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Following a strong third-quarter result, we have reiterated our long-term ‘Neutral’ recommendation on Omnicell (OMCL - Analyst Report), provider of end-to-end automation solutions for the medication-use process, with a target price of $16.00.

In the third quarter of 2012, Omnicell reported earnings per share of 22 cents, well above the Zacks Consensus Estimate of 13 cents. Revenues in the quarter (including the results of MTS Medication Technologies) increased 30.9% year over year to $84.3 million, nominally missing the Zacks Consensus Estimate of $85 million.

After quarters of contraction, the margin expansion in the most recent quarter was a turnaround. Gross margin expanded 114 basis points (bps) along with a significant 586 bps increase in operating margin in the third quarter.

Omnicell serves a niche market that is expected to grow further. Its inroad into the non-acute care market after its acquisition of MTS Medication has helped the company develop a wider revenue base. Given the high profitability and underpenetration of the non-acute market, the buyout appears to be a rational and lucrative opportunity to support long-term growth.

Further, the shortage of nursing facilities in the U.S. should drive demand for automated solutions for medication and supply solutions. The company is on a deal winning spree as a rising number of institutions switch over to the automated mode.

We note that the international market remains largely underpenetrated. Omnicell’s continuous attempts to expand its geographical footprint should yield positive results.

However, lower capital expenditure by hospitals as they battle reimbursement cuts and budget constraints remains a looming concern for Omnicell. The company also faces intense competition in the medication management and supply chain solutions market from major players such as CareFusion (CFN - Analyst Report) and McKesson Automation (MCK - Analyst Report).

We believe that Omnicell, through its attractive growth prospects and a three-pronged strategy of domestic expansion, selective acquisitions and targeted international expansion, is poised to accelerate growth. The stock carries a short-term Zacks #3 Rank (Hold).

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