iKang (NASDAQ:KANG) reported fiscal Q1 2015 earnings and revenue yesterday after close, and both figures missed analyst estimates. The company reaffirmed its full-year revenue guidance of $283 million to $290 million, representing a 40% to 43.4% increase over the previous year. iKang was down as much as 16% after hours on the earnings and revenue miss. Margins were also pressured in Q1, but this was mostly due to lower margins of newly opened centers. As the new services ramp-up over time, margins will come back up to previous levels and rise further.
I also believe that a part of the reason for such a bad reaction after the report is the full-year guidance, which was far below the analyst consensus. The consensus at the time of the earnings release was $323 million. Thomson Reuters issued a correction today and stated that the consensus was wrong, and that the real consensus for fiscal 2015 revenue is $289.1 million. However, the earnings report was not as good as I hoped, and I am revising my growth estimates for fiscal 2015 and 2016 (see table below). And since my base case scenario was based on a forward 2016 P/E ratio of 25, I am lowering my base case price target to $22.50. The high end of the projected 2016 P/E translates into a $27.00 price target. This represents 15% and 35% upside from the current price in the pre-market. Long-term potential in the bullish case is still north of 100%, but we would need to see higher earnings growth in the next two quarters.
Source: Yahoo! Finance, Author's estimates
It is also important to note that iKang's revenues and profits are affected by seasonal patterns. The company has most of its growth in fiscal Q2 and Q3, while the growth is lower in fiscal Q1 and Q4 quarters, which are now behind us. We should expect at least a 30% sequential increase in revenues in fiscal Q2 and Q3, as the company benefits from stronger demand in the next two quarters. We should also expect more rapid earnings expansion in the next couple of quarters on improving margins in the newly opened centers. I believe that the bullish thesis is still pretty much intact, but the lower expected growth might have a short-term impact on the share price.
Disclosure: The author is long KANG.
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