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Cerner (NASDAQ:CERN), a leader in health-care information technology, should get a bump from wider use of electronic medical records, explains Barron's Lawrence C. Strauss. Shares are up 50% since March on stimulus plans to encourage more health-care IT, and there could be another 40% upside over the next 12 months.

Shares may look a little pricey at 22.8 times this year's profit estimates, but bulls argue there's plenty more upside as national gaps in health-care IT start to get filled. Part of Obama's stimulus plan earmarks $36B of incentives to encourage wider use of electronic medical records, and penalizes providers that don't make that effort. The company estimates its clients could receive around $8B of stimulus incentives, half of which could flow to Cerner. And hospitals and doctors' offices have another incentive to adopt health-care IT - the savings from the move could total more than $77B per year.

Health-care providers have been slow to make the transition until now, leaving big IT gaps especially in hospitals, which are Cerner's mainstay customers. In fact, just 1.5% of U.S. hospitals reported having "a comprehensive electronic-records system." Computerized order entry penetration is just 17%. These are both profitable areas for Cerner, generating around 15% of its $1.7B in revenue.

Cerner has also seen increased recurring revenue from its professional-services operations, which include installing IT and training hospital personnel to use it. There's also been growth in support and maintenance, and in managed services.

Though hurt by a recent cutback in hospital spending, Cerner still reported a decent first quarter. The company earned $0.52/share on $392.3M of revenue. Though revenue rose just 2%, adjusted operating margins rose, expenses stayed steady, and operating cash flow stayed strong, as did the firm's balance sheet.

  • Sean Wieland, of Piper Jaffray, has a twelve-month price target of $78 based on the potential impact of the stimulus package. The company closed at $55.50 on Friday.

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  • Cerner: Q1 EPS of $0.52 beats by $0.01. Revenue of $392M (+1.9%) vs. $418M. Full-year guidance in-line. (PR)
  • Bullish Bankers calls IT one of the best sectors to be in during 2009, and says Cerner could see growth rates well over 25% for years to come.
  • Barron's included Cerner in its March list of ten stocks to hold long-term.
Source: Cerner's Clean Bill of Health - Barron's