Tuesday, February 18, 2014

Cerner Corp. 4Q13 and FY Earnings: Decent Results, Exiting Position

Cerner Corp. reported 4Q13 and FY earnings February 4th and held a corresponding conference call after market at 3:30 E.S.T.  Quarterly revenue came in at $795.3M, a little lower than our estimate of $802M, and substantially lower than street estimates of 811.4M, up 12% YoY.  Quarterly EPS came in at $0.36, which was well below our estimate of $0.44 as well as the street’s estimate of $0.39.  EPS did however grow 9% YoY.  As for FY13, Cerner reported $2.91B in revenue, up 9% YoY, which is in line with our prediction but slightly below analysts’ estimates of $2.96B.  Yearly EPS was reported at $1.32, well below our estimate of $1.40 and consensus of $1.44.  Cerner Corp showed strong numbers through 4Q13 and throughout 2013 as well.  We are impressed with Cerner’s total bookings increasing to a record $3.77B for 2013, proving that they can still increase their revenue.  In order to fight the dilution from options, Cerner has also approved another stock repurchase program of up to 217M shares of common stock. 

Cerner’s revenues were driven by not only an increase in bookings, but more efficient gross and operating margin.  A major highlight of 2013 is their continued success in gaining market share.  With much success in 2013, Cerner believes they can further improve in 2014 due to the shaky economy causing customers to reevaluate their suppliers, ultimately resulting in them switching to Cerner.  To reiterate upon our 3Q13 report, Cerner’s Intermountain Healthcare selection has proven to be important to their growth.  This imperative win over their competitors have positioned Cerner well and strengthened their vision for population health to carry more weight in the selection process.  Since health care doesn’t have a true costing system, Cerner believes their work with Intermountain Healthcare to build an activity-based costing system will further their differentiation.  Cerner’s regional medical center with 2 hospitals, ITWorks, had a great year, including a new contract in Q4.  ITWorks focuses on optimizing user experience, as well as shifting systematic work from into Kansas City, freeing clients to focus on providing care.  Another sector of Cerner, Revenue Cycle had a stellar year.  Revenue growth of approximately 50% represents Revenue Cycle’s success with premier client Adventist Health. 

For 2014, Cerner expects stronger free cash flow, which will be driven by growth in operating cash flow, as well as a decline in CAPEX.  For 1Q14 Cerner expects revenue between $770-810M compared with out estimate of $842M.  Cerner also expects 1Q14 EPS of about $0.36-0.37 where as we expect EPS of $0.40.  This range lowballs consensus, being that consensus factored in the growth off of 1Q13 tax benefit.

Based off Cerner’s stock price appreciation leaving little of evidence to support further multiple expansion, we are forced to sell out of our position.  Historically, the stock has sold at an average of 35.5x times trailing twelve-month earnings.  Currently the stock is selling at 53.7x ttm earnings, representing a large premium.  While we praise Cerner’s success and remain attracted to the name, we see no current upside and must remain on the sideline for a more attractive entry point.

No comments: