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Near-Term Outlook for Medical Information Systems Industry

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The Zacks Medical Info Systems  industry comprises developers and marketers of healthcare information systems. These companies offer software and hardware solutions that enable healthcare providers securely access clinical, administrative and financial data in a time-efficient manner.

These companies primarily derive revenues from the sale of proprietary software and related hardware, professional services and IT outsourcing services. The recurring service contracts for software maintenance and certain transaction processing services also drive revenues for these companies.

Here are the three major themes in the industry:

  • Digital transition is accelerating demand for IT service solutions in healthcare. Robust adoption of technologies is easing management of billing, quality measurement and reporting, clinical documentation and data exchange, patient communication and referrals, and many other related tasks. The latest trend of electronic health records (EHRs), electronic medical records, predictive analytics and real-time alerting in the U.S. MedTech space has been gaining prominence. Healthcare organizations are now increasingly using cloud technology with the cloud-based EHR model being the most common application of big data in healthcare. Reports suggest that MedTech companies with strong exposure to big data automated EHRs will excel in terms of operations and margins.
     
  • Hospitals, clinics, and other medical facilities have been seeing a growing number of threats of late owing to payment reforms put forth by the Centers for Medicare & Medicaid Services (CMS) and commercial health payers. However, an analytics-based approach using big data and machine learning has been improving productivity in the healthcare revenue cycle. In this regard, Revenue Cycle Management (“RCM”) solution is becoming increasingly popular. RCM is the financial process (utilizing medical billing software), which healthcare facilities use to keep track on patientcare episodes from registration, appointment scheduling and the final payment of a balance. The RCM market is currently worth $50 billion in the United States. Per Frost & Sullivan, RCM is 7.5 times larger than the EHR market. NextGen Healthcare, Inc. (NXGN - Free Report) has scored the highest among all ambulatory vendors for its performance in some key RCM areas.
     
  • Escalating administrative costs to manage and hold records of healthcare providers also justify the fast-adoption of these state-of-art technologies. Industry experts estimate that doctors, hospitals and diagnostic information service providers have been shelling out roughly $2.1 billion toward the same every year. In fact, in April 2018, leading health care companies like Humana (HUM - Free Report) , MultiPlan, Quest Diagnostics (DGX - Free Report) and UnitedHealth Group’s (UNH - Free Report) Optum and UnitedHealthcare formed an alliance to launch Synaptic Health Alliance pilot project on the blockchain technology. Aetna, a CVS Health business, and Ascension have recently joined this program. There is also a growing need for healthcare organizations to have instant and complete access to a patient’s medical records to avoid medical errors which are considered to be a leading cause of death in the United States. In this regard, U.K.-based publisher of medical journals and clinical research, BMJ, stated in a 2016 podcast that around 250,000 deaths every year in the United States are caused by medical errors (per an article on Crypto Currency News). Also, healthcare organizations are increasingly required to prevent data hacking and phishing while maintaining confidentiality of patient’s health information.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Medical Info Systems industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #86, which places it in the top 34% of more than 250 Zacks industries.

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

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms S&P 500 and Sector

The industry has underperformed the Zacks S&P 500 composite and its own sector in the past year.

The stocks in this industry have collectively declined 6.3% against the Zacks Medical sector’s return of 27.6% and the S&P 500’s increase of 6.3%.

                                        One Year Price Performance

 

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry is currently trading at 38.48X compared with the S&P 500’s 16.73X and the sector’s 17.58X.

Over the last five years, the industry has traded as high as 49.47X, as low as 30.61X, and at the median of 38.86X, as the charts below show.

                                    Price-to-Earnings Forward 12 Months (F12M)

                                 Price-to-Earnings Forward 12 Months (F12M)

 

Bottom Line

Growing dominance of technology will continue to create robust demand for IT service solutions in healthcare. Moreover, with increasing competition and rising healthcare costs, it will become absolutely necessary for healthcare organizations to control administrative costs. All these factors are expected to work in favor of most companies in the Zacks medical info systems universe. 

Here, we present three stocks that either have a Zacks Rank #1 (Strong Buy) or 2 (Buy). These stocks are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

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 #1 stock has gained 46.5% in the past year. The company has an estimated long-term earnings growth rate of 11.8%. It has a splendid earnings surprise record and has outperformed the Zacks Consensus Estimate by an average of 9.7% in the trailing four quarters.

                                 Price and Consensus: OMCL

HMS Holdings Corp (HMSY - Free Report) : Headquartered in Irving, TX, HMS Holdings provides cost-containment solutions in the U.S. healthcare space. The stock has a Zacks Rank #1 and has rallied 104.5% in a year’s time. The medical info systems player has an estimated long-term earnings growth rate of 11%. The company has surpassed estimates in the last four quarters, the positive earnings surprise being 33.7%.

                                    Price and Consensus: HMSY

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% in the past year. The company has an estimated long-term earnings growth rate of 10.3%. It has an average positive earnings surprise of 30.2% for the last four quarters, with a beat in three quarters.

                                    Price and Consensus: CPSI

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