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Cerner Hurt by Low System Sales and Intense Competition


On Nov 25, we issued an updated research report on North Kansas City, MO-based Cerner Corporation CERN – a leading global provider of healthcare information technology solutions (HCIT). The stock currently carries a Zacks Rank #4 (Sell).

Cerner represents a negative return of 13.3% for the last one month, much lower than the S&P 500’s almost 3.5% over the same time frame. In fact, over the last 30 days, the Zacks Consensus Estimate for full-year 2016 earnings decreased by 6 cents to $2.14 per share, with one estimate moving down.

Notably, the stock recorded a negative earnings surprise of almost 1.8% in the last reported quarter.

On this note, Cerner ended third-quarter 2016 on a dismal note, missing the Zacks Consensus Estimate for both the top and the bottom line. Also, the lowered revenue guidance for 2016, owing to reduced hardware revenues, is a dampener.

In the quarter, while System sales decreased 7.3% on a year-over-year basis there was a 21% decline in technology resale and 12% drop in licensed software. All these are likely to mar prospects for Cerner going ahead.

Coming to the HCIT space, of late the niche market has been gaining prominence, courtesy of latest technologies like EMR (Electronic Medical Record) and Electronic Health Record (EHR).

Cerner, a major player in this space, has been facing cut-throat competition from reputed names such as Allscripts Healthcare Solutions, Epic Systems, GE Healthcare Technologies, McKesson Corp, Quality Systems among others. This has impacted the company’s pricing and margins to a great extent. Stringent hospital budgets exert further pressure on pricing.

As a result, Cerner’s projected sales growth is now pegged at 8.65%, much lower than the industry average of 18.5%.

However, we are upbeat about Cerner’s Revenue Cycle management and Population Health platforms. The platforms posted strong results in the quarter, courtesy of solid sales, inclusion in new EHR deals and solid contribution from RevWorks services (revenue management services).

Additionally, a long-term expected earnings growth rate of 14.7% instills some confidence among investors.

Key Picks

Better-ranked stocks in the broader medical space include HMS Holdings Corp. HMSY, Medidata Solutions Inc. MDSO and IDEXX Laboratories, Inc. IDXX. Notably, HMS Holdings and Medidata Solutions carry a Zacks Rank #2 while IDEXX Laboratories sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

HMS Holdings Corp has a long-term expected growth rate of 14.26%. Notably, the company has a solid one-year return of roughly 58.8%.

Medidata Solutions has a strong one-year return of roughly 18.22%. The stock represents a long-term expected growth rate of 22.33%.

IDEXX Laboratories represents a solid one-year return of almost 70.09%. The company has a long-term expected growth rate of almost 14.96%.

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