Is WebMD an Obvious Buy?

Who hasn't used WebMD WBMD before? It is an extremely useful website with a lot to offer the average browser. Recently, rumors started to spread that WebMD may be considering various options to sell itself. Furthermore, people have been talking that WebMD has already hired an investment bank, specifically Credit Suisse CS, to help it in the process.

Upon hearing the rumors, traders drove the stock price up by about 10%. Despite the large run-up in price, is WebMD a buy right now? Billionaire investors Carl Icahn and George Soros are large shareholders of the company, each owning 9.5% and 5.6% respectively.

From an operational perspective, WebMD has been becoming more and more successful every year. Over the last five years, it has bolstered its revenues, taking them from $254 million in 2006 to $535 million in 2010. It has also managed to drive up margins, essentially producing its products in a more efficient manner. by keeping operating costs' growth at a minimal rate, net margins have been positive for the company.

Its operating cash flow also shows a similar picture, increasing year over year due to net income, stock-based compensation, and positive changes in net working capital. Web MD has also started to sell investments in various securities, resulting in large cash gains. Lastly, it has been repurchasing common stock aggressively and has also been paying back diligently over the last several years, directly increasing its value to equity holders.

Based on the various operational activities, WebMD's balance sheet has continuously become stronger. While increasing its cash position to increasing its property, plant, and equipment, the company has been able to increase assets in an organic manner over the years. It has also been able to keep its liabilities fairly low, although it has recently acquired short and long-term debt. Interestingly, its paid-in capital skyrocketed in 2009 and 2010 while its retained earnings tumbled.

Investors should keep in mind that the rumors are simply rumors, and that WebMD may not be selling itself to anyone. Investors should also remember that mergers and acquisitions are very complex, and although a premium is likely to be paid for WebMD in such a transaction, that it could fluctuate depending on the type of transaction. Therefore, now may or may not be the best time to initiate a position in the company.

• The company's operational history is very strong, filled with organic revenue growth and strategic acquisitions.

• WebMD is a leader in a niche industry, offering customers almost anything they may want regarding everyday health care.

• In the event rumors are true, there will be a premium paid for WebMD, meaning that investors are almost guaranteed positive returns.

• The rumors could be false, and if so, there is a good chance the market will drive down the stock price immediately.

• WebMD does not have many competitors and operates in a very narrow industry, meaning that it may be hard for investment banks to pitch the firm to prospective buyers.

• Financial buyers may be wary of purchasing the company, as it has recently acquired significant debt and has not had stable income growth. The overall economy also makes it tough for financial buyers to purchase something large like WebMD.