Should You Buy It? WebMD Looks Too Rich
WebMD Health (WBMD) gained nearly 7% Wednesday, closing at $30.00, after the stock was upgraded from hold to buy at Citigroup.
More than 50 million users a month visit the company's sites, which include WebMD.com and Medscape.com and which offer health and clinical information to individuals and medical professionals alike. That's equal to 10 times the traffic of any of WebMD's closest competitors.
At current levels, the stock is up 36% from its April lows, though still down 28% year to date. (Looking at value stocks is my bailiwick here at TheStreet.com, where I run the Value Investor service. (
for a free trial.) With that in mind, I'm here to answer readers' questions: Should you buy it? Can WebMD shares continue to recover, or should investors not pay up for the stock?
Postpone Your Visit With WebMD |
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Guidance Down, Ratings Up
WebMD cut its full-year sales and earnings guidance last month, citing lower advertising demand. This is a major drag for the company, as advertising and sponsorship accounted for 70% of total revenue in the most recent quarter.
But according to the Citigroup upgrade, there's still a lot of potential for growth in this area as just 4% of advertising in the pharmaceutical industry is online, compared with 7% to 8% in overall domestic advertising.
In the meantime, WebMD is in the midst of merging with its parent company
Emdeon
(HLTH)
. As a result, arbitrage traders have created a large short interest in WebMD shares. According to the most recent data, traders have sold short 5.05 million shares of the 9.5 million Class A shares outstanding.
Ahead of the deal, WebMD has a pristine balance sheet with $301 million of cash and equivalents ($5.20 a share). But even with this liquidity, the stock does not appear inexpensive at 39 times expected 2009 earnings of 77 cents a share.
The stock has already enjoyed a sharp run, and I believe that readers should avoid WebMD shares at current levels. Despite the company's strong competitive position, the recent rally in the stock is largely because of short-covering, and slower advertising demand will likely continue to weigh on earnings.
WebMD is not included in TheStreet.com Value Investor model portfolio. David Peltier writes regularly about value stocks, such as General Motors (GM) - Get Report, Citigroup (C) - Get Report and Chevron (CVX) - Get Report for TheStreet.com
.
David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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