Cerner Upgraded to Outperform

We upgrade our rating for Cerner (CERN - Analyst Report) to Outperform. Its first quarter earnings of 51 cents a share beat the Zacks Consensus Estimate. Net income rose 37.4% year over year to $88.7 million (or 51 cents per share) due to buoyant bookings.

Revenues for the first quarter rose 30% year over year to $641.2 million, handily beating the Zacks Consensus Estimate of $578 million. In the reported quarter, higher revenue from Support, Maintenance and Services (up 18.4% to $403.9 million) was supported by robust System sales (up 60.9% to $225.8 million).

Bookings amounted to $652.3 million, up 24% year over year, a record high for the company in any first quarter. Total revenue backlog came to $6.27 billion at the end of the first quarter, up 22% year over year, including $5.57 billion of contract backlog and $704 million of support and maintenance backlog.

Cerner remains the trend setter among pure-play, publicly traded healthcare IT (HCIT) vendors. We believe Cerner is one of the better placed clinical technology vendors to benefit from high HCIT spending over the next few years. The company is diversified not only on a global basis but serves both hospitals and ambulatory outfits. Its integrated solutions have captured market share.

We believe long-term investors may consider Cerner, which serves a sizeable installed inpatient base that requires composite clinically-focused applications in compliance with “meaningful use” parameters, reimbursement challenges and complicated coding problems. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.

On the negative side, the federal Stimulus program will gradually wind down. Cerner faces stiff competition from established HCIT players, such as Athenahealth (ATHN - Analyst Report), Allscripts-Misys (MDRX - Analyst Report) and Quality Systems (QSII - Analyst Report) and many others in a crowded field. The company is developing multiple growth drivers which will ensure its future growth.

The stock currently retains a Zacks #3 Rank, which translates into a short-term “Hold” recommendation.