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Cerner Q3 - Lower growth

Last week one of our smaller holdings, Cerner, reported their third quarter financial report. The numbers were mostly in line with analyst expectations, but in the current market environment, a 'match' is the same as a 'miss'. The stock dropped 11% on Friday.

Here are the details for the three months in the quarter, revenue increased 5% to $1.34 billion, operating expenses increased 9% to $903 million, which translated into earnings per share of 61c compared to 62c last year this time. Even though operating expenses grew faster than revenues, the impact on earnings was muted thanks to the lower tax rates this year.

The increased operating expenses came from growing their servicing teams, and through higher research and development costs. Both these cost increases have the ability to pay off in years to come. As more Cerner systems are installed into hospitals, services revenues will grow and become a type of annuity income for the company. This is important during tough times; if new sales come under pressure, the historic base services revenue will still be there.



Looking forward, the company expects to grow revenues by high single figures. The smart analysts at Goldman Sachs, have the same growth forecasts, coupled with margin expansion. The margin expansion will mean profits are expected to grow by double digits in the years to come.

I don't see the share price doing much in the short term though, share prices don't go up when a company is matching expectations. The federal government under the Republican Party has cut healthcare benefits, which has reduced capital spending by hospitals. The company would need a positive catalyst for the share price to take off. Given the space that they operate in, it is not out of the question that Cerner lands a large contract which the market wasn't expecting. There is no question that digitisation in medicine is the future, and Cerner is one of the leaders in the space. 'Lucky' things tend to happen to companies in the right place.


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