A Healthy Debate Concerning an Ailing Stock

Healtheon/WebMD (HLTH) (Jim: Don’t buy)

(Mike: Buy)

*

Jim: Friday’s sell-off didn’t much help our first stock today, Mike, Healtheon/WebMD--

Mike: Boy, that name’s a mouthful.

Jim: --And I was just about to say, can’t they do something about that name?

Mike: Be grateful it’s still that short, given Healtheon/WebMD’s penchant for buying one company after another. For all we know, six months from now it might be HealtheonWebMDMedicalManagedCareInsiteHealthNetwork, or some such.

Jim: How about just Stickyourtongueout.com?

Mike: Speaking of which, let me make a disclosure here.

Jim: Uh-oh. You’ve been sick?

Mike: After a fashion. In what became a very well-covered stunt back in January, $1 billion of Healtheon/WebMD warrants--which are rights to buy that company’s stock--were bought by Janus Capital.

Jim: The big mutual-fund house.

Mike: I own shares in some of the Janus funds, whose Healtheon holdings have lost about 60% of their value since Janus bought in. So yes, I’m not feeling really perky right now.

Jim: Healtheon/WebMD basically tries to slash the amount of paperwork in the medical-care field by linking doctors, hospitals, insurers, managed-care providers and so forth via the Internet, so they can do their transactions there. The company was started by Internet pioneer and Netscape co-founder Jim Clark.

Mike: All well and good, except that its stock has dropped faster than someone with cardiac arrest. This is what happens when there is a lot of money chasing too little value. Healtheon/WebMD essentially wants to be a clearinghouse for all the cross-traffic in medical billings and the like. And you might say it’s not quite accurate to call Healtheon/WebMD an Internet company, although WebMD is part of its name, because a lot of what it does is helping health-care providers meld their computer-software systems to be more efficient.

Jim: At the moment it claims to have more than 16,000 doctors doing transactions over its site, up from 6,000 a year ago.

Mike: Of course it needs a lot more.

Jim: Right, and that’s why Healtheon/WebMD has been buying all these other companies, to get what economists call “critical mass.” That’s the scale it needs to be a real force in this business. Trouble is, it’s taking a toll on Healtheon/WebMD’s performance, and stock, in the meantime.

Mike: Exactly right. But you have to give them credit for the basic strategy. Clearly, Healtheon/WebMD’s management believes that in this business, eventually there’ll be No. 1 and there’ll be everybody else. Healtheon/WebMD is determined to be No. 1.

Jim: Splendid. And when it gets even close to being No. 1, I’ll think about buying the stock. But not today.

Mike: Well--and my knuckles are white--I’d buy it, especially at this price. I think this company has the best chance of being No. 1.

Jim: No way. Healtheon/WebMD is losing money, it’s lost Wall Street’s enthusiasm, and to make matters worse, I read that a whole bunch of managed-care providers--including Foundation Health, PacifiCare and WellPoint--are thinking of developing their own version of Healtheon/WebMD.

Mike: You mean those HMOs that have so effectively won the hearts and minds of patients and doctors?

Jim: Point taken. But look, not only do they present a potential big rival to Healtheon/WebMD--I mean, why do those companies need a middleman?--but doesn’t it also mean those health-care firms are less likely to sign up for Healtheon/WebMD’s service? It’s like the airline business right now. You have Priceline.com and others offering cheap seats on the Net, but now the airlines themselves are forging Web alliances to bypass the middlemen.

Mike: You’ve just posited what I learned in my freshman French class, something known as a “false cognate.”

Jim: Oh boy, here we go.

Mike: A false cognate is when you hear a word that’s spelled the same in French as it’s spelled in English, and you leap to the conclusion that it means the same thing. And you end up with a D-minus in class, because it doesn’t.

Jim: Thanks for the lesson. Your point?

