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Health Care IT Provider Cerner Is a Game-Changer

CERN intersects 2 growing sectors — technology and health care

   

cernerLogo_185Cerner (NASDAQ:CERN) provides a platform to make electronic recordkeeping easy, hand-held and available across all the platforms of medical research, patient care, pharmaceutical/medication management and billing. The company has a very solid growth record and should continue to grow rapidly for several years.

Cerner’s software manages various processes for health care organizations of all sizes, from solo practitioners to large health care systems to entire countries. Approximately 9,000 medical providers/facilities use the company’s platform, including 2,600 hospitals, 3,500 physician practices covering more than 30,000 physicians, 500 ambulatory facilities (such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers), 800 home health facilities and 1,600 retail pharmacies.

The company’s main software is called Cerner Millennium, and it runs on standard computer hardware. In fact, Cerner has relationships with Dell (NASDAQ:DELL), Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM) so its customers can buy hardware at a discount. Cerner Millennium allows health care professionals to access a patient’s electronic health record at point of care. They get up-to-date patient information in real time, complete with decision-support tools for physicians and nurses. Woven into the software are prompts that allow for ordering, documentation and billing.

Just one example of this software’s use is the emergency room, where the hectic pace is ripe for error and inefficiency. For this critical area of care, Cerner offers a triage and tracking board that shows doctors which patients are most in need of immediate care. Cerner’s software also can improve the awful waiting times by identifying activities required in the ER and highlighting potential delays. On the business side, Cerner’s solutions allow physicians to quickly complete documentation to ensure proper coding for billing.

Cerner has a steady “razor and blades” model — sales of the software itself are the razor, and ongoing maintenance and service sales are the blades. This is significant, as virtually all of Cerner’s software customers enter into maintenance agreements to support their systems. These agreements also give clients access to new releases of software covered by the agreements. Through the first nine months of 2011, software sales brought in 31% of revenues, services accounted for 41% and maintenance contributed 26%. That’s a sizable chunk of recurring maintenance and service revenues, which helps give the company strong visibility into earnings and also should continue to grow as more Millennium systems are installed.

In addition to the strong secular winds at the company’s back, Cerner has internal initiatives to drive growth, including a Powerchart mobile device that may further encourage physicians to adopt EHRs. The company also should realize initial revenues from their Healthe (yes, that is the way they spell it) Intent cloud-based platform in 2012. Longer-term, the company should gain market share in the U.S. thanks to its strong product offerings, and CERN believes it can boost sales to existing clients with ancillary services. International revenues also should be a strong area of growth, as they currently account for just more than 10% of revenues.

Accelerating Growth

Cerner’s revenues increased from $1.378 billion in 2006 to $1.85 billion in 2010, nearly 35% over the five-year period. However, growth began to accelerate in 2010, when revenues increased 10.6%, due in large part to the HITECH Act. Through the first three quarters of 2011, sales grew 18%, including a 24% jump in the third quarter. You can see the momentum building, and the outlook for continued growth looks bright with the order backlog at $5.65 billion at Oct. 1, 2011, up from $4.66 billion the year before.

I like how successful the company has been in leveraging the sales growth into higher earnings. Operating earnings rose 23% in 2010, even though gross margins were flat from 2009, because operating expenses rose 7% compared with the 11% increase in revenues. That enabled earnings in 2010 to grow 20.3% to $1.39 per share. The trend was even more pronounced in the first nine months of last year as operating expenses grew 10% while revenues more than compensated with a 23% gain. As a result, operating earnings and earnings per share were both up 26%.

Consensus estimates call for earnings (pro forma) in 2012 to increase 22% to $2.25 a share from $1.84 in 2011. These are very realistic expectations that could prove conservative given the strong momentum and large backlog. It’s also very realistic to expect an additional 20% or more in 2013.

The stock was a strong performer in 2011, gaining 29% for the year. However, it has pulled back from its high of $74.39 a little more than three months ago, which gives investors an opportunity to buy low. I look for the stock to outperform again in 2012, and investors will continue to reward it with a high P/E thanks to its excellent growth visibility over the next several years.


Article printed from InvestorPlace Media, http://investorplace.com/2012/01/health-care-information-technology-provider-cerner-game-changer-cern-dell-hpq-ibm/.

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