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Analyst Blog

Shares of Cerner Corporation (CERN - Free Report) hit a new 52-week high of $99.28, before closing on Monday, Jun 3 at $98.86. Shares of this leading health care IT vendor have moved upward by 27.5% since Jan 1, 2013.

Drivers that Led to Upward Movement

Cerner has reported four consecutive positive earnings surprises in the past four quarters, with an average surprise of 5.4%. Positive earnings surprises have contributed to the shares moving higher.

Cerner reported first quarter adjusted earnings per share of 62 cents beating the Zacks Consensus Estimate of 59 cents and the year-ago earnings per share of 51 cents. Revenues in the first quarter rose 6.1% year over year to $680 million, missing the Zacks Consensus Estimate of $709 million. Bookings amounted to $801.6 billion up 23% year over year and a record for the company in any first quarter. 

We believe Cerner is one of the better placed health care information technology vendors. The company serves both hospitals and ambulatory outfits and has a small international presence. We believe long-term investors may consider Cerner, which serves a sizeable installed hospital base. The company’s clients require integrated clinically-focused applications complying with meaningful use requirements and complicated coding patterns.

Besides its strength on the inpatient side, Cerner is rapidly capturing market share on the ambulatory side. The company is developing multiple growth drivers such as ITWorks and RevWorks.

The company has consistently grown its business, mostly through organic means.  We expect Cerner to further expand operating margin by improving on time required for implementation. Cerner has grown earnings per share in the past by expanding operating margin.

Key Indicators of the Stock

Cerner currently trades at a forward P/E of 37.6x, reflecting a 15% premium to the peer group average of 32.7x. Its price-to-sales ratio of 6.3 is also at a premium to the peer group average of 3.4. Given the company’s compelling fundamentals, the premium valuation may be justified.

The company has a trailing 12-month return on equity (ROE) of 15.2%, which is better than the peer group average of 10.6%. Cerner enjoys an 11.8% return on assets (ROA), which is higher than the peer group average of 6.5%. 

About the Company

Cerner is one of the larger health care information technology companies with a substantial presence in the electronic health record (“EHR”) market. While fresh opportunities are shrinking in the industry, the replacement market is growing. The company faces competition from numerous players in a crowded field, including Athenahealth, Inc. (ATHN - Free Report) .     

Cerner carries a Zacks Rank #3 (Hold). We are more positive about Merge Healthcare Incorporated and Omnicell Inc. (OMCL - Free Report) each of which carries a Zacks Rank #2 (Buy) and are expected to do well.

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