WebMD Attractive on Yahoo! Implications?
WebMD (NASDAQ: WBMD) is a mid cap company in the technology sector providing health care information services. Shares of the company have shown a gradual increase in its stock price over the last 30 days and have climbed about 10 percent, which is a major increase. On Thursday, the stock gained about 3.45 percent with an intraday high of $40.24 and eventually closed at $39.28. This closing is still below the 52 week average price of WBMD of $43.16, which may lead to further upward movement.
The stock was seen in overdrive mode when WBMD was said to be on "the wish list" of Yahoo! which was drafted before appointing Scott Thompson (NASDAQ: EBAY) as its new CEO. Yahoo! may be planning to acquire WBMD as it provides a tax-efficient asset swap with Softbank, a Japanese company with 40.16 percent of shares being owned by Yahoo!. As the news came in, the price of the stock skyrocketed.
As a company, WBMD has done well in the past and has a current ratio of 8.72 for the quarter ending Sep 2011. It seems that the company has no liquidity issues. In addition, the PEG ratio of WBMD is 2.57, which is best PEG ratio of a company in the Healthcare Information Sector, and may indicate that WBMD is currently undervalued relative to its competitors. The ROE of WBMD is about 12.36 percent, which is considered to be a decent figure along with other above mentioned statistics.
There has been a considerable increase in the open interest (OI) of WBMD Call options (expiring on Feb. 12 and Mar. 12). We can see from the image below that the peaks of the OI graphs for call options is showing a movement towards the right, indicating that the investors are expecting to see prices go up in the coming months. Also, the OI for put options has gone down considerably, indicating that not many investors are taking a bet on stock price moving downwards.
If Yahoo! acquires WBMD, then it would help them to bring down its stakes without paying the capital gains taxes in the United States. This may also allow them to swap a part of its stake in Softbank with Alibaba. However, this idea is still in embryonic stage and may also be rejected by Yahoo!'s executive committee. This will likely take some time for things to get figured out. Given this, WebMD may prove to be an attractive investment in short term.
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