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Omnicell Maintained at Neutral

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We have recently reiterated our Neutral recommendation on Omnicell (OMCL - Free Report) with a target price of $15.00.

Omnicell reported an EPS of 7 cents in the first quarter of fiscal 2012, beating both the Zacks Consensus Estimate of 6 cents as well as the year-ago EPS of 5 cents. However, including $1.0 million in pre-tax settlement expense related to litigation claims in the year-ago period, adjusted EPS came in at 4 cents for the first quarter of 2011. Reported earnings increased 75% on a year-over-year basis, primarily on the back of revenue growth and improved margins during the quarter.

Revenues in the reported quarter increased 12.2% year over year to $64.1 million, and exceeded the Zacks Consensus Estimate of $63 million.

The company primarily operates in the niche automated medication distribution industry and stands to benefit from favorable demographic trends, regulatory environments, and the lack of nursing staff. As the information technology market is growing by leaps and bounds with increasing investment by healthcare industries and gradual modernization of the healthcare system, the demand for automated healthcare management systems has also been on the rise.

In order to further seize the opportunity in this segment, Omnicell introduced its next-generation G4 product platform last year. This G4 platform is cost effective and complies with increasingly stringent regulatory pressures.

The company expects its customers to save up to 70% to 80% of their investment while upgrading their installed systems to G4. Additionally, the company’s industry-leading products such as Single Pointe and Anywhere RN are performing well. During the reported quarter, 28% of the company’s orders were generated from its new contract with greenfield customers who are purchasing automation on this platform for the first time.

Furthermore, the company is on a deal winning spree, especially after the launch of G4. We consider Omnicell’s recent announcement of G4 expansion at Texas Children's Hospital, which has been Omnicell’s customer for the last 10 years, as a step ahead in this direction. This apart, the University of Chicago, the St. Francis Health System of Oklahoma and Royal Victoria Hospital in Ontario, Canada have struck deals with Omnicell in recent times.

Additionally, Omnicell aims to expand into the international market given the fact that the international market is less than 1% penetrated with very few hospitals adopting medication control systems. Following its entry in China in 2011 and the launch of the Mandarin-language versions of G4 platform, the company encouragingly noted that during the reported quarter, it had initial sales in China.

Omnicell also announced a partnership with China Resources Beijing Pharmaceutical for distributing its automated medication dispensing systems in China.

However, the company’s products, primarily catering to the hospitals and nursing homes, are still suffering from weak credit markets and higher unemployment. Constrained hospital spending is a primary headwind for the company.

Moreover, the company faces intense competition in the medication management and supply chain solutions market from major players such as CareFusion Corporation and McKesson Automation (MCK - Free Report) . The company presently retains a short-term Zacks #3 Rank (Hold).

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