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When Diplomat Pharmacy (NYSE: DPLO) reported its first-quarter results in May, investors were perhaps a little worried. After all, the specialty pharmacy had set expectations lower for 2016 than Wall Street wanted. But Diplomat dispelled any worries by posting strong growth in the first quarter and raising its 2016 outlook.
Diplomat announced its second-quarter results after the market closed on Tuesday. Were there reasons for investors' worries to resurface?
Diplomat results: The raw numbers
YOY = year over year. Data source: Diplomat Pharmacy.
What happened with Diplomat this quarter
Diplomat's stock sank over 7% in after-hours trading. What could investors possibly not like with those results? As good as the company's second-quarter results were, revenue wasn't enough to meet investors' high expectations.
Despite revenue coming in a little below expectations, investors had to like how Diplomat achieved its numbers. Organic growth grew 23% year-over-year, with new drugs making up more of the organic growth than price increases of existing drugs. Sales growth was also bolstered by acquisitions, in particular Diplomat's buyout ofBurman's Apothecary.
Gross margin in the second quarter wasn't as strong as in the past -- 7.6% compared to 8.6% in the prior-year period. This decline primarily resulted from a continued shift to higher-priced drugs that have lower margins and Diplomat's sale in September 2015 of its compounding business.
The strong revenue growth obviously helped earnings. However, Diplomat also benefited fromlower interest expense and a lower income tax rate in the second quarter compared to the same period in 2015.
On a non-GAAP basis, Diplomat posted earnings of $0.23 per share compared to $0.16 per share in the prior-year period. That reflects impressive growth and was higher than what investors expected.
What management had to say
Phil Hagerman, Diplomat's chairman and CEO, said:
Diplomat affirmed its previous full-year 2016 revenue and adjusted EBITDA guidance. Revenue for the year is still expected to be between$4.5 billion and $4.9 billion, with adjusted EBITDAbetween $121 million and $129 million.
The company increased the lower end of its guidance for adjusted earnings per share. Diplomat now expects 2016 adjusted earnings per share to come in between$0.90 and $0.95, up from the range of$0.88 to $0.95 provided earlier.
Diplomat's pricey valuation (with an earnings multiple of 63) makes the stock vulnerable to any hiccups. Lower-than-expected revenue qualifies as a hiccup. But the company's long-term prospects matter more than the results from one quarter.
As Hagerman noted, Diplomat continues to fire on all cylinders, with the one exception of the slowing hepatitis C market. The company's organic growth remains impressive. Its acquisitions appear to be paying off. And the moves Diplomat has made to sell off low-profit businesses make sense. Despite a negative market reaction to the company's second-quarter results, the long-term future for Diplomat Pharmacy still appears to be positive.
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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Diplomat Pharmacy. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.