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Medical Info Systems Stock Outlook: Short-Term Pain to Stay

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The medical information systems industry comprises a number of companies which develop and market healthcare information systems. These companies offer software and hardware solutions that provide healthcare providers with secure access to clinical, administrative and financial data in a time efficient manner.

Growing prominence of innovative technologies like big data (the cloud-based electronic health records [EHR] model being the most popular), 3D printing, blockchain and Artificial Intelligence have shaped the MedTech space of late.

Escalating administrative costs, need for instant and complete access to a patient’s medical records to avoid errors and the growing requirement for healthcare organizations to prevent data hacking and phishing while maintaining confidentiality of patient’s health information are fueling adoption of these technologies.

However, many analysts are of the opinion that controlled spending by smaller hospitals might impede the adoption of these technologies. Moreover, the reimbursement mix has dented endowments income, affecting hospital spending capabilities further.

Further, there are certain regulatory and legal headwinds confronting the players in the medical information systems industry. Per an article on HIT Consultant, the repeal of net neutrality rules may give rise to a plethora of issues for the industry.

The repeal will increase the bargaining power of telecom players who will decide on the distribution and pricing for acquiring and delivering data and information. This may bump up costs for gathering EHR data for Medical Info Systems industry companies.

Industry Comparison with S&P 500 & Sector

The Zacks Medical Info Systems industry, within the broader Zacks Medical Sector, has underperformed the S&P 500 and its own sector in the past year.

While the stocks in this industry have collectively gained 11.8%, the Zacks S&P 500 Composite and Zacks Medical Sector have rallied 14.3% and 19.2%, respectively.

The underperformance can be attributed to escalating operational expenses, traditional software revenue growth challenges due to the maturing EHR market and a shift to more Software as a Service (SaaS) based models.

One-Year Price Performance

Zacks Medical Info SystemsStocks Trading Cheap

The industry’s valuation is quite cheap right now, thanks to the underperformance over the past year.

Valuation is a tricky business for Medical Info Systems companies. Not to forget, these companies spend a lot on unplanned R&D and hence it is difficult to account for such high expenses. Notably, one might gain a fair idea of the industry’s relative valuation from its Price/Book ratio.

The industry currently has a Price/Book TTM ratio of 3.74, which is a little away from the high end of the past year as well as the last five years. When compared to the high of 3.96 and the median level of 3.67 over the past year, we believe investors should wait for a dip to enter the market.

The space also looks quite discounted when compared with the market at large as the Price/Book TTM ratio for the S&P 500 is 4 and the median level is 3.76.

Price-to-Book Trailing Twelve Months (TTM)

Dim Earnings Outlook Keeps Us Cautious

Another regulatory hurdle that might hit the Medical Info System industry players is the European General Data Protection Regulation which was enforced on May 25, 2018. Per an article on HIT Consultant, this legislation has made significant changes to how the personal digitalized information of EU citizens is assembled and distributed. Notably, the legislation will also be applicable for companies which are not operating in EU countries.

One reliable metric that can give investors an idea of the industry’s future price performance is its earnings outlook. Empirical research shows that earnings outlook for the industry, showing the earnings revision trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.

Price and Consensus: Medical Info Systems industry

Please note that the 64 cents EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Medical Info Systems industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings per share of the industry for 2018 but how this estimate has been moving recently.

This becomes clear by focusing on the aggregate EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Current Fiscal Year EPS Estimate Revisions

As you can see, the 64 cents EPS estimate for 2018 has remained steady since June, declining from 82 cents at July 2017-end. Looking at the earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings potential. This could possibly be due to the regulatory hurdles in the Medical Info Systems industry.

Zacks Industry Rank Indicates Bleak Near-Term Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term.

The Zacks categorized Medical Info Systems industry currently carries a Zacks Industry Rank #177, which places it at the bottom 31% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Medical Info Systems Industry Promises Long-Term Growth

The long-term prospects for the industry indicate steady growth. When compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the Zacks Medical Info Systems industry of 14.1% appears promising. The corresponding figure for the Zacks S&P 500 composite is 9.8%.

Though the group’s mean estimate of long-term EPS growth rate has sharply declined from the high of 14.7% achieved in July 2017, it has been steady ever since and is above the low of 13.9% over the past year.

Mean Estimate of Long-Term EPS Growth Rate

In fact, the basis of this long-term EPS growth could be a steady increase in top line that the Medical Info Systems industry has seen since the end of 2016.

Bottom Line

Although the short-term picture looks dull, the industry is beaming with prospects for investors who are ready to wait it out.

The ongoing digital transition is accelerating demand for IT service solutions in healthcare. Robust adoption of technologies, which eases the billing management, quality measurement and reporting, clinical documentation and data exchange, patient communication and referrals, and many other related tasks, can be major growth drivers.

The latest trend of EHRs, electronic medical records, predictive analytics, real-time alerting and revenue cycle management services in the U.S. MedTech space has been gaining prominence.

Of these, the cloud-based EHR model is the most common application of big data in healthcare. According to Transparency Market Research, the global EHR market is expected to see a CAGR of 5.7% from 2017 to 2025, to reach an estimated value of $38.29 billion.

Reports suggest that MedTech companies with strong exposure to big data automated EHRs will excel in terms of operations and margins.

Further, systems for recording and managing medical data are slow, centralized and often extremely vulnerable. This in turn leads to a chain of issues that are adversely impacting overall healthcare services and increasing the demand for the portfolio of hardware and software solutions offered by the Medical Info Systems industry.

A fresh report by Research and Markets shows that big data in healthcare raked in $11.45 billion in 2016 and is expected to grow double-digits in the 2017-2025 period.

Thus, keeping the long-term expectations in mind, investors could advantage from the cheap valuation and bet on a few Medical Info Systems stocks that have a strong earnings outlook.

Here we pick one stock from the Medical Info Systems industry with a Zacks Rank #2 (Buy) which has seen positive earnings estimate revision.

Computer Programs and Systems, Inc. (CPSI - Free Report) : The stock of this Mobile, AL-based healthcare information technology solutions and services provider in the United States and the Caribbean nation has gained 6.6% over the past year. The Zacks Consensus Estimate for its current-year EPS has been revised 2.7% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: CPSI

Investors may also hold onto these stocks that have been seeing positive earnings estimate revision and have solid long-term growth potential.

Cerner Corp. (CERN - Free Report) : Headquartered in North Kansas City, MO, Cerner has been dominating the headlines of late, courtesy of its efforts to digitize EHR systems. Cerner's HealtheIntent is a big data platform, which provides the company with significant exposure to AI trends in the medical world. This Zacks Rank #3 (Hold) stock has gained 4.2% over the past three months.

Price and Consensus: CERN

Omnicell, Inc. (OMCL - Free Report) : Headquartered in Mountain View, CA, Omnicell is a major automation and business analytics software solutions provider for medication and supply management in healthcare globally. This Zacks Rank #3 stock has gained 25.7% in a year’s time.

Price and Consensus: OMCL

Streamline Health Solutions, Inc. : Headquartered in Atlanta, GA, Streamline Health Solutions is a provider of health information technology solutions and services for hospitals and health systems in the United States and Canada. This Zacks Rank #3 stock has gained 34.2% over the past year.

Price and Consensus: STRM

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