Why HMS Holdings Shares Dropped

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 cost containment services company HMS Holdings (NAS: HMSY) dipped 12% this morning after reporting weaker-than-expected first-quarter results.

So what: HMS, which helps U.S. government programs track fraud and improper payments, noted that new Medicaid rules on claim transactions hurt its business, but it described the problem as only "temporary." For the quarter, HMS reported a profit of $0.08 while revenue increased by 30% to $107.3 million. Unfortunately, expenses spiked by an even higher 38%. Wall Street had been looking for HMS to earn $0.10 on revenue of $114.5 million.

HMS Holdings' forecast wasn't any better, with the company guiding down from its previous estimates to $0.58-$0.64 in EPS and a range of $500 million to $515 million in revenue. This, too, is below the current consensus estimate on the Street of $0.66 in EPS and $519.6 million in revenue.

Now what: Temporary or not, any company that is relying on the U.S. government to drive business growth at a time when the government looking to cut more than $2 trillion out of its budget is not a company I'd seriously be considering as an investment. Even at the mid-range of estimates, HMS is trading at 40 times fiscal 2012's earnings and that, to me, is still far too high.

Craving more input? Start by adding HMS Holdings to your free and personalized watchlist so you can keep up on the latest news with the company.

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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