WebMD's Triple Whammy Makes It A Short Candidate

Jan.10.12 | About: WebMD Health (WBMD)

Shares of healthcare information provider WebMD (NASDAQ:WBMD) fell 30% at the open on Tuesday after the company reported a slew of bad news. The company hit a new 52-week low on the news, and is going to be one of the worst performers on Tuesday. Here's the three bad pieces of news that killed the stock.

CEO resigns:

The company first announced that CEO Wayne Gattinella has resigned his position as CEO and President, effective immediately. The company did not provide a reason. On an interim basis, CFO and Anthony Vuolo will take over as CEO. Mr. Vuolo will give up his role as COO for now, and the position will be overseen by a special management committee. The company also announced that it will start an immediate search for a new CEO. Obviously, a CEO departing with no warning is troubling, as it throws the management picture into chaos for the short term. Investors like certainty, and this move will remove some of that for the next couple of months.

No Potential Sale:

In late 2011, the company had started a process to review strategic alternatives, in an effort to enhance shareholder value. As part of that process, the company looked for a potential buyer for the company. Even recently, we heard rumors that Yahoo! (NASDAQ:YHOO) was a potential suitor. According to rumors, the business lines were potentially similar, and that it was possible that either Yahoo! or Alibaba (OTC:ALBCF) was a potential buyer of WebMD.

This part of today's news might force some investor activism from some of the largest shareholders. As of the latest report, Carl Icahn held nearly a 10% stake in WebMD, meaning he lost a lot of money on Tuesday. It's possible that takeover rumors might start up again in the near future, but given today's news, I think the price would be a bit lower than many had been hoping for.

Guidance Warning:

If that wasn't bad enough, the company also announced that 2012 sales would be below expectations. The company announced that 2012 revenues would be down 2% to 8% from 2011 levels, well below the 1.2% growth analysts were currently expected. Now, we don't know the exact number for 2011 yet, so if they miss on 2011 current expectations, the drop in 2012 will be even worse.

Here are the quotes the company provided:

"WebMD's fourth quarter sales activity for advertising and sponsorship products was less than anticipated and reflects a challenging business environment for certain pharmaceutical company customers and a more competitive landscape in the consumer products markets."

WebMD anticipates it will experience lower revenues in 2012 as certain of its pharmaceutical company customers manage the effects of their products losing patent exclusivity.

Additionally, WebMD expects to face a more competitive landscape in its consumer products market in 2012, primarily resulting from a variety of ad networks and social sites.

The company also stated that it expects 2012 expenses to be approximately 5% to 8% higher than they were in 2011. It expects its Adjusted EBITDA and net income to be significantly lower in 2012 than 2011's numbers. The company will provide more guidance when it reports earnings on Feb. 23.

Today's news was terrible for the company and it makes this company a short candidate for the near future. We've seen in the past year that these large drops tend to get worse, and even if the stock bounces off the $25 level it hit just after opening, there's a chance it could drop below that level in the next few days. I'd be short the name for the next month or so probably, but expect some of the activists like Icahn to eventually get involved. I don't think they can or will remain silent on this one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.