JTMcGee (99.36)

Is WebMD a Buy?

January 10, 2012 – Comments (0) | RELATED TICKERS: WBMD

I addressed WebMD in late November in a post titled "Why WebMD is like Groupon, but I'm Buying." There were three separate trends at play - slowing online prescription adspend, growth in local advertising, and an underlying wellness business.

I thought that given the potential for free cash flow, growth in the wellness industry (spurred by government incentives) and the amount of cash on hand ($1.2 billion in current assets) WebMD was hardly selling for a price that mirrored its potential.

 Out Early, Out Often

I closed my position on December 30, 2011, feeling that the odds for a buyout would wane significantly if it weren't announced before the new year.  I also found it difficult to pass up a 1-month, 15-point CAPS profit on pure speculation.

Today, the CEO stepped down, and earnings forecasts were thrown out the window.  The stock is also trading down nearly 30% to $25.90 per share.  

  What About Icahn?

Both Carl Icahn and George Soros reportedly built massive stakes in the firm leading up to buyout discussion.  Soros was itching for a buyout.  Icahn, however, proposed that the firm buy back $1.1 billion in stock - essentially replacing its cash holdings with a lower share count.

Soros' suggestion is off the table.  The company closed the discussions surrounding a potential sale.  Icahn's suggestion of a massive share buyback should find both support and disfavor given recent happenings:

1. Falling Share Price - WBMD is essentially a $1.5 billion business with $1.1 in cash.  The company could greatly reduce sharecount and give tax-free benefits back to investors.

2. Falling Earnings - The indication is that WBMD will see earnings lower than expected in 2012.  This does not bode well for share buybacks - especially those large enough to drain all of the company's cash.  Liquidity may be necessary for a period of weakness.

 Given the above, I'm content on staying out.  Sure - the company is very heavily discounted, but with the CEO gone, all talks of a buyout apparently off the table, and the company giving little good guidance about the future, one has to wonder what good an activist investor can do for a company like WebMD. 

 tl;dr - WBMD is a buy...if you can buy the whole thing.