Why Is Change Healthcare (CHNG) Down 36.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Change Healthcare (CHNG). Shares have lost about 36.9% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Change Healthcare Q3 Earnings Top Estimates, Down Y/Y

Change Healthcare Inc. reported third-quarter fiscal 2020 adjusted earnings per share of 33 cents, which beat the Zacks Consensus Estimate by 10%. However, the bottom line declined 13.2% year over year.

Revenues decreased 1.7% to $808.2 million in the reported quarter. The top line also missed the Zacks Consensus Estimate by 0.9%.

Segmental Analysis

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

Software and Analytics

Revenues at this segment totaled $387.3 million, improving 0.5% on a year-over-year basis.

Network Solutions

Revenues at this segment came in at $150.7 million, up 5% year over year.

Technology-Enabled Services

Revenues at this segment came in at $241.5 million, down 5.9% year over year.

Margin Analysis

In the quarter under review, Change Healthcare reported operating income of $76 million against year-ago quarter’s operating loss of $126 million.

Financial Position

As of Dec 31, 2019, cash and cash equivalents amounted to $74.2 million, up 1.6% sequentially.

Cumulative cash flow from operating activities at the end of the third-quarter fiscal 2020 came in at $400.9 million, compared with $248.8 million in the year-ago quarter.

Guidance

For fourth-quarter fiscal 2020, the company projects Solutions revenues between $775 million and $785 million. Adjusted EBITDA is estimated to be in the range of $260-$270 million while adjusted net income is expected in the band of $115-$125 million.

For full year fiscal 2020, the company continues to anticipate revenue growth between 1% and 2%. This projected range excludes revenues from the sale of its extended care business in fiscal year 2019 and also the effect of planned contract exits.

Moreover, adjusted EBITDA growth is expected in the range of 6-8% for full-year fiscal 2020, while adjusted net income is estimated in the band of 9-11%.

For full year fiscal 2021, the company continues to expect Solutions revenue growth of 4% to 6%. Adjusted EBITDA is estimated to grow in the range of 6-8%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Change Healthcare has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

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