Mike: Healtheon/WebMD’s effort to be the electronic middleman for health-care professionals has nothing to do with the consumer service that Priceline.com provides. Think of it this way. Let’s say you’re a medical group and you have a choice: Either take the independent Healtheon/WebMD or the--now what can we call them that we can actually get in the paper?--these HMOs that have tormented you with their paperwork for years now.

Jim: I have no quarrel with Clark’s mission to cut medical paperwork. Good for him. I have a problem with the stock.

Mike: Well, you should have only 40% of that problem now, given how far the stock has dropped!

Jim: And I noticed the other day that Clark and others actually spent $220 million to buy more Healtheon/WebMD shares, as a show of confidence.

Mike: Some might argue that that’s a sign these guys have too much money.

Jim: Reminds me of that famous story about the market crash--not Friday’s, the one in 1929--when J.P. Morgan and his cronies sent their gofer, Richard Whitney, down the floor of the exchange to buy 10,000 shares of U.S. Steel, you know, to show they weren’t worried. We know what happened after that.

DuPont (DD)

(Jim: Buy)

(Mike: Buy)

*

Mike: Now here’s a company, Jim, that must be asking itself: All those strategies we cooked up a couple of years ago to move beyond our basic chemical businesses seemed like great ideas at the time--so how come we aren’t rich?

Jim: Allow me to be more blunt. If there was ever a stalwart, conventional industrial company that tried making itself sexier to jack up its stock price, it’s DuPont. But the whole thing backfired.

Mike: You mean DuPont put on the evening gown only to discover that it forgot to zip up the back?

Jim: Exactly. What we have here, of course, is the nation’s biggest chemical company, maker of such famous products as Teflon coatings, Lycra Spandex, Kevlar--you know that material that’s used in bulletproof vests--and the list goes on and on.

Mike: Then there are its farming chemicals and other fibers, and it all generates about $28 billion in annual sales. And the stock is in the Dow Jones industrial average.

Jim: It all produces stable but relatively slow growth. So a few years ago, DuPont and some other companies hit on the strategy of “life sciences,” and DuPont even shelled out $8 billion to buy a leader in the field, Pioneer Hi-Bred. Care to explain what life sciences means?

Mike: It’s basically biology, or biotechnology. It’s a way of using agricultural products and other things to enhance yields of crops. . . .

Jim: Michael, please. You sound like some Wall Street analyst. It’s more like mixing chemicals, drugs, biotechnology and anything else lying around to create gigantic squash.

Mike: Are you talking about the vegetable or the sound of what happened when these ideas went public?

Jim: Both. Look, I get the idea. DuPont and others know they can help come up with zillions of additional acres of rice or corn or whatever, to better feed the world and turn a higher profit. Nothing wrong with that.

Mike: Except the public bit them in the tractor seat.

Jim: It sure did. The public, to some degree, has freaked out about bioengineered crops. That prompted the farmers to plant less of those seeds, and thus buy fewer products from DuPont and its peers.

Mike: Well, I believe this business is going to take off one day because it’s simply necessary, and that’s one reason I’d buy DuPont’s shares. When the next famine develops in the Third World, the value of this technology is going to be clear.

Jim: Until then, I like the fact that DuPont has decided to go back and focus on its basic lines. For example, it’s working to develop new uses for Teflon and its other proprietary technologies. That’s not all. The stock, which held up pretty well last week despite the market’s freefall, still sells for only 19 times this year’s earnings. And finally, half of DuPont’s sales come from overseas, and the Asian economic rebound can only help.

Mike: I agree. DuPont’s price is going to rise because its core businesses are continuing to grow and DuPont is the industry leader. And I think Wall Street will look favorably at DuPont’s willingness to say, “OK, we’re past the stage of putting curtains on the shack, because you saw right through them.”

Jim: And let’s not forget, DuPont isn’t abandoning life sciences. It’s still pursuing those areas and spending lots of cash on their development. You might be right, Mike, that they likely will be in great demand some day, and that’s one more asset in DuPont’s back pocket.

*

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).