Cerner
Corporation reported earnings October 25th and held a corresponding conference
call after market close at 4:30 E.S.T. Revenue came in at $728.0MM up 8% yoy, shy
of our bullish $771MM estimate. Lower technology sales had an impact on revenue
but the impact on earnings was limited. Non-GAAP EPS was reported at $0.35
which is up 17% compared to 3Q12, shy of our estimate of $0.38 but in-line with
street consensus of $0.35. In 3Q13 $28
million worth of shares were repurchased bringing year to date purchases at
$170 million completing the share repurchase program authorized last December.
In addition, 3.6 million shares have been repurchased post stock-split.
Q3 highlights
involve international opportunities for the firm. Cerner has gained clientele
at two prestigious hospitals, CHU de Nantes in France (6th French
client), and their first Brazilian client, Albert Einstein. Brazil is an
emerging area of opportunity with 7,000 hospitals having limited EMR
penetration. The company has also signed its first contract with the Saudi
Arabia ministry of health as part of a plan to cover 200 public hospitals
across the country. Domestically, Cerner had a big win with Salt Lake based
Intermountain Health Care against their main competitor and look to this
project as an opportunity to create a unique new system. The depth and breadth
of Intermountain’s information provides a challenge for Cerner and calls for
innovation to solve this issue of managing the information and keeping up
Intermountain’s high quality standards. Cerner has also continued success with
small hospitals, adding six new clients using their CommunityWorks software
suite. The cloud-based platform Cerner has released has been able to become
compatible with non-Cerner systems, allowing more flexibility for clients. Also,
Cerner has become an authorized reseller for all apple-computing products,
which will streamline the purchasing and deployment
of devices to clients.
Initial Q4 guidance
was offered at sales of $775MM-$815MM up 12% yoy at the midpoint and Non-GAAP
EPS of $0.38-$0.39 compared to our estimates of $850MM and $0.45 EPS. While the
Quarter offered highlights of strategic wins, looking forward we are
disappointed with the light revenue guidance. Lower technology margin resale
was noted as impacting revenue and Q4 will be the last quarter with a tough
comparable technology resale comp. We will be selling out of our position and
maintain a neutral rating on the stock.
Our decision to
sell out of Cerner is based largely on valuation. Historically the stock has
sold at an average of 35.5x times trailing twelve-month earnings. Currently the
stock is selling for 44x ttm earnings, which represents a significant premium,
indeed (close to peak) for Cerner. This premium is justified due to a Class A
management team, leading market position and capitalization of domestic and
international growth opportunities. However, the current premium valuation
against what we expect will be another lower-than-expected revenue result in Q4
is not likely to lead to multiple expansion in the near term. The stock is now
valued at 41.2x our FY13 EPS estimates. While there are still significant
merits to our long-term investment thesis, in lieu of the recent earnings
report we are not convinced that material multiple expansion in Q4 is likely,
and remain on the sidelines for a more attractive entry point.
-Jeevan Sunny
-Jeevan Sunny
No comments:
Post a Comment