Established in 1979, Cerner Corporation (NASDAQ: CERN – $59.17) is in the business of developing, marketing and installing information technology solutions for the healthcare industry. The company’s flagship product is marketed under the Cerner Millennium name and includes clinical, financial and management information systems that allow providers to access an individual’s electronic health record at the point of care. Cerner provides in-house software to clients as well as hosting its applications at its Kansas City Missouri-based data center. In addition, the company provides implementation and training, outsourcing, ongoing application support and system maintenance, among other technology-related services. Cerner is the largest provider in the industry and serves integrated delivery networks, hospitals, physician groups, managed care organizations as well as pharmacies and health maintenance organizations. Cerner’s Millennium system is sold primarily to large and mid-sized hospitals and medical centers, while their Community Works shared solution has been sold to over 100 small hospitals and critical access facilities. Cerner, currently operating in over 25 countries, plans to increase its sales outside the U.S. as other countries realize the importance of technology in today’s rapidly expanding and complex healthcare industry. Cerner, which was recently awarded a $4.3 billion (over ten years) Department of Defense contract, controls an estimated 25% of the installed base of hospitals and other clinical providers in the U.S., based on revenue. The industry is highly competitive and includes a number of large companies such as privately held Epic Systems, McKesson Corp., GE Healthcare and AllScripts and smaller players, including Computer Programs & Systems and privately held Meditech and Healthcare Management Systems, for example.
In February, Cerner completed a $1.3 billion acquisition of substantially all the assets and related liabilities of Siemens Health Services (SHS), the health information technology business of Germany’s Siemens AG. SHS, a large U.S. competitor at the time, offers a portfolio of enterprise-level clinical and financial health care information technology solutions, as well as consulting and managed services to support health providers across the continuum of care. Cerner is in the process of integrating SHS’ product lines and will continue to support its flagship Soarian system and probably sun set its other legacy platforms over time. Cerner intends to increase its market share by providing innovative solutions and services to existing and new clients as well as by capturing some potential clients who wish to upgrade their systems to avail themselves of the financial incentives offered by the Health Information Technology for Economic and Clinical Health Act (HITECH). U.S. revenues account for about 88% of the company’s total, however, the acquisition of SHS, will expand its international sales. For now, the strong-dollar effects on Cerner’s revenue and bottom-line are minimal.
In the third quarter, CERN was able to meet analysts’ earnings consensus of $0.54 per share, and full-year profits should settle at $2.09 – $2.13. For next year, revenue should approach $5 billion and earnings of $2.46 per share is a reasonable estimate. Insiders, including CEO and founder Neal Patterson, control about 13% of the outstanding 344.8 million shares. The current share price, off its high of $75.72, is not cheap at 24 times next year’s earnings per share, but is below its historical norm. The company does not – and will unlikely – pay a dividend and positions aren’t suited for the risk-averse investor. Finances are rock-solid, however, with a reasonable long-term debt position of $567 million. Cerner continues to demonstrate that it is a force to reckon with in the clinical information systems business, as evidenced by the strength of its bookings. Indeed, contracting activity remains quite healthy and ongoing hosting and system support fees provide a steady stream of recurring income. The company is having good success making inroads outside its established Millennium base and HITECH, enacted as part of the Affordable Care Act of 2009 to promote the adoption and meaningful use of health information technology, should continue to provide significant upside to companies like Cerner.