Cerner: Healthcare Plus Technology Equals Right Place, Right Time

Jan. 4.12 | About: Cerner Corporation (CERN)

Medical technologyCerner (NASDAQ:CERN) caught my interest last year because of its outstanding stock performance. It is a part of the healthcare field's modernization developments that focus on coordinating and improving medical care through technology. The company's growth shows in its results - long-term double-digit percentage gains in both sales and earnings. The outlook for 2012: sales growth of 13+% to $~2.5 billion and earnings growth of 22+% to $2.25 per share.

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CERN performance graphClick to enlarge

Why healthcare technology is a good 2012 investment

Mention "healthcare" and many (most) will think about the new healthcare plan and the associated fundamental/legal/political debates. However, there is another development that has little debate: healthcare improvements driven by technology. Here the outcomes are widely viewed as win-win (healthcare and cost improvements). In a recent interview, James Hay, president of the California Medical Association, had this to say:

Q: What do you expect to see as major healthcare trends and issues in 2012?

A: This will be the year when the Affordable Care Act will be affirmed or rejected by the Supreme Court, and few events in history will have greater impact on how we practice. Congress is unlikely to fix the problems of Medicare in an election year, and seniors are going to find it more difficult to find physicians willing to put up with the low reimbursement and serious hassles Medicare imposes on them.

Hospitals and physicians will continue to integrate to better coordinate care and provide safer, more efficient, and more medically- and cost-effective care. CMA and the San Diego County Medical Society will work with physicians to assist these transitions, especially to help solo and small group practice doctors connect to each other or to larger physician organizations or physician-hospital systems.

Therefore, while we likely will see more political debate, uncertainty and inaction about the new plan, there is a strong desire and potential for real improvements based on technology. Hence, Cerner looks to be a rewarding investment in 2012.

Why Cerner?

The best answer to that question is the short description the company uses in its press releases:

Cerner is transforming healthcare by eliminating error, variance and waste for health care providers and consumers around the world. Cerner® solutions optimize processes for health care organizations ranging in size from single-doctor practices, to health systems, to entire countries, for the pharmaceutical and medical device industries, employer health and wellness services industry and for the health care commerce system. These solutions are licensed by more than 9,000 facilities around the world, including approximately 2,600 hospitals; 3,500 physician practices covering more than 30,000 physicians; 500 ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers; 800 home-health facilities; and 1,600 retail pharmacies. The trademarks, service marks and logos (collectively, the "Marks") set forth herein are registered and unregistered trademarks and/or service marks owned by Cerner Corporation and/or its subsidiaries in the United States and certain other countries throughout the world.

Then there is this historical growth table from the company's 2010 annual report. Note Cerner's absence from the stock market's "lost decade" (the 0% return for the S&P 500 Index at the bottom of the fourth column).

Cerner annual report tableClick to enlarge

For more, see Cerner's investor website.

What about the stock's valuation and performance?

Last year's ~50% rise through September clearly outran the company's earnings growth. The resulting high valuation combined with the stock market worries produced a weak period in which the stock price fell back to more attractive valuations. Not knowing how low it could go, my strategy was to step into a full position. Below is CERN's graph noting my three equal-weighted purchases. (I described the first two orders here.)

CERN daily stock graphClick to enlarge

Why not wait for a return to those recent, lower prices?

My expectation is that we've seen the lows of 2011's bout of mega-fear selling, particularly for Cerner because:

  • We're in a new year with last year's earnings becoming a footnote
  • Cerner's business is less economically sensitive
  • Cerner is financially sound, with excess cash flow, ample reserves and little debt
  • Cerner's stock price, while up from the recent lows, is still below its highs
  • Cerner is about to present at the January 10 JPMorgan Healthcare Conference in San Francisco
  • Last is technical: CERN looks to have completed a double bottom with Tuesday's rise perhaps being the first step to establishing a new uptrend

The bottom line

Cerner's good potential growth appears to be forthcoming regardless of the new healthcare plan's outcome or general economic developments. The gains in both healthcare effectiveness and efficiency (cost!) should drive the business forward. Cerner's long-term record of success suggests that the company will participate fully in that growth. With CERN selling at a reasonable valuation level, now appears to be a good time to own the stock.

Disclosure: I am long CERN.