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Here's Why You Should Hold on to Cerner (CERN) Stock Now

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Cerner Corporation CERN is well poised for growth on the back of big data based electronic health records (EHR) system and strategic deals. However, sluggishness in both gross and operating margins remains a concern.

Shares of Cerner have gained 33.9% outperforming the industry’s growth of 16.4% in a year’s time. Meanwhile, the S&P 500 Index has rallied 20.7% in the same timeframe.

The company, with a market capitalization of $24.04 billion, offers healthcare information technology (HCIT) solutions worldwide. It anticipates earnings to improve 13.7% over the next five years. Moreover, it surpassed estimates in the trailing four quarters by 1.5%, on average.

Let’s take a closer look at the factors that substantiate the company’s Zacks Rank #3 (Hold).

What’s Favoring the Stock?

Cerner has been benefiting from the prospects of the EHR services in the U.S. MedTech space. Notably, Cerner's HealtheIntent is a big data platform, which provides the company with significant exposure to AI trends in the medical world. Per management, the company’s prospects of expanding presence of EHR-agnostic CareAware and HealtheIntent solutions beyond EHR base are significant.

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.

The company has strengthened foothold in the Healthcare Information Technology (HCIT) space through both organic and inorganic means and plans to collaborate with leading companies and academic institutions to provide a wider portfolio of EHR solutions.

In fact, the company announced an investment and partnership with i2i Systems in third-quarter 2019. i2i holds 25% market share within the federally qualified health centers segment, which covers nearly a third of all Medicaid patient data and has a strong payer business with 13 managed care clients.

Moreover, Cerner follows a strategy of acquiring complementary businesses that enable the company to expand solutions, device offerings and services, and strengthen market and client base.

In fourth-quarter 2019, the company completed the acquisition of AbleVets for about $75 million (in cash consideration). Cerner has started to integrate AbleVets’ service offerings into its portfolio to accelerate growth in the federal space. Per management, the buyout is expected to contribute about $90 million to revenues in 2020. On the basis of expertise and the importance of Cerner’s federal business, AbleVets seems a suitable fit.

Strong outlook for first-quarter 2020 instills investor optimism in the stock. For first-quarter 2020, Cerner expects revenues between $1.42 billion and $1.47 billion. The mid-point of this range indicates growth of 4% from the prior-year quarter.

Adjusted earnings per share are anticipated to range between 69 cents and 71 cents. The mid-point of this range is 15% higher than that of fourth-quarter 2018.

For the full-year 2020, adjusted earnings per share are expected between $3.09 and $3.19, with the mid-point of this range suggesting growth of 70% over 2019.

What’s Deterring the Stock?

Cerner has been witnessing sluggishness in gross margin in the last couple of quarters. In fact, in fourth-quarter 2019, gross margin was 80.8%, down 180 bps on a year-over-year basis thanks to higher third-party services largely related to its federal business and a lower margin mix within technology resale.

Further, competition in the global MedTech space remains a concern.

Which Way Are Estimates Headed?

For 2020, the Zacks Consensus Estimate for revenues is pegged at $5.88 billion, indicating an improvement of 3.3% from the prior-year period. The same for earnings stands at $3.14 per share, suggesting growth of 17.2% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks from the broader medical space include Patterson Companies, Inc. (PDCO - Free Report) , West Pharmaceutical Services, Inc. WST and DENTSPLY SIRONA, Inc. XRAY, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Patterson Companies has an expected long-term earnings growth rate of 6.4%.

West Pharmaceutical has an estimated long-term earnings growth rate of 14%.

DENTSPLY SIRONA has a projected long-term earnings growth rate of 11.6%.

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