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With new Medicare regulation changes approaching the healthcare sector, it may be more important than ever for hospital systems to keep a former patient healthy. In fact, as of a few weeks ago, new medicare guidlines may reduