Thursday, October 18, 2007

IMS Health (NYSE:RX): Color on earnings

Several firms are commenting on IMS Health (NYSE:RX) today after the provider of market data on sales of prescription medicines announced results and guidance well below analyst expectations:

- Baird is taking their rating to Underperform from Outperform and cutting tgt to $24 from $37. Firm notes RX's performance looks to have turned on a dime since June. Elongated selling cycles and pricing pressure are expanding globally. IMS' fixed cost infrastructure has a compounding impact on margin. They believe 2008 will struggle to deliver mid-single-digit sales and EPS growth. EPS CAGR over any period since 2000 has been 1%-8%; we now see more of the same in 2008.

IMS sees unprecedented uncertainty in Big Pharma purchasing behavior; now expanding beyond 2Q's European issues. Multi-market awards eroded margin but are not pulling through expanded opportunities. With pharma's challenges unlikely to abate and given concerns that spending is further crimped in an election year, the firm sees no signs of relief.

Management's planned shift to a more variable cost structure (including off-shoring and outsourcing) will take time and Baird question why this didn't happen sooner (either concerns about quality and control, or the opportunity was previously deemed modest).

- Goldman Sachs is adding RX to their Americas Sell List saying the decrease in demand was driven by pharmaceutical customers who are re-evaluating their product portfolios and strategies, resulting in hesitation to make purchase decisions. GSCO believes these trends could provide a headwind to revenue over the next six to nine months, impacting the rate of margin expansion and earnings growth.

- Banc of America notes RX's surprisingly large share repurchase and more muted optimism in 2Q07 foreshadowed a weaker 3Q07, but the stock should still trade sharply lower tomorrow. Reduced EPS expectations are clearly problematic, but deteriorating balance sheet metrics and lower free cash flow guidance are in contrast to the traditional investment thesis on the stock, which centers on its predictable cash flow generation capabilities. Also, we are hard pressed to see why management's concerns over longer selling cycles and profit and cash flow challenges do not signal weaker 2008 prospects as well. Maintains Neutral.

Notablecalls: Whew! I was somewhat cautious on RX after the co reported its Q2 results in July but I sure didn't expect this! RX stock is going to top today's casualty list as I see the stock down 15-20% following yesterday's dismal guidance.

I'm quite sure the problems will be there in 2008 and while we are seeing ests being cut already today, it may not be enough.

Value investors will be sinffing around RX after the fall-out but I don't see the stock becoming buyable until it reaches say the $24-$25 level. After two disappointments, it's a broken stock.

For s-t traders, if you can get fills above the $26 level, you're probably going to make money shorting today.

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