Omnicare Shares Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Omnicare (NYS: OCR) cost as little as $27.45 per share this morning, precisely 10% lower than they closed at the end of trading on Friday.

So what: So what did happen? It wasn't earnings -- those actually happened last week, when Omnicare slipped into a second-quarter loss on litigation costs. What's more, when Omnicare did report last week, it reported numbers that arguably "beat earnings." But for the costs of fighting allegations by Michigan and Massachusetts that Omnicare overcharged the states on Medicaid drug prices, Omnicare would have earned $0.50 per share last quarter, and beat earnings by a penny.

Now what: My best guess then is that the reason Omnicare slumped this morning has something to do with one (or several) of the numbers contained in a series of earnings restatements the company filed with the SEC on Friday. Something in there someone on Wall Street didn't like.

Personally, the number that jumped out at me was contained in this document. If you include Omnicare's cost of rolling up smaller businesses as part of the drain on its annual free cash flow, the document shows that Omnicare last year generated only about $233 million in such cash profits. This gives the stock a P/FCF ratio of about 14, which seems a bit expensive for the 10% long-term growth rate Wall Street has assigned Omnicare.

It might not be the precise reason for today's sell-off, but to my Foolish eye, it's a good enough reasonto sell Omnicare.

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At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of Omnicare. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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