WBMD is the in the portfolio of 04 gurus including George Soros, Joel Greenblatt, Ron Barron and Carl Icahn. Carl Icahn is the large shareholders of the company, holding up to more than 12% of the company. He began to buy into the company since the second half of 2011, when its stock price was around $35, and continuously added WBMD in his portfolio all the way through down to $26.
WBMD is the leading provider of health information services to consumers, physicians and other healthcare professionals, employers and health plans though public and private online portals, mobile platforms and health focused publications. With the public portals, the WebMD Health Network generates more than 80 million unique users per month and more than 7 billion page views in total, the WebMD owned sites would account for around 80% of unique users and more than 90% of the total page views. Those public portals generate revenue mainly from sales of advertising and sponsorship products, whereas the users can get accessed to the portals for free. For private portals, the WebMD Health Services business has helped employers and health plans improve the health of the employee and plan member populations and reduce healthcare costs. These portals are accessed through client’s Website or intranet; enable employees and health plan members to make more informed benefit, treatment and provider decisions. The private portal does not generate revenue from advertising or sponsorship, but from licensing product to employers and health plans, through distribution relationship. The main revenue sources was coming from public portal advertising and sponsorship, taking more than 83% of the total revenue and growing quite fast. The private portal are now only around 16% or so.
Over the years, WBMD is expanding its business gradually, growing its top line very consistently, from $75 million to $535 million within just 10 years. That happens the same with the cash flow generation position of the company, regarding to both operating cash flow to free cash flow. The operating cash flow grew from $3 million in 2003 up to $122 million in the end of fiscal year 2010, and the free cash flow went up steadily from $1 million in 2003 to $90 million in 2010. The operating income and net income got some wide fluctuations, especially in the year of 2008, when the company reported the unusual gain of more than $530 million on the sale of EBS Master LLC, creating the sudden shot-up in the net income, reaching more than $560 million net income regarding to total revenue of only $370 million in 2008. However, the cash flow from operating activities in that year has been adjusted not to reflect that unusual gain.
|Cash Flow from Operations||28.6||52.8||87.51||102.91||107.72||121.82|
|Free Cash Flow||10.48||24.35||69.46||78.66||89.84||89.57|
For the financial health, the D/A is nearly 60%, whereas long term debt has accounted for more than 49% of the total asset, with the amount of $800 million, from two convertibles note, one due in 2016 and the other due in 2018. In the asset side, WBMD held substantial amount of cash, of more than $1.1 billion, equivalent to nearly 68% of the total asset. The amount of goodwill stays around $200 million, of more than 12%. With the cash in hand of more than $1.1 billion and 05 more years until the first maturity date of convertible notes, along with the growing operating cash flow and free cash flow, staying at $121 million and $90 million respectively, I personally do not think the debt poses significant threat to the operation of the company. With the market capitalization of $1.55 billion, adjusting the cash position and the debt employed, the enterprise value stays at around $1.24 billion.
In terms of valuation, WBMD is trading at 21.8x P/E, 2.3x books and 11.6x cash flow. In the absolute term, it seems to be high valuation, but it was just nearly half of what it has traded over the average 05 years period, and the lowest valuation ever of the company’s history. With the ratio of price to Free cash flow, it was trading just a little bit higher than the bottom of 2008.
P/FCF over time
In short, I think WBMD should be considered by any value investors to include in the basket of diversified value investment portfolio, with all the signals of guru holdings, insider buying, very liquid balance sheet with growing performance over time.
Disclosure: No position at the time of writing.