After the White House and House Republican leaders cut that historic debt ceiling deal earlier this month, health care stocks ran for cover on fears of deep Medicare cuts. But while hospitals, nursing care companies and health insurers had a pretty rough few weeks, hospital information systems stocks like Cerner (NASDAQ:CERN), McKesson (NYSE:MCK) and Quality Systems (NASDAQ:QSII) took smaller hits and are back above their 50-day moving averages.
Why the disparity? To quote Ben Kingsley’s character “Cosmo” in the 1990s movie “Sneakers,” “It’s all about the information.” Hospital IT initiatives like electronic medical records and nursing or physician information systems that are integrated into other medication, nutrition and hospital finance systems can save a lot more money, time and resources than they cost.
Crunching the numbers, the market research firm Technavio last week projected the global HIS market to grow by 13% per year — largely driven by government financial incentives and regulations to ensure more efficient patient care and fewer errors.
For example, most companies in this sector will benefit from federal incentives for hospitals and doctors to implement electronic health records. The incentives will run through 2014. But if they don’t take the carrot, there are plenty of big sticks in the health care reform regulations to drive HIS adoption down the road to deployment. Here are three winning HIS stocks that warrant a closer look:
Cerner
This company has managed to reap incentives of a different kind — it will receive $147 million in Kansas’ sales tax money as part of a $414 million development deal. The project will include two office towers to house 4,000 new employees, as well as a new professional soccer stadium.
CERN set a new 52-week high of $68.12 on July 29 and, at $67.33, is trading more than 85% above its 52-week low of $36.33 last August. With a market cap of $11.43 billion, the stock has a price/earnings-to-growth ratio of 1.93, indicating it might be overvalued. The company’s debt position looks good: CERN has total cash of $682.02 million compared to total debt of $114.69 million.
McKesson
In June, MCK’s iKnowMed electronic medical records solution was certified by the Surescripts health information network to exchange prescriptions electronically and gain real-time access to cancer patients’ insurance information, plan formulary and medication history.
MCK set a new 52-week high of $87.32 on May 19 and, at $78.20, is trading more than 35% above its 52-week low last August. With a market cap of $19.26 billion, McKesson’s PEG ratio is 1.06, meaning the stock is close to fairly valued. Debt position is okay, with total cash of $3.12 billion compared to total debt of $3.99 billion.
Quality Systems
In mid-August, QSII acquired CQI Solutions — a provider of practice management software to doctors and dentists. The acquisition, which will be part of Quality’s NextGen Information Systems operation, will help the company rapidly grow its health care IT business.
QSII set a new 52-week high of $93.64 on Aug. 1 and, at $92.62, is trading more than 65% above its 52-week low of $55.93 last August. With a market cap of $2.73 billion, Quality has a PEG ratio of 1.6, indicating the stock could be overvalued. The company has total cash of $125.16 million and no debt.
Bottom Line
Cerner, McKesson and Quality are all well-entrenched competitors with solid fundamentals in a growing segment of the health care market. CERN and QSII are posting impressive year-over-year quarterly earnings growth — nearly 30% and 57%, respectively. McKesson’s -4% year-over-year quarterly earnings growth is offset by its stake in the increasingly lucrative specialty drug market, which will hit $100 billion in the next two years. MCK also went ex-dividend on Tuesday at 20 cents per share — a yield of 1.1%.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
