Cerner's "Office," called Millennium, handles tasks as diverse as turning paper records into electronic ones, billing patients, processing laboratory specimens and making sure bandages are adequately, but not wastefully, stocked. It's selling well. Last year the company posted a 19% increase in sales, following a 25% increase the year before. The stock's price has soared more than 150% in three years to a new all-time high. That recently caught the attention of our Price Momentum stock screen.
A supplier of health-care information technology, health-care devices and related services.
|Market Value||$4.3 billion|
|Trailing 12-Month Sales||$1.4 billion|
|Proj. Long-Term EPS Growth Rate||24.5%|
|| | | ||
Our screen is based on a simple but powerful observation made by stock-market researchers over the past two decades: Stocks with strong recent price increases are more likely than not to keep rising for awhile. Early studies on the subject were at times contradictory. Researchers found that winners from the past several years didn't do as well as ones from the past few months. The immediacy of the price momentum, they found, was important for predicting stock gains. Recent research suggests a better way to find stocks with current price momentum.
Rather than look for big price increases over, say, the past year, look for stocks that are trading near their 52-week high prices. Those two might sound the same, but a screen for stocks that are near their highs eliminates cases where a stock is up big over the past year but has dipped in recent weeks. Studies on stocks near their 52-week highs show that they tend to produce market-beating returns for up to five years.
We recently searched through 8,000 stocks for those that are within 5% of their 52-week high prices. We also looked for recent earnings surprises, share ownership by company managers and projections for strong earnings growth over the next several years. See our recipe of criteria for details on the demands and use our stock screener anytime to run the search for yourself. It recently produced eight survivors, including Cerner.
Based in North Kansas City, Mo., Cerner is No. 2 in the field of health-care information technology, with a market share of 8.5%, according to CIBC World Markets, an investment bank. McKesson is the largest, with a 13.5% share. Spending on health-care IT is expected to total close to $20 billion this year, according to market research firm ISC, and to rise to more than $23 billion over the next two years. Cerner has more than 1,500 customers world-wide and trailing 12-month sales of nearly $1.4 billion. It makes just over a third of its money by selling IT systems, and more than two-thirds by servicing those systems. Its products can be bought individually or as part of packages.
Fourth-quarter results for Cerner, reported Feb. 1, showed sales increasing 17% and bookings, or anticipated sales, totaling 41% more than in the year-earlier quarter. Bookings got a big boost from a contract Cerner holds with British Telecom, which is working on that country's National Health Service initiative to digitize medical records. But even without the NHS work, bookings increased 22%. Earnings for the quarter, as accountants tally them, increased 43%. Adjusting for some temporary tax benefits the company received and for its adoption of new rules for deducting stock and option grants from its earnings, fourth-quarter earnings increased 24%.
Last year the company cleared about 14 cents in operating profits for each dollar it generated in sales. Analysts see the company's margin improvements coming from capitalizing on research money it has already spent and from two new initiatives designed to make product installations faster and less expensive. Blackrock is a tool that automates the building of databases common to many Cerner programs and the company's Accelerated Solutions Center will bring customers in to complete pre-installation work, reducing the amount of time Cerner workers must spend at customer sites by about three months, according to the company.
Those efforts could prove current earnings estimates conservative. "The company does not need to achieve significant margin expansion over the next couple of years to meet the market's current earnings per share expectations," noted CIBC analyst Charles Rhyee upon initiative coverage of the stock with a rating of Sector Outperformer (Buy, essentially) on Feb. 22.
Current shares trade at 32 times forecast 2007 earnings. That might look pricey, but the company is expected to increase its earnings by 24.5% a year over the next five years. That gives the stock a PEG ratio (price/earnings ratio divided by earnings growth projection) of 1.3, for a discount to the broad stock market of about 15%.
Note that our full list of screen survivors includes a few companies that have turned up on past Price Momentum screens always a promising sign. Restaurant chain Buffalo Wild Wings has posted an 86% stock gain since we recommended it the stock, that is; we're agnostic on the wings in July 2004. Zumiez, which sells surf-themed clothes and gear, is up 54% since we highlighted it in January 2006. FactSet Research Systems, a stock-data seller, is up 51% since our May 2006 endorsement.
Also, WebEx, a maker of conference-call software, is up 132% since we featured it in a price momentum search in October 2003. We've left it on the list, but note that the company last week received a $3.2 billion buyout offer from computer networking specialist Cisco Systems.