Thursday, July 19, 2007

IMS Health (NYSE:RX): Color on quarter

Baird comments on IMS Health (NYSE:RX) after the co released its Q2 results last night:

- Firm notes 2Q results met but were hindered by unexpected European sales challenges, preventing sales upside and limiting margin somewhat surprising following the bullish May 24 IR event.

Revenue variance vs. firm's model was primarily Sales Force Effectiveness performance, resulting from unexpected June-end timing and sales execution delays in Europe, primarily U.K. and Germany, as clients responded to challenging reimbursement and regulatory events, by refocusing marketing efforts. IMS has introduced new solutions to address this and has a strong 3Q marketing log, though this situation suggests some caution into 3Q.

IMS remains comfortable with guidance, but the European slowdown raises some challenges and IMS must continue to hold data and delivery cost growth to continue to show leverage in Consulting & Services, leverage recent M&A, generate new product uptake, and continue to generate strong FCF through among other items DSO improvement. The tone on the 2Q report was slightly more cautious than recent experience, and the firm is lowering estimates to be within guidance as they no longer expect upside in 2007. These adjustments leave 2007 EPS target at $1.58 (the midpoint of guidance) vs. prior $1.63. 2007 adjustments also carry into 2008, with 2008 EPS target declining by $0.09 to $1.74 (10% Y-Y growth).

Maintains Outperform but cut tgt by $1 to $37.

Notablecalls: RX's management has done admirable job over the past 6-7 years, restructuring ops and making the co grow again at a healthy clip. The stock has responded well, currently trading at eight-year highs.

Also, RX has not missed ests for the past 3 years or so. That's until yesterday. The co came in below consensus despite favourable FX. I think everyone was expecting an easy beat. Both GM and OM declined, indicating there will be no expansion in 2007. This also means there isn't going to be any upside to guidance. In fact, we have Baird taking down their ests which suggests other firms will do the same. With the stock trading around 18-19x FY08 EPS (based on closing price of $31.82), I don't think the news will be well receieved.

I expect to see some downside in RX stock today and over the next couple of weeks. I continue to like RX's business but given the tough environment seen by many of its clients (big pharma), I think the valuation multiples need to contract somewhat. The stock needs a breather.

Although I would not want chase RX on open, I think the stock offers a quick shorting oppy.

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