping from your roof with a garbage bag for a parachute, and end up with a broken femur.

If any of these scenarios sound like your family, Health Grades Inc. (HGRD) is something you should be using. According to the Health Grades website, more than 2.5 million consumers visit Health Grades each month to research and choose healthcare providers. Visitors to Health Grades are generally patients with specific conditions or surgical needs. Health Grades, Inc. is a healthcare ratings, information, and advisory services company. They provide clients with targeted solutions that enable them to measure, assess, enhance, and market healthcare quality.

What does all of that mean - besides the fact that I can copy/paste their Company Profile?

Health Grades has ninja-like stealth qualities. First of all, they are flying low under the radar with an average daily volume of 125,000. Second, this is a micro cap stock with a market cap of $130.36 Million. And finally, Health Grades inc. is a unique company that isn't up against a lot of competition. There has been some analyst confusion that their main competitor is WebMD (WBMD)but after closely looking at the two business models, WebMD is more of an educational tool for doctors than anything else. Health Grades is in the business of telling you what physicians and healthcare facilities you can feel safe with.

Fundamentally, their balance sheet is fairly clean, with $15.31 Million in cash, only $5.92K in debt, and free cash flow of 6.03 Million.

If there is one thing I don't like about this stock, it's the high P/E. We're looking at a 52.6 trailing P/E and forward 22.95 for 2007. However, quarterly revenue growth is pegged at 36.90% YOY, and there is speculation that Google (GOOG) is in the planning stages for a health care search service that would include HealthGrades, among others. This could be the catalyst that HRGD needs to beat earnings, have further growth, and get some well-deserved recognition.

HRGD is currently trading in the middle of its 52-week range.

HRGD 1-yr chart:

Article written by Phil McCallister.

Disclaimer: The author was long 800 shares of HGRD at the time this article was posted.