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Cerner 2Q numbers - double digit growth

Cerner, the information technology healthcare business, released results a couple of sessions ago. The company is in a sweet spot, the more time goes on, the more electronic all healthcare records are likely to be. I think that there is an incredible amount of runway left, anyone who visits their local healthcare professional can attest to this. Equally, a procedure at the hospital amounts in a small forest being cleared, so many forms are needed to be filled in. Equally, in the aftercare environment, the more people involved, the more mistakes. From medicine not administered properly, to the incorrect patient receiving the wrong procedure, technology will help prevent mistakes. At the end of the day, that is the company mission: "to contribute to the systemic improvement of health care
delivery and the health of communities."


The name itself comes from the Latin word "to discern". The results themselves - Second Quarter 2016 Results, were Mr. Market showing the company the same good judgement. You almost got the sense that the stock was primed for ordinary. Revenues of 1.216 billion Dollars represented a 8 percent increase on this time last year, earnings per share for the quarter clocked 58 cents and were 12 percent better than the 52 cents recorded this time last year. Bookings (i.e. future orders) jumped 9 percent, the total backlog now has grown to 15 billion Dollars.

Bloomberg pegs this years earnings at 2.36 Dollars (or as near to that as possible). That means after the recent price spike to 66 Dollars, in which the stock rallied around 7 percent post results, the price is probably at the correct valuation, 28 times forward. That does seem a little rich, the stock always trades at a slight premium. That is as a result of the company being in an industry that is expected to continue to show the same kind of growth both in North America and across any new territories that they would expand into, high single digit or low double digit revenue growth. The company guided both the next quarter and full year in about the place that the Street had pencilled in numbers, around 5 billion Dollars at the top end of the range (for the full year) and 2.30 to 2.40 in earnings for the full year, slap bang where Mr. Market and Street had expected.

I suspect that whilst this is a difficult company for most to get a handle on, it certainly is a company that has tremendous growth prospects. From making front end reception payment systems in waiting rooms easier to integrate with health insurance products, to the Smart Room, which makes it easier for patient and care staff to know exactly what is going on at all moments, with the touch of a button and a screen to examine vitals and progress. We all know that medical costs can, not only take you several leaps backwards, it can also cripple families with limited (or even comprehensive) health insurance. A company like Cerner continues to use technology to reduce the costs of pharmacies, doctors and hospitals, who in turn pass that onto patients. And ultimately that means more money for healthcare development and progress.

Their most important business, from a sales point of view, is their ongoing annuity income associated with their services business, and the maintenance thereof. Whilst it is important for the company to fulfil that backlog as soon as possible, the ongoing work is equally important. The company are using cloud based services to make their integration systems a lot more affordable, smaller hospital groups no longer need the big capital outlay in order to own all the moving parts with this type of expensive technology. All you need is a quick internet speed (and redundancy) and staff that can adapt easier.

At the end of the day, you are buying a software solutions provider to the healthcare industry, and as such, this is a pretty niche market. We continue to believe that legacy systems across the globe will be replaced with better cloud based solutions and practical cost saving solutions that will encourage healthcare groups to adopt these types of software. The company has also been the speculation of buyout rumours, specifically from IBM, the current market cap is 24 billion Dollars, the premium would be pretty significant were it to happen, and whilst IBM has the ammo, it may be unpalatable for their shareholders to pay that much. We continue to accumulate the business on weakness, we are happy that the market continues to validate the investment thesis.


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