Seeking Alpha
Long-term horizon, registered investment advisor, portfolio strategy, fund holdings
Profile| Send Message| ()  

Mediware Information Systems (MEDW)

  • Share Price: $11.75
  • Intrinsic Value: $15.50
  • Buy Below: $12

Business Description & Background:

Mediware designs, develops and markets software solutions targeting specific processes within healthcare institutions. Software products are sold to hospitals, long-term care and behavioral health facilities, and stand-alone blood and plasma donation centers and alternate care settings.

The company was founded in 1970 and is headquartered in Lenexa, Kansas.

Source: Yahoo! Finance, company filings

Thesis:

Traditional healthcare environments leverage disparate information systems and manual processes throughout the care process. This results in reduced efficiency as well as increased safety risks due to the potential for human error and delayed access to patient information and records. Errors and risks associated with medications, blood, or biologics can often result in tragic consequences. In 2008, medical errors cost almost $20B according to a 2010 study by Milliman.

The American Recovery and Reinvestment Act (ARRA), which became effective in 2009, includes more than $38 billion in incentives to help healthcare organizations modernize operations through the acquisition and use of information technology solutions. A part of ARRA designated the Health Information Technology for Economic and Clinical Health Act (HITECH) provides for roughly $2 billion in jump start funding that the Department of Health and Human Services is to distribute over a two year time frame beginning in 2011. ARRA also includes approximately $17 billion in Medicare and Medicaid incentives targeting the improvement of health care record keeping and data submission.

The government spending is intended to reduce inefficiencies and improve patient care through the use of technologies. ARRA, and specifically HITECH, increases the pressure on hospitals and care providing institutions to adopt technology. HITECH provides funding for facilities to launch improvement projects associated with the "meaningful use" of key information technologies. Qualifying hospitals can receive payments over a period of approximately four or five years beginning in 2011, based on their use of certified health information technology systems. HITECH also provides financial penalties to hospitals by reducing Medicare reimbursement payments for hospitals that do not comply with certain “meaningful use” requirements by 2015.

MEDW has been increasing its penetration with existing hospitals, home health care, and behavioral health pharmacies with bolt-on acquisitions. They are using their relationships with existing customers to cross-sell other medical needs. In particular they are looking at expanding recurring revenue products through Software-as-a-Service (SaaS).

The market for Medical healthcare IT is large, almost $32B, which has steadily increased over the past decade. The market is extremely fragmented so there is room for acquisitions. MEDW has spent about $5mm each year for the past three years to acquire smaller players that fit their core market. They have been able to successful cross-sell these services across their customer base.

MEDW has done a good job of cutting out expenses after it makes acquisitions. Many of the acquisitions' revenue drops to the bottom line as they implement best practices. Free-cash-flow (FCF) margins have increased from 24% to 28% (before capitalized software and acquisitions costs) in the past three years. Recent acquisitions seem to be successful so far. Each has been accretive to earnings and they haven't paid more than 1x revenue. Although we are always leery of growth by acquisition stories, it seems Mr. Mann and his team take a conservative approach to achieving future growth.

MEDW has made a nice niche for itself in the U.S. Military market. They recently won a contract for their blood transfusion management software. This was in addition to their awards in October for the blood donor operations.

Management and Stewardship:

MEDW is run by Kelly Mann, former SVP of marketing for 3M Corporation's (MMM) Health Information Division. Mr. Mann has done a good job increasing MEDW recurring revenue stream to 59% of revenues, up from about 50% three years ago when he took over. Return on invested capital has been steadily moving up to the mid-teens from single digits just three years ago.

Valuation:

MEDW shares are attractively priced after taking into account the coming tailwind from the ARRA stimulus. We have included software capitalization and acquisition expenses in our FCF numbers. Over the trailing twelve month period, MEDW has generated $6.2mm in FCF (Cash from Ops.- CapEx- Software Capitalization - Acquisitions). Backing out acquisitions, MEDW would have had over $11mm in FCF. MEDW has a strong balance sheet with over $27mm in cash ($30mm - $3mm for CareCentric acquisition) and no debt. Mr. Mann has made it clear that he doesn't not like using debt and prefers to fund future acquisitions with excess FCF.

Market Value:

Net Cash

$27.1

Market Cap

$96.1

Enterprise Value

$69.0

Valuation Multiples:

P/E

18.7x

P/S

1.8x

P/FCF

15.5x

EV/FCF, ex int

11.3x

EV/FCF, ex int

11.3x

FCF Growth

Years

25.0%

1

15.0%

2

0.0%

3

10.0%

4

6.0%

5

3.0%

6-10

0.0%

11-20

0.0%

Terminal

10.5%

Discount Rate

0.3%

Dilution

$15.36

Total per share IV

20.4x

Multiple to Y0 FCF

0.8x

Price% of IV

30%

Upside/current

To achieve our targeted upside of 30%, we would recommend purchasing the shares at, or below, $12.

Sources: Company web-site, sec.gov, company filings, Yahoo! Finance, Morningstar.com, Data provided by EDGAR Online’s I-Metrix Professional, XBRL-enabled application.

Disclaimer: This discussion is for informational purposes and should not be taken as a recommendation to purchase any individual securities. Information within this discussion and investment determination of the author may change due to changes in investment strategy when warranted by changing market conditions, or if a security’s underlying fundamentals or valuation measures change. There is no guarantee that, should market conditions repeat, this security will perform in the same way in the future. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that the author will continue to hold this position in companies described herein, and may change any of his position at any time.We use or best efforts to obtain good data in our models, however it can’t be guaranteed that our inputs and data are correct. This is not a recommendation for readers to purchase shares in the above security without consulting your financial professional to discuss your own risk tolerance and objectives.

Source: MediWare: Profiting From Government Healthcare IT Stimulus