HMSY

[David Randolph]

The following analysis was written on September 24th, 2007:

HMSY please.

I chatted with Ramsburg the other day, and the chart looks bullish.



Jacky

1. Profile

HMS Holdings Corp. (HMSY), through its subsidiary, Health Management Systems, Inc. (HMS), provides cost containment, coordination of benefits, and program integrity services to government healthcare programs in the United States. Coordination of benefits services route claims already paid by a government program to the liable third party, which then reimburses the government payor. Cost avoidance services provide validated insurance coverage information that is used by government payors to reject claims that are the responsibility of a third party, typically a group health plan sponsored by a beneficiary's employer. Program integrity services review claims paid by government programs, identify payments errors, and then recoup the erroneous payments. The company also provides Medicare bad debt cost reporting and Disproportionate Share claiming services to healthcare providers. These services enable customers to increase revenues, reduce costs, and ensure regulatory compliance. The company's customers include State Medicaid agencies, government-sponsored managed care plans, child support agencies, SCHIP programs, the Veterans Health Administration, and other public programs. It helps these programs contain healthcare costs by identifying third party insurance coverage and recovering expenditures that were the responsibility of the third party, or that were paid in error. HMS Holdings was founded in 1974 and is headquartered in New York, New York.

2. Stock Price History



HMSY had its debut in the stock market in December 18, 1992, at $7.77 per share. Today it closed at $24.85 and this represents an average annual return of 8%. I identify four phases in the stock's history:

1) 1993 - 96

Revenue and EPS were growing nicely until mid 96, when net profit margin declined sharply.

2) 1996 - 2000

HMSY declined 97.8% between the mid 1996 high of $37 and the December 2000 low of $0.81. How's that for a "safe" investment in a company with close ties with the US government?

Fundamentally what happened was that a $0.39 profit per share in 96 turned into a loss per share of ($1.09) in 2001.

3) 2001

This was the bottoming phase. It is curious to note that the bottom in the share price coincided with the company's most horrible losses. Should we buy shares when companies are losing money? Well, yes, if there's some perspective of a turnaround.

4) 2002 - Now

There certainly has been a fundamental turnaround at HMSY, with EPS going from $0.05 in 2002 to $0.22 in 2006. Analysts expect $0.55 EPS in 07 and $0.73 in 08.

This means the 2007 earnings multiple is $24.85/$0.55 = 45, which is quite high.

3. Short Term Chart



The short term technical trend is certainly bullish. I wonder what happened in the volume spikes on points 1 and 2.

I don't see any news out on point 1, I guess volume spiked because the price was coming down and this attracted buyers. On point 2, when the stock rose nearly 20% in one day, the news out was the following:

• HMS Holdings Corp. Announces Second Quarter 2007 Results; Raises Guidance For Full Year 2007
PR Newswire (Thu, Aug 2)

I see there was a 103% revenue growth in Q2 2007 when compared to Q2 2006, but that was at least partially due to an acquisition.

There's no doubt fundamentals are improving but that seems completely priced in, in my opinion, since the stock is trading at 45 times future earnings.

Since the company had wild fluctuations in its revenues and earnings in the past, I think its business isn't as predictable as one could think. Therefore I believe the stock is expensive at this point.

4. Conclusion

HMSY looks fully valued or even overvalued to me, even though the technical trend is bullish. I'm neutral on the stock and not interested in investing in it.

Thanks anyway jackyw, good luck if you own it

Next I'll cover INSW on sctrben's request.

[David Randolph]

4. Conclusion

HMSY looks fully valued or even overvalued to me, even though the technical trend is bullish. I'm neutral on the stock and not interested in investing in it.

HMSY had a high p/e, it seemed overvalued to me at the time, and yet it is up about 20% from that point.

There are many issues surrounding a company's valuation, the p/e is just a small part of the story.

Anyway, just leaving the updated chart for now.