Cerner FY & 4Q numbers - Revenue flat

Cerner, the specialist information technology healthcare company reported numbers after the market closed. Last year was their toughest year in a long time, spend on hospital systems slowed as uncertainty around government action in the healthcare sector increased. The fewer benefits for the public at large, from a healthcare point of view, will mean that the hospital industry will have to operate on lower costs with possibly lower outcomes. These numbers are for the full year and the last quarter, let us look at the FY numbers to get perspective. Revenues hardly budged at all, clocking 5.446 billion Dollars. The revenue backlog did rise 12 percent, which is pleasing, to nearly 16 billion Dollars. There was a shift in the sales mix to more annuity business, services and support and maintenance at the expense of new sales. This reflects what we were talking about above.

Expenses were up 11 percent when compared to the prior year, which is not "small", some of that included voluntary separations, which also impacted on operating margins. For the full year, 2016, adjusted EPS clocked 2.30 Dollars, up 9 percent from the year prior. The company bought back shares to the tune of 700 million Dollars last year. They are not paying dividends at all, for the duration of the listed entity, they have not paid any dividends. And with the growth trajectory set at quite a "high" level, I suspect that we are unlikely to see a dividend any time soon.

Yet there was not much by way of growth over the last year, which explains why in large part the stock has trended lower and lower. At the after-market price of 51.65 Dollars (down over four percent), the stock trades on 22.45 times earnings and is not delivering the earnings growth that the market expected. At least not in the short term. Guidance, let us have a look at that quickly. For the full year, the company expects revenues to grow at 8 percent and earnings at the midpoint of the range at (2.44 to 2.56 Dollars a share) at 9 percent. That is a little over 20 times earnings at the midpoint, which puts the PEG ratio at over 2 times, which is by no means cheap.

Often when analysing a business and trying to discern (which ironically is the name Cerner in Latin) whether it is a good investment or not, you need to look at the management, the product and the market and try and work out whether people are going to need more, or less of their products in the future. Margins and cash flows are also an important part of the puzzle. For the most part, hospitals and paperwork go hand in hand. The founding premise of Cerner is to make healthcare easier, eliminate humans in critical areas of hospital and doctor to patient service (from dispensing to administration of medicines, to critical care and monitoring) with the same objective, to improve the outcome. And by that, eliminate mistakes, cut down on paper and improve productivity. Who wouldn't be thrilled by that outcome?

Via the Cerner Twitter platform, the company pointed out that only ten percent of all hospitals in the US allow patients to view, download or transmit records. This was research done by Nielsen. Only 15 percent of all patients have email access to their physicians. And only 20 percent have the ability to schedule appointments online, and to see the scheduling. Everything from billing systems to aftercare of patients has not advanced to the level that we would have expected, in a society that is technologically savvy. That is where I think that the business has huge potential. The stock price might however not be "right" at this point in time. If you hold the stock, expect that the market is going to take a dim view on the outlook. Know that you are in the early stages of what will become a huge business, the complete digitisation of the industry. And that will be better for all of us. Hold. A good company, in a good sector, going through a bit of a funk.