We downgrade our rating on Quality Systems, Inc. (QSII) to Underperform with a target price of $27. The company reported earnings per share of $0.26 in fourth-quarter fiscal 2012, just missing the Zacks Consensus Estimate.
Quality Systems offers an electronic health record (EHR) product and is benefiting from the migration of ambulatory and inpatient practices to EHR under the federal stimulus. Of late, however, growth of its pipeline metric has been on a falling trend along with progressively lower number of signed deals on a quarterly basis. The company has made multiple acquisitions to bolster organic growth. Its acquisitions are expected to facilitate its entry in the small hospital segment.
We are concerned about execution risk emanating from Quality Systems entry into the rural inpatient market. Also, on the negative side, it competes in a fragmented market with larger competitors. The market is price sensitive and vulnerable to price cutting.
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