Quality Systems to Benefit From Bush's Electronic Medical Record Goal

Medical records have sparked some interesting debates in Washington. President Bush has announced a goal that every American would have a EMR (Electronic Medical Record) within 10 years. As lawmakers point out the virtues of doctors knowing which medicines a patient is taking to reduce errors and provide more accurate diagnostics, privacy advocates wonder how the information will be kept secure and who will have access to pull this information.

The business side of this issue has plenty of questions as well. Who will fit the bill when it comes to establishing such records? What type of equipment is necessary and how will doctors interface with such databases? And what incentives should be offered to private physicians to help get the ball rolling on implementation?

Quality Systems (QSII) provides technology and information solutions to small and mid size physicians groups and dental practices. The company has benefited from the increased publicity surrounding electronic records, but still the market is largely under-penetrated. It is estimated that only 25% of all practices have implemented or are in the process of implementing an EMR system. Small practices are especially difficult for QSII or competitors to sell to because they usually don't have a significant benefit from installing such systems and the time it takes to learn the process would take valuable time away from their patients. Thomas Wiesel speculates that government support for EMRs will have to pick up in order for adoption to accelerate.

QSII trades at a bit of a discount to peers in the same business. Some of this discount is due to the fact the company does not issue any guidance. It is hard to model what the future earnings will look like and because of that risk, investors demand a bit more premium hence the lower stock price. On the positive side, the company has a significant amount of cash and recently paid a special dividend to shareholders. It has no debt and just initiated a regular quarterly dividend of $0.25 which is roughly a 2.6% yield. Some speculate that the company would be in great financial shape to make an acquisition although the company states that their priority is organic growth. That growth could potentially stall if there is not sufficient encouragement from regulatory bodies for small practices to install such systems.

One issue that has pressured the stock relates to the CFO's trading of stock before an earnings announcement. The SEC has begun a formal investigation to see if there were any improper trades. The company is cooperating with the SEC but also stated that they have hired a third party law firm to look into the matter and after exhaustive research they did not find any improprieties. This matter will continue to be a damper on the stock until the SEC announces their findings.

Although I don't have a position at this time, I am thinking hard about selling stock short. I think the overall industry will be a bit stagnant as the presidential cycle is winding down and the competition in this area is fierce. Competitors include General Electric (GE), Siemans (SI), Merck (MCK) and Cerner (CERN). It may be worthwhile to put on a pairs trade going long CERN and short QSII to hedge against a broad move in the overall industry. One caveat is that if the SEC finds no problems with the insider trading, it will likely cause the stock to move up quickly and possibly shake out a short investor before likely trading back in line with the overall trend.

QSII 1-yr chart

Disclosure: none