The greatest investor of all time, Warren Buffett, has a famous quote about investing in companies: "I would rather buy a good company at a fair price than a fair company at a good price." Let's look at the WebMD (WBMD) business to see which one it is and whether investors might consider it for inclusion in their portfolio.
Current State of the Business
WebMD is a health information provider to consumers, physicians, health care professionals, employers, and health plans. The company generates revenue from its public portals through the sale of advertising, sponsorships, and continuing medical education services. Its customers include pharmaceutical, biotechnology, medical device, health care, services, and consumer product enterprises which sell products and related services concentrated in the health and wellness arena.
Balance Sheet (As of 12/31/2011)
Total Debt- $800,000
WebMD has a net cash position of over 5$ per share.
Full Year 2011 Results and 2012 Guidance
On February 23, 2012, WebMD announced its 4th quarter and full year results for 2011 and provided guidance for how it expects the business to perform in 2012. For the full year, revenue increased 4.5% to $558.8 million from $534.5 million in 2010. Net income was $74.6 million, or $1.25 per diluted share, aided by an $11.7 million gain from an investment and $10.4 million coming by way of discontinued operations. Without those items, net income would have been $53.8 million or $.90 per share, versus $61.2 million or $1.00 per share in 2010.
For the 4th quarter of 2011, revenue was down 10.6% to $150.7 million as compared to $168.5 million in 2010. Public portal advertising and sponsorship decreased 11% to $131 million from $145 million in 2010. Private portal services revenue also decreased by 7.5% to $20 million.
If we look at adjusted EBITDA as a metric for comparison, in the 4th quarter of the year, the 2011 total dropped 20.9% to $54.6 million from $69.1 million in 2010.
WebMD expects total revenue in 2012 to range between $500-$535 million. Adjusted EBITDA is expected to fall between $100-125 million versus $181.2 million in 2010.
Net income for the full year is expected to range between a loss of $2 million to $15 million or .(.04) to $.26 cents per share.
For the 1st quarter of 2012, WebMD expects:
Revenues of $105 million, down 20% from the same quarter of 2011.
Adjusted EBITDA of $11-12 million versus $38 million in 2011.
Loss from continuing operations of 9-13% of revenues as compared to income from continuing operations in 2011 of 8.4% of revenues.
The WebMD guidance reflects an uncertain spending environment for the pharmaceutical and consumer services industries.
WebMd is investing in its mobile platform with an eye for the future. According to the most recent earnings release, traffic to the WebMD Health Network continued to grow, reaching an average of 111.8 million unique users per month and total traffic of 2.32 billion page views during the fourth quarter, increases of 29% each, from a year ago.
On March 6, 2012, WebMD announced it will start a Dutch auction to repurchase up to $150 million of its own common stock. The price range for the repurchase will range from $24.50-$26.00 per share. WebMD delivered the results of the auction on April 4, 2012.
Carl Icahn Is Buying
Famed activist investor Carl Icahn has been accumulating WebMD shares with a position of over 13% of the shares outstanding. The position has been increased from 11.64% with another purchase of over $200 million.
Here are a few statistics to look at for the current valuation of WebMD:
|Market Cap (intraday):||1.27B|
|Enterprise Value (Apr 19, 2012)||946.52M|
|Enterprise Value/EBITDA (TTM)||7.28|
It makes no sense to value WebMD based on trailing or forward earnings multiples as those ratios are inflated by a low earnings figure for 2012.
With 55.72 million shares outstanding (25% of which are owned by company insiders), the market capitalization of WebMD is 55.72*22.73=$1.265 billion. If we take management at its word and adjusted EBITDA is at the lower end of guidance for 2012, or $100 million, the current market cap/EBITDA ratio is 1265/100=12.65.
However, if we back out the cash and use enterprise value for valuation, the figures become 1,265-300=965/100 or 9.65.
If we look at average operating margin over the last three years, we get:
Operating Cash Flow
Operating Margin %
The average operating margin at WebMD over the last three years is 9.77+21.09+20.5/3=17.12%
Clearly, 2012 is expected to be a down year for the company, but with the typical operating margin of the business running at close to 20% and the traffic totals to its network increasing, there is value in the shares because a buyer typically owns a growing asset with solid operating margins. The fact that 2012 is an off year could be an opportunity for those with a longer time horizon than the current year.
The Bottom Line: Decision Time
When you put it all together, you have a company in a very strong industry (to name a few- Pfizer (PFE), Johnson & Johnson (JNJ), UnitedHealth Group (UNH), and Quest Diagnostics (DGX)), which is buying back its own shares.) The business is typically a sound one with good operating margins and a balance sheet with a great deal of cash. There is an activist investor with a great track record who is buying the shares at current levels. If you need a healthcare-related company, are willing to be patient and hang in there for a turbulent year, WebMD could be a good prescription for your portfolio.