Does the Post-Earnings Weakness in Catamaran Corp.’s Shares Represent a Buying Opportunity?

Catamaran Corp.’s (TSX:CCT)(NASDAQ:CTRX) stock has fallen nearly 5% since it released better-than-expected fourth-quarter earnings on February 26. Should you buy on the dip?

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Catamaran Corp. (TSX:CCT)(NASDAQ:CTRX), one of the world’s leading providers of pharmacy benefit management services and technology solutions, announced better-than-expected fourth-quarter earnings on the morning of February 26, but its stock has responded by falling over 4.5% in the trading sessions since. Let’s take a closer look at the quarterly results to determine if we should consider using this post-earnings weakness as a long-term buying opportunity, or a warning sign.

Breaking down the better-than-expected results

Here’s a summary of Catamaran’s fourth-quarter earnings results compared to what analysts had expected and its results in the same period a year ago.

Metric Reported Expected Year Ago
Earnings Per Share $0.67 $0.62 $0.56
Revenue $5.74 billion $5.54 billion $4.53 billion

Source: Financial Times

Catamaran’s adjusted earnings per share increased 19.6% and its revenue increased 26.7% compared to the fourth quarter of fiscal 2013. The company’s very strong revenue growth can be attributed to sales increasing in both of its major segments, including 26.9% growth to $5.7 billion in its Pharmacy Benefits Management segment and 13.1% growth to $44.33 million in its Health Care Information Technology segment. Its near 20% increase in earnings per share can be attributed to adjusted net income increasing 18.5% to $138.42 million, which was helped by total operating expenses decreasing 1.9% to just $194.92 million.

Here’s a quick breakdown of eight other notable statistics and updates from the report compared to the year-ago period:

  1. Gross profit increased 12% to $364.03 million
  2. Gross margin contracted 90 basis points to 6.3%
  3. Earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 21.9% to $221.82 million
  4. EBITDA margin contracted 10 basis points to 3.9%
  5. Operating profit increased 34.1% to $169.11 million
  6. Operating margin expanded 10 basis points to 2.9%
  7. Net cash provided by operating activities increased 16.8% to $163.05 million
  8. Ended the quarter with $1.01 billion in cash and cash equivalents, an increase of 11.6% from the beginning of the quarter

Catamaran also provided its outlook on fiscal 2015, calling for the following performance:

  • Adjusted earnings per share in the range of $2.45-$2.60
  • Revenue in the range of $23.5 billion-$24.5 billion
  • EBITDA in the range of $905 million-$930 million

Should you buy shares of Catamaran today?

Catamaran Corp. is a leading provider of pharmacy benefit management services and technology solutions, and increased demand for its offerings led it to a better-than-expected fourth-quarter performance, but its stock has responded by falling over 4.5%.

I think the post-earnings drop in Catamaran’s stock represents a great long-term buying opportunity because it trades at low valuations, including just 24.7 times its median earnings per share outlook of $2.53 for fiscal 2015 and only 21.7 times analysts’ estimated earnings per share of $2.88 for fiscal 2016, both of which are inexpensive compared to its five-year average price-to-earnings multiple of 47.4.

With all of the information provided above in mind, I think Foolish investors should strongly consider using the post-earnings weakness in Catamaran Corp.’s stock as a long-term buying opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned. The Motley Fool owns shares of Catamaran.

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