Sunday, August 4, 2013

Cerner Corporation 2Q13 Earnings: Thesis Intact, Remain 'Cautiously Bullish' due to extended run up

Cerner Corporation reported earnings July 25th and held a corresponding conference call after market close at 4:30 E.S.T. Revenue came in at $708.0MM up 11% yoy reasonably shy of our bullish $720MM estimate. Sales were on the low end of guidance due to lower levels of reduced margin technology resale. Non-GAAP EPS was reported at $0.34 vs $0.28 in 2Q12 up 17% shy of our estimate of $0.36 but in-line with street consensus of $0.34.

In 2Q13 79 million shares were repurchased bringing year to date purchases at 142 million. 3 million shares have been repurchased post stock-split so far while $28.0MM remains from a $170.0MM authorization from last December. We view the increased R&D expense along with share buybacks as a positive use of capital. Investment in development as noted, will remain high through out the year as Cerner focuses on increasing its cloud infrastructure base.

Taking advantage of a legislative opportunity? Earnings continue to rise as more hospitals and medical practices make the conversion to electronic health records and meeting the meaningful use standards well in line with our original thesis. As a reminder, “meaningful use” is an incentive based system where hospitals and physicians may adopt EMR systems and receive additional Medicare or Medicaid kickbacks to the tune of millions for hospitals and tens of thousands for doctors as a result of the Health Information Technology for Economic and Clinical Health Act (2009).  Rules of compliance have been released in stages and by 2016 incentives turn into penalties for providers who fail to comply with core and “menu” objectives of meaningful use. Nearing the end of Stage 1, Stage 2 Rules have been finalized which will spur healthcare providers to comply too the next logical steps in the meaningful use process. For the investor, this entire process just means that the gap of providers and doctors not using electronic medical records will be closing, and closing fast.

Ease in adoption of a complete integrated system no matter current level of technology make Cerner a clear choice for businesses no matter how larger or small complying with meaningful use. While being mac and Linux compatible feeds a competitive edge as more doctors are integrating Ipad’s and other devices into normal operations. While the extended run up leaves us judicious on the stock the valuation remains intriguing.

Initial Q3 guidance was offered at sales of $740MM-$770MM up 12% yoy at the midpoint and Non-GAAP EPS of $0.35-$0.36 compared to our estimates of $771MM and $0.38 EPS. FY 13 guidance was reiterated on sales of $2.95B-$3.05B and Non-GAAP EPS narrowed to $1.40-$1.42 from $1.39-$1.42.

Cerner has a 3-year historical average price to earnings of 32.5x.  While Cerner continues to offer opportunity for long-term investors, currently the stock is valued at 40.7x ttm earnings leaving us on the sidelines for a more attractive entry point. Our $1.45 FY EPS estimate represents a forward multiple of 33.2x, which offers a fair risk reward. Using a blend of p/e, cash-adjusted p/e, and ev/ebitda we arrive at a price target of $48.16 compared to the current price of ~$50.07 as of 08/02/13, which we feel is reasonably valued at these current levels. A further company comparable analysis will be updated to make a bull case for re-entry into the portfolio come September, assuming the price gets more ‘attractive’. 

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