CPSI A Buy? Our Analysts Say Yes

Jul.26.13 | About: Computer Programs (CPSI)

Our more detailed report analysis is available, but the Computer Programs and Systems summary is as follows:

Thesis Overview:

Computer Programs and Systems (NASDAQ:CPSI) passes our 3-M's test with flying colors. This is a great business and we hardly could have been more impressed with our conversation with CFO David Dye. it has a niche in an industry that is growing nicely with near-term catalysts. A nice dividend, insider buying, strong moat, and relative value are all positives. CPSI has grown top-line revenues at greater than 12% in the last three years. This is likely to accelerate due to legislative catalysts and the recent launch of its subsidiary TruBridge, yet valuation multiples are below historical levels and that of peers.

Investment Highlights:

  • Recurring revenues represent 60-65% of CPSI's top line. This recurring revenue is from support and maintenance, and business management services.
  • ROE (Return on Equity) for 2012 was over 50% and the 10 year average has been almost 40%.
  • CSPI sales and earnings are growing at almost 9% and 15% annually.
  • The dividend has been growing at a healthy rate; the 2013 dividend was increased 11%.
  • Strong balance sheet with virtually no long-term debt.
  • The backlog is almost $150 million.

Company Profile

Computer Programs and Systems Inc. is a healthcare information technology company that designs, develops, markets, installs and supports computerized information technology systems. The company's target market includes acute care community hospitals with 300 or fewer beds and small specialty hospitals, with its primary focus on hospitals with 100 or fewer acute care beds. CPSI is providing software and hardware products, complemented by data conversion, installation, support and information technology management and professional services. Its integrated, enterprise-wide system automates the management of clinical and financial data across the primary functional areas of a hospital. In addition, it provides services that enable its customers to outsource certain data-related business processes.

Investment Highlights and Interesting Data Points:

  • Recurring revenues represent 60-65% of CPSI's top line. This recurring revenue is from support and maintenance, and business management services.
  • ROE (Return on Equity) for 2012 was over 50% and the 10 year average has been almost 40%.
  • CSPI sales and earnings are growing at almost 9% and 15% annually.
  • The dividend has been growing at a healthy rate; the 2013 dividend was increased 11%.
  • Strong balance sheet with virtually no long-term debt.
  • The backlog is almost $150 million, which doesn't reflect add-on sales from the current base needing to get from Stage 1 to Stage 2. When we asked CFO David Dye if the company's Stage 1 hospitals had begun ordering software to get to Stage 2, he responded, "Not even close." viii
  • ARRA, HITECH, Medicare, and Medicaid among others have created near-term catalysts with financial incentives for healthcare facilities to adopt EHRs by October 1, 2015 or face penalties.

Mispricing and Valuation:

Much of the mispricing comes from the so called Street experts' displeasure with CPSI falling short of quarterly earnings estimates by a penny or so. The reason for this has to do with CPSI's strategy for getting hospitals to Stage 1 Meaningful Use. In 2012, CPSI began offering its systems at almost no upfront cost to clients; they just pay a monthly fee until they receive their stimulus check. Once they receive the stimulus check, they then pay for the system in full. What the Street does not like about this strategy is that instead of receiving the revenue from this in Q2, it might not be until Q3 or Q4 that CPSI receives the revenue due to the lag between attestation and receiving the stimulus from the government. Attestation happens when a healthcare facility proves to the government that they are using the electronic records system, meeting the standards set for the various stages of Meaningful Use. The strategy creates a window of time where costs are greater than revenues, but once the revenue is received, it is at a very high margin. CPSI is able to do this because of its exceptionally strong balance sheet. Companies like Prognosis Health Information Systems have similar strategies but not the financial backing to support them, so they are struggling. This strategy is slowing down though as the bulk of the contracts CPSI is signing currently are for Stage 2 Meaningful Use. Long-term investors will be best served as they will be able to better recognize the gains from this strategy.

This implementation strategy aside, CPSI has grown top-line revenues at more than 12% over the last three years, and ROE is at a high of 53%. This is likely to accelerate given ARRA legislation and the launch of TruBridge. However, valuation multiples; Price/Earnings, EV/EBITDA, and Price/Book are below historical levels and that of peers. Free Cash Flow Yield is 3.39% (which is understated for the reasons listed above), and with the most recent dividend increase, CPSI is yielding about 4% at its current price.

Inside its existing customer base, CPSI has an internal market opportunity of 168 hospitals needing to get to Stage 1 Meaningful Use (based on 75% of current base being Stage 1), and an outside market opportunity of 100 hospitals for Stage 1 sales. Using $800 thousand (the midpoint between $1 million and $600 thousand) for a Stage 1 sales estimate, that equates to $214 million in revenue over the next two years as the deadline for Meaningful Use Stage 1 is October 1, 2015. For simplicity, you could assume that number will be spread evenly at $107 million a year. We expect recurring revenues to grow in the 5% range. For 2013, we estimate top-line revenue to be $216 million. Holding margins constant gives us an EPS estimate of $3.00. In our model, for conservatism we did not give CPSI any credit for margin expansion, which is likely over time as a greater percentage of revenues come from services, nor did we include sales numbers for Stage 2 and Stage 3 Meaningful Use or potential revenues from TruBridge. Also, it is worth noting that there are indications of continuing stages of Meaningful Use after Stage 3, for which we did not model.

CPSI has a niche in an industry that is growing nicely with near-term catalysts. Based on our DCF model, which forecasts top-line growth of 15% until 2015 and a WACC (weighted average cost of capital) of 15%, we set a price target of $62.00 and recommend buying under $52.00 for an appropriate margin of safety.

Disclosure: I am long CPSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.