With all the healthcare-related hubbub today, if you crave even more information, check out the Weekend Research Center, with its coverage of healthcare companies reporting earnings this week. You'll find the Center in our brand new "Fool's Gold" newsmagazine, which also offers a Foolish Feature on the intriguing carbon fiber company Zoltek, a sector snapshot of the printer industry, Stocks for Mom in honor of Mother's Day, and the Fribble of the week -- an annual report from Hell. And coming soon is. . . the e-mail version of MF Bogey's Industry Decathlon! Stay tuned for more details early next week!
MF Merlin's Economic News today covers the Bureau of Labor Statistics' April report on the Producer Price Index. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on the Evening News screen. In tonight's Fool on the Hill, MF Templar focuses on the acquisition of CyCare by HBO & Co. Enjoy!
Medical products manufacturer UroMed <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: URMD)") else Response.Write("(NASDAQ: URMD)") end if %> popped up $2 7/8 to $13 1/2 after it announced that it had acquired all assets relating to the already-approved Miniguard Patch, a female urinary incontinence product, for $30 million from a liquidating trust. It is estimated that 26 million women in the U.S., Japan and parts of Europe suffer from urinary incontinence and that the patch will be marketed to over six million of them, contributing to corporate growth by the end of next year. UroMed also makes and markets the Reliance Urinary Control Insert.
Noven Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NOVN)") else Response.Write("(NASDAQ: NOVN)") end if %> reported losing $0.03 per share, more than the Street expected, but it was up $7/8 to $14 1/8 anyway. Why? Well, yesterday's announcement that that Novo Nordisk <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NVO)") else Response.Write("(NYSE: NVO)") end if %> and Rhone-Poulenc Rorer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RPR)") else Response.Write("(NYSE: RPR)") end if %> were joining forces to market a wide range of hormone replacement therapies probably didn't hurt. And Smith Barney's initiating coverage of the company with a "buy" rating" might have helped, as well.
Efficient market indeed. When it was announced on the 8th that Scios <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCIO)") else Response.Write("(NASDAQ: SCIO)") end if %> had received a patent for its method of producing "human basic fibroblast growth factor ("bFGF"), the stock moved only slightly. Two days later, however, the stock shot up $2 3/16 to $7 7/16 based on the fact that its bFGF could be used to treat stroke, peripheral vascular and coronary artery disease. The efficient market theory has as its core assumption that all information about companies is distributed quickly and efficiently in modern markets. Maybe if they amend that to read "after two days", they will be correct.
QUICK TAKES: THE WET SEAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WTSLA)") else Response.Write("(NASDAQ: WTSLA)") end if %> stunned the Street today, earning $0.06 per share for its first quarter, when it was only expected to break even. Shares in the retailer of clothing for young women rose $3 1/4 to $17 1/8. . . Upscale women's clothing retailer CHICO'S FAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHCS)") else Response.Write("(NASDAQ: CHCS)") end if %> announced that its sales in April rose 8.7%, lifting shares $1 1/2 to $11 1/8. . . SMART MODULAR TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMOD)") else Response.Write("(NASDAQ: SMOD)") end if %> rose $2 3/4 to $22 3/8 after introducing four new 168-pin memory modules earlier in the week. Last week the company was downgraded to "market perform" from "buy". . . INSIGNIA SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INSGY)") else Response.Write("(NASDAQ: INSGY)") end if %> was up $1 to $9 5/8 a few days after introducing new Ntrigue products which enable users to run Windows applications on other platforms, like Unix and Macintosh. . . Another insignia-related company, INSIGNIA FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IFS)") else Response.Write("(NYSE: IFS)") end if %> also fared well today, rising $3 3/4 to $26 after reporting earnings up 54% from the year-ago quarter yesterday.
Creative Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MALL)") else Response.Write("(NASDAQ: MALL)") end if %>, which benefited from stronger-than-expected PC sales for the first quarter a few weeks back, slumped $2 to $6 1/2 today after it posted a shocking 25 cent loss for its first quarter when a gain of $0.14 was expected. The company reported that its chief financial officer (CFO) was leaving and that despite sales being up 24%, the company had unusually high theft and fraudulent credit card charges. It also blamed part of its troubles on poor sales of Apple products. Dillon Read reacted by cutting its rating for the company to "neutral".
CD-Rom storage device developer Pinnacle Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PNCL)") else Response.Write("(NASDAQ: PNCL)") end if %> got fried this morning, losing $2 1/2 to $7 1/2 after posting a huge first quarter loss and reporting that the losses would continue for the next two quarters. Are we exaggerating a little? Well, they were expected to lose $0.04 and they lost $0.50. Management blamed losses on eroding gross margins, competitive pressures, new product launch costs, and restructuring costs. Hmm. . . what other business could they go into with a ticker like PNCL? Pinochle? Pencils?
QUICK CUTS: In spite of beating estimates of $0.19 EPS by six cents, ROSS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RTEC)") else Response.Write("(NASDAQ: RTEC)") end if %> fell $2 to $12 1/2 when Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %> declined to buy the additional shares stipulated under a previous agreement. . . INTERSOLV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ISLI)") else Response.Write("(NASDAQ: ISLI)") end if %> slumped $1 1/8 to $10 3/8 after pre-announcing yet another quarter of disappointing results, saying it will only earn between $0.14 to $0.16 per share (EPS) instead of the mid-$0.20s that analysts were looking for. . . Merrill Lynch cut its near-term rating on EMPLOYEE SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ESOL)") else Response.Write("(NASDAQ: ESOL)") end if %> from "buy" to "accumulate", knocking the employee benefits provider down $2 1/4 to $38 3/8. . . MACNEAL SCHWENDLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: MNS)") else Response.Write("(AMEX: MNS)") end if %> got bashed, down $1 7/8 to $12 7/8, after warning that earnings are likely to be lower-than-expectations, in the $0.11-$0.12 range.
FOOL ON THE HILL:
Medical Information
HBO & Co.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HBOC)") else Response.Write("(NASDAQ: HBOC)") end if %> purchase of CyCare Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYS)") else Response.Write("(NYSE: CYS)") end if %> today for the stock equivalent of about $52 per share highlights the need for individual investors to reconsider how potential acquirers are valuing companies in the medical information industry. How can a company that has only grown earnings at a 29% annualized rate over the past five years have grown its stock price by 47.4% over the same period? Why is HBO & Co. willing to pay about 40 times next year's earnings for a company that is set to grow at a little more than half that rate? Well, something interesting must be going on, because HBO & Co. rose $7 to $120 and CyCare was up $1 5/8 to $47 5/8.
Market curmudgeons shake their heads to this sort of activity and begin long-winded dissertations on "market tops" and "froth". These musings, however fear-inspiring, neatly sidestep the fact that companies are ultimately valued based on what an acquirer will pay. The MFS Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MFST)") else Response.Write("(NASDAQ: MFST)") end if %> acquisition of UUNet Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UUNT)") else Response.Write("(NASDAQ: UUNT)") end if %> again shows that value in any market is ultimately industry-specific. Both companies were taken out at multiples that were wildly above earnings which could be reasonably expected in the next two years yet both companies are considered by some to still have been bargains to the acquirers.
Although the price/earnings ratio remains one of the most valuable tools in an investor's toolkit, there are many applications for which it is not entirely adequate in and of itself. Simply because you cannot pound a screw in a wall with a hammer does not make the hammer any less useful. Valuation is best conceived as building a structure using a wide variety of tools, each one reinforcing and adding to the input of another. These valuations should reflect earnings, cash flows, revenues and equity, but they also should try to incorporate industry-specific features to give the fullest picture of what a company might be worth to a peer in the industry that wants to consolidate or a larger corporation that is looking to get in a new and additive line of business.
"Health informatics", or medical information services companies come in three broad flavors -- those that provide financial services like billing to healthcare concerns, those that offer peer review for insurance claims or worker's comp, and those that offer electronic data interchange (EDI) services revolving around patient data such as lab reports and x-ray results. CyCare Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYS)") else Response.Write("(NYSE: CYS)") end if %> is one of the premier EDI companies. In contrast, HBO & Co. is a medical information systems company and provides actual physical information systems to hospitals, including software and networking/connectivity solutions.
With its acquisition of CyCare, HBO & Co. moves from broad, enterprise-wide applications down to specific information exchange. HBO & Co. also gets to diversify itself from the slower-growth hospital market, as CyCare Systems is entirely focused on physician practices with its client/server based systems. A parallel that might be more transparent to readers is the relationship between Intuit Financial Services(IFS) and any of the banks that use IFS to enable online banking. Intuit provides the software system and enables the transactions, while the individual bank keeps track of the specific account and the balance and services the actual customer.
When HBO & Co. went to buy CyCare Systems, they were not worried as much about what the company was bringing to the earnings line in their financial statements as with what kind of client base they had, how big this client base was and whether or not the revenues they were generating were recurring or one-time. With 70% of their revenues recurring annually and 5,000 customers, the real value for HBO & Co. was an immediate jump to massive market share in an entirely new niche. Medical information systems, as Keith Berman (MF MedInfo) aptly emphasizes in his series of articles on the industry in the Fool's Healthcare area, are valued based upon their installed base. This installed base of 5,000 customers generating substantial recurring revenues is fundamentally different than a consumer products or electronics company competing solely on price for market share.
Berman is quite clear on this subject: "The installed base can be equated to an acquisition value, and given the number of publicly-traded medical information systems, companies that have been acquired or merged in the past 3 years, many analysts now devote entire research reports to potential acquisition value rather than profit-generating potential." So when you go out tonight to look at other medical information companies like CIS Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CISI)") else Response.Write("(NASDAQ: CISI)") end if %>, Cerner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CERN)") else Response.Write("(NASDAQ: CERN)") end if %>, Health Management Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMA)") else Response.Write("(NYSE: HMA)") end if %>, Quality Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QSII)") else Response.Write("(NASDAQ: QSII)") end if %> and HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HBOC)") else Response.Write("(NASDAQ: HBOC)") end if %>, you should probably bear this in mind. These guys are an isolated bunch. Among traditional technology companies, only Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> has any sort of health informatics business at all. As this still remains a high-growth, insular industry with most companies still run by their founders, the people making the frequent acquisition decisions are really the ones who are driving the values. To me this means that people need to at least pay attention to this and not simply write off unique industry valuation metrics as fevered products of a market spinning out of control.
When you have a rash of acquisition activity in an industry based on a certain set of metrics, those who stubbornly insist on only using tried and true methods end up measuring liquids in distance units. If some came up to you and said they thought that you only needed to use a foot of milk when making a cake, would you agree if they insisted that feet were a perfectly valid measure that worked all of the time for them? A large part of investing successfully in a myriad of industries is remaining mentally flexible to understand the industry as it presents itself and not to instill some sort of artificial set of valuations foreign to the industry. If earnings were the end all, be all, then Time Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWI)") else Response.Write("(NYSE: TWI)") end if %> would be absolutely worthless.
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