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Growth & Income

Todd Bunton

Computer Programs and Systems, Inc.

CPSI

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Computer Programs and Systems, Inc. (CPSI - Snapshot Report) recently delivered its 4th consecutive positive earnings surprise on strong revenue growth and expanding margins.

The company continues to benefit from federal regulation designed to encourage healthcare organizations to adopt Electronic Health Records, which CPSI provides.

Following stellar first quarter results, analysts revised their estimates significantly higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy). Based on consensus estimates, analysts are projecting 30% EPS growth this year and 17% growth next year.

In addition to solid earnings growth, the company pays a dividend that yields an attractive 2.6%.

Company Description

Computer Programs and Systems, Inc. provides healthcare information solutions primarily for small community hospitals. The company was founded in 1979 and is headquartered in Mobile, Alabama.

It has a market cap of $664 million.

EPS Up 81% in Q1

Computer Programs and Systems reported first quarter earnings per share of 49 cents, beating the Zacks Consensus Estimate of 46 cents. It was a whopping 81% increase over the same quarter in 2010.

Total revenue for the first quarter jumped 28.0% to $40.4 million. System sales, which accounted for 38.7% of total revenue, surged 60.9% year-over-year.

The company continues to benefit from an increased demand for healthcare information technology, thanks to a not-so-gentle nudge from the federal government. The American Recovery and Reinvestment Act of 2009 allocated more than $19 billion in funding to aid healthcare organizations in acquiring and using healthcare information technology, just like the kind CPSI provides.

Included in the funding is $17.2 billion in "incentives" through Medicare and Medicaid reimbursement systems to encourage and assist healthcare providers in adopting Electronic Health Records (EHRs). If an eligible healthcare provider does not begin to demonstrate "meaningful use" of EHRs by 2015, however, reimbursement under Medicare will begin to be reduced.

Meanwhile, gross profit expanded from 38.4% of revenue to 42.4% in the quarter. Operating income soared 93.0% as the company leveraged its fixed expenses.

Estimates Rising

Following the strong first quarter, analysts revised their estimates significantly higher, sending the stock to a Zacks #2 Rank (Buy).

Analysts are projecting strong growth from CPSI over the next two years based on consensus estimates. The 2011 Zacks Consensus Estimate is $2.23, representing 30% growth over 2010 EPS.

The 2012 consensus estimate is currently $2.61, corresponding with 17% growth.

At the end of the first quarter, CPSI had a very strong 12-month backlog of $129.0 million.

Solid Dividend Yield

Computer Programs and Systems pays a dividend that yields an attractive 2.6%. The company hasn't raised it since 2006, however.

Its payout ratio is still relatively high at 74%, so don't expect a dividend hike for a while.

Valuation

Shares are up more than 30% year-to-date despite a recent pullback:

CPSI: Computer Programs and Systems, Inc.

Valuations have risen too, although not alarmingly so. Shares trade at 24.1x 12-month forward earnings, which is essentially in-line with its 10-year median.

The company also carries no debt and continually generates strong returns on equity. Over the last 12 months, ROE was a stellar 47.0%.

Conclusion

Computer Programs and Systems has solid earnings momentum with 4 consecutive positive earnings surprises and rising earnings estimates. With federal regulation creating higher demand for its products and a dividend that yields a solid 2.6%, CPSI offers plenty to like.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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