Baird Has Nothing Good To Say About Quintiles, Downgrades To Underperform

Baird downgraded Quintiles IMS Holdings Inc (NYSE: Q) to Underperform, a day after the shares touched a new 52-week high of $83.04 following the fourth-quarter results, which was also the first earnings report after the company's merger with IMS Health.

Analyst Eric Coldwell said Quintiles has become less transparent, harder to model, and the earnings are of lower quality. In a normal world, the analyst said such reports would lead to 52-week lows, not 52-week highs.

“Naturally, higher uncertainty, less visibility, lower quality earnings, and less impressive guidance suggest higher risk, and higher risk should mean lower valuation,” Coldwell wrote in a note.

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Coldwell noted that the company’s earnings are of low-quality as it has been including what was previously excluded (e.g., minority interest) and excluding what was previously included (e.g., SBC and amortization).

Quarter In Review

On the guidance front, the first quarter outlook includes:

• $1.890 billion–$1.925 billion revenue is 2.8 percent below Street’s $1.962 billion.
• $450 million–$465 million adjusted EBITDA is 10 percent below Street’s $509 million.
• $0.93–$0.97 adjusted EPS is 10 percent below Street’s $1.06.

Following a very light first-quarter guidance, pressure mounts for Quintiles to deliver later in the year. But, the analyst believes the 2017 guidance was not impressive as it is mainly driven by materially higher share repurchase, and slightly lower tax rate. The 2017 forecast includes:

• Revenue $8 billion–$8.1 billion, 1.3 percent below Street’s $8.15 billion.
• Adjusted EBITDA at $2 billion–$2.1 billion, 0.5 percent below Street’s $2.06 billion.
• Adjusted EPS at $4.40–$4.55, in line with Street’s $4.48.

Analyst's Commentary

Coldwell, who also cut the price target to $74 from $80, was critical about Quintiles’ lower-quality bookings presentation and weak bookings. In addition, the analyst warned that the integration with IMS is not going as smoothly as the company is messaging.

“[W]e think bookings are awful. Q quit reporting I.H.S. bookings (for a reason). The new opaque, confusing approach on what’s left masks reality. We continue to hear that resumes are flooding out the door at all levels and in all geographies. A lot of good people have left. Clearly the integration is not going as well as Q reports,” Coldwell elaborated.

But, it seems Quintiles investors ignored these negatives and focused solely on the earnings beat as the shares rallied 4 percent on the results.

“Reality doesn’t seem to matter much today; but, we think it will become more important over time as the allure of Q’s fulsome messaging wears off,” Coldwell added.

Shares of Quintiles closed Tuesday’s trading at $82.30. But, at last check, shares had fallen 3.99 percent at $79.02.