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’.
No comments:
Post a Comment