Kensico Capital Management owned 5.7 million shares of WebMD Health Corp. (NASDAQ:WBMD) at the end of June (find more stocks Kensico owned). According to a recent 13D filed with the SEC, Thomas Coleman, an executive at Kensico (which is managed by Michael Lowenstein), has now joined the Board of Directors; his Board seat was a new addition and so no directors were removed. The health and wellness information website has a market capitalization of about $710 million (and daily dollar volume of about $7 million, judging by average daily share volume over the last three months). WebMD has been one of Kensico’s top holdings since the summer of 2011, when it nearly tripled its stake between the beginning of July and the end of September.
WebMD Health Corp. has been skidding recently, however. The stock is down 62% this year, and revenue was down 20% in the second quarter compared to the same quarter in 2011. With costs actually rising slightly in absolute terms, profits turned negative (11 cents per share of losses, when in Q2 2011 it had earned 36 cents per share). Cash flow from operations in the first half of the year was down by two-thirds, with the company dipping into its large cash hoard to buy back nearly $175 million in shares. At the end of the second quarter, it still had nearly a billion dollars in cash and cash equivalents on its balance sheet; this indicates that investors consider the operating assets to be worth less than the substantial debt that WebMD carries.
Billionaire activist investor Carl Icahn owned 6.7 million shares of WebMD Health Corp. at the end of the second quarter. Icahn got into the stock shortly after Kensico did and generally has been adding shares since, through the decline in the stock price (see Carl Icahn’s top stock picks). Billionaire Israel Englader’s Millennium Management has been a more recent buyer: it more than doubled its stake in the second quarter to 1.3 million shares (research more stocks that Millennium Management has been buying).
WebMD is something of a unique business, but its business model of providing specialized go-to online information and then monetizing the audience for that information allows us to compare it to other information websites. We’d choose news and other information portal AOL, Inc. (NYSE:AOL), local amenities reviewer community Yelp Inc (NYSE:YELP), travel reviewer community Tripadvisor Inc (NASDAQ:TRIP), and family history network Ancestry.com Inc (NASDAQ:ACOM) to be peers. AOL is a bit of a special case, having sold a portfolio of intellectual property to Microsoft earlier this year and now paying a one-time dividend to investors. Its stock has done well recently, but the owner of the Huffington Post property is struggling on the business side: its revenue was down 2% in the second quarter compared to the same period in 2011. Ancestry.com is a bit different in that it gets much of its revenue from subscribers rather than eyeballs. With revenue and earnings growth in its most recent quarter both in the 20% range, and trading at only 20 times trailing earnings, we think it could qualify for “growth at a reasonable price” status.
Yelp and Tripadvisor have both gone public in the last year, and are flat and up 15% respectively. Yelp is unprofitable, and is expected to be barely profitable in 2013; its $1.5 billion market cap seems dependent on continuing its strong revenue growth (up 67% last quarter versus a year earlier) for the next few years and seeing that translate into earnings. Tripadvisor, at a trailing P/E of 24, doesn’t seem particularly overpriced but its earnings are about flat recently. In addition, a number of market participants are bearish on the stock with 17% of the outstanding shares held short. We don’t think either of these two companies is a buy.
We don’t like WebMD on value terms- creation of shareholder value would likely depend on an acquirer attracted to the cash on the company’s balance sheet who also believed they could improve the property. To be fair, its peers- with the possible exception of Ancestry.com- do not look like good buys either.
