We downgrade our recommendation on Quality Systems, Inc. (QSII) to Underperform with a target price of $17. The company reported earnings per share of $0.26 in the first-quarter of fiscal 2013, missing the Zacks Consensus Estimate of $0.36.
Quality Systems offers an electronic health record (EHR) product and benefits 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 a progressively lower number of signed deals on a quarterly basis. The business is crowded with many players operating at the upper end of the market where Quality Systems has traditionally been strong.
The company has undertaken multiple acquisitions to bolster organic growth. These 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.
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