On Nov 29, we retained our Neutral recommendation on Cerner Corporation (CERN). We are encouraged about CERN’s higher earnings in the 2013-third quarter and continuous bookings growth but disappointed about revenue miss in the same quarter compared with the Zacks Consensus Estimate as well as the company’s own estimates.
Why Maintained?
On Oct 25, Cerner Corporation reported net earnings of $115.3 million or 33 cents per share for the third quarter of the year, meeting the Zacks Consensus Estimate. This reflected a 16.6% rise from $98.9 million and 17.9% from 28 cents in the comparable quarter a year ago.
Revenues in the quarter grew 8% to $727.8 million, but it was below the Zacks Consensus Estimate of $756 million. The revenue growth was below CERN’s own expectations due to decreased levels of low-margin technology resale. However, notably, bookings rose 21% to the all-time third quarter high of $928.0 million.
Following the release of third quarter results, the Zacks Consensus Estimate for 2013 earnings fell 0.75% to $1.32 per share. However, the Zacks Consensus Estimate for 2014 earnings rose 0.6% to $1.57 per share. Currently, Cerner has a Zacks Rank #3 (Hold).
CERN is the largest HCIT company and its wide footprint, wider client base and composite array of solutions make it an ideal candidate for investors seeking an exposure to the HCIT industry. Moreover, Cerner enjoys a multitude of growth drivers, particularly through its various partnerships such as QualityWorks, DeviceWorks, etc. The company’s recent deal with Intermountain Healthcare expects to generate more than $50 million in annual revenues for the company.
However, Cerner is expected to face significant headwind due to winding down of the government Electronic Health Record (EHR) program. Further, Cerner faces strong competition from its major rival Epic Systems. Their attempts to enter the mass market will increase competition and pressurize margins.
Other Stocks to Look For
While there are no other stocks from the medical information systems industry that are currently worth a look, we consider stocks from the broader medical products industry such as Hill-Rom Holdings, Inc. (HRC), Boston Scientific Corporation (BSX), and diaDexus, Inc. (DDXS). Hill-Rom Holdings carries a Zacks Rank #1 (Strong Buy), while both Boston Scientific and diaDexus carry a Zacks Rank #2 (Buy).
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