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Why Is Change Healthcare (CHNG) Down 5.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Change Healthcare (CHNG). Shares have lost about 5.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Change Healthcare due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Change Healthcare Q3 Earnings Top Estimates, Up Y/Y

Change Healthcare Inc. reported third-quarter fiscal 2021 adjusted earnings per share of 34 cents, which beat the Zacks Consensus Estimate by 13%. The bottom line also improved 3% year over year.

Revenue Details

Revenues declined 2.9% from the prior-year period to $785.1 million in the reported quarter. Further, the top line missed the Zacks Consensus Estimate by 0.1%.

Segmental Analysis

Change Healthcare operates through three segments — Software and Analytics, Network Solutions, Technology-Enabled Services and Postage and Eliminations.

Software and Analytics

Revenues at this segment totaled $372.2 million, down 3.9% on a year-over-year basis.

Network Solutions

Revenues at this segment were $192.6 million, up 27.8% year over year.

Technology-Enabled Services

Revenues at this segment amounted to $222.5 million, down 7.8% year over year.

Postage and Eliminations

Revenues at this segment totaled $22 million, down 23.4% year over year.

Margin Analysis

Total operating expenses were $722.4 million, up 1.5% from the prior-year quarter.

In the quarter under review, Change Healthcare reported operating income of $62.7 million, which plunged 34.8% from the year-ago quarter.

Financial Position

The company exited the quarter with cash and cash equivalents of $137.4 million compared with $167.5 million in the preceding quarter.

Cumulative cash provided operating activities at the end of third-quarter fiscal 2021 amounted to $487.2 million compared with cash flow from operating activities of $400.9 million in the year-ago period.

Merger Update

On Jan 5, 2021, Change Healthcare and OptumInsight — a diversified health services company — which is also part of UnitedHealth Group, made an agreement to combine. Per the terms of the agreement, OptumInsight (through a wholly-owned subsidiary) will purchase all of the outstanding shares of Change Healthcare common stock for $25.75 per share in cash. The merger is anticipated to be completed in the second half of 2021.

Guidance

Given the recently proposed merger agreement, Change Healthcare will not be issuing financial guidance going forward.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

At this time, Change Healthcare has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Change Healthcare has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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