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On Dec 6, we maintained our Neutral recommendation on athenahealth Inc. (ATHN - Analyst Report). We are encouraged by the company’s robust utilization trends and rapid strides in capturing the Electronic Health Record (EHR) business of physician practices. However, we are concerned about the headwinds faced by ATHN due to changes in government regulations.

Why Maintained?

On Oct 17, athenahealth reported adjusted earnings of $8.0 million or 21 cents per share (excluding amortization and integration and transaction costs) for the third quarter of the year, exceeding the Zacks Consensus Estimate of 15 cents per share. This translated into a 15.5% rise in net earnings from $7.0 million and 10.5% rise in earnings per share from 19 cents in the comparable quarter a year ago.

Revenues in the quarter surged 43.1% to $151.5 million but missed the Zacks Consensus Estimate of $155 million. Excluding the Epocrates and other revenues (consisting of third-party tenant revenues) totaling $17.2 million, core athenahealth revenues rose 27% to $134.3 million. Growth was led by expanded clientele for the company’s offerings since the acquisition of Healthcare Data Services and strong athenaCoordinator business.

Following the release of third quarter results, the Zacks Consensus Estimate for 2013 remained the same at 33 cents per share. However, the Zacks Consensus Estimate for 2014 went down 6.0% to 63 cents over the same timeframe. ATHN now has a Zacks Rank #3 (Hold).

athenahealth’s unique business model makes it a strong niche provider of RCM services (athenaCollector) to small physician practices. Its SaaS-based approach allows for a lower cost and more flexible delivery mechanism that is expected to help ATHN win deals. Further, its EHR product (athenaClinical) is a key player in ambulatory or physician billing.

However, athenahealth’s long-term goal of 30% top-line growth is challenging, given the consolidation trend among small physician practices. Moreover, the company faces strong competition from EHR products of Allscripts Healthcare Solutions (MDRX - Analyst Report) and Cerner Corporation (CERN - Analyst Report).

Other Stocks to Look For

In the absence of any better-ranked stocks in the medical information systems industry, we can consider Hill-Rom Holdings, Inc. (HRC - Snapshot Report) from the medical products industry. Hill-Rom Holdings carries a Zacks Rank #1 (Strong Buy).

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