Emageon's Mature Hospital Market

Emageon, Inc. (EMAG) operates in a mature large hospital picture archiving and communications system (PACS) market. The company might not grow successfully because of the superior financial resources, technical expertise, marketing, distribution, and support capabilities of its competitors.

The overall strategic direction of the company is uncertain. A new Strategic Alternatives Committee has a broad mandate to pursue all strategic alternatives including sale of the company. Last April, the prior committee had recommended Emageon to continue as an independent company and focus on improving its core products and services.

As the company depends on a small number of customers for a large portion of sales, the loss of any one can adversely affect its financial results. A trend towards perpetual licenses could cause greater volatility in Emageon’s operating results, as revenue from the software license fee and certain implementation fees are generally all recognized in the month system acceptance is achieved. Quarterly revenue could fluctuate solely due to the timing of achieving system acceptances.

Emageon expects to reignite growth in the replacement market that is expected to begin its replacement cycle in 2009. In a mature large hospital PACS market, the company needs to execute on initiatives to compete successfully in the replacement market and eventually may need to complete suitable acquisitions to resume a strong growth rate.

At its current price of $2.01 per share, EMAG is trading at 0.5x our current fiscal year revenue estimate of $88 million, which is at a discount to the 1.6x group average multiple, 2.4x industry mean multiple, and 2.0 industry median multiple. We believe the stock is appropriately valued at this stage as most of Emageon’s declining sales bookings and revenue expectations have been factored in. Our price target moves to $2.05.

Read the full analyst report on EMAG

Read the full analyst report on EMAG