One of the most consistently strong sectors over the past six months has been companies focused on medical practice and hospital software.
Let’s take a quick look now at one of my favorite companies in the group, Cerner Corp. (CERN), which I first recommended in December, then re-recommended twice more this year, including the start of May.
Shares are up 47% in 2009, including 6% this month, a nice feat in a down market, and some analysts think it’s got at least another 40% to go before reaching fair value.
Much of the surge in interest in CERN stems from President Obama’s economic stimulus plan. About $36 billion was earmarked in the emergency legislation in February to overhaul the country’s medical information technology systems, which are dragged down by inefficient paper records.
Analysts and company executives believe Cerner’s client base could receive about $8 billion of that, with about half actually flowing into company coffers. That’s more than double a typical year’s revenue, about $1.6-$1.7 billion.
The trend has some legs because clients have incentive to make the switch. According to the New England Journal of Medicine, less than 2% of hospitals nationwide have comprehensive electronic medical record systems. Switching from a paper-based system to an EMR system can be very pricey and time-consuming, costs that many mid-size and smaller hospitals simply can’t afford to make at the moment without government subsidy.
Once hospitals do switch, however, the results are often great. Cerner’s Millennium system has reportedly improved clients’ efficiency in numerous ways, from patient administration to a reduction in medical errors that have serious consequences.
Some examples…
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The nursing staff at the University of Illinois in Chicago said it improved efficiency by 30%, which meant that a lot of hours spent looking for patient charts can now be spent on the patients. Penn State’s Hershey Medical Center said it saw a 40% reduction in the time between a physician’s signature to an order being filled or a procedure completed. The University of New Mexico said it saw its monthly balance of unbilled charges decrease by 60%. Children’s Hospital in Seattle said it saw a 75% decrease in errors regarding medication ordering.
It’s hard to imagine these kinds of systems not being implemented in all but the most cash-strapped hospitals. Institutions with EM systems have significant advantages over competitors that lack them. Patients and families have given Cerner’s system high marks, and hospital executives and administrators stick by the company because of quick and comprehensive maintenance.
Cerner is geared toward much bigger clientele than a rival that I’ve recommended recently, Computer Programs and Systems (CPSI). Its sales people go after medium to large-sized regional hospitals that can more easily afford their more expensive, comprehensive systems.
CERN’s market capitalization stands at about $4.5 billion, which makes it three times larger than top competitor Quality Systems (QSII) and 10 times larger than CPSI. Earnings are expected to grow 10.5% this year and 16% next year, well in advance of its industry and the broad market.
As you might expect, CERN’s price/earnings is higher than peers, at 23, but that’s not in any way outrageous for a leader. Debt is just $144 million, while cash on hand is $347 million, the mark of a strong balance sheet.
CERN continues to be the class of a tough market, and is likely to challenge its all-time highs soon.
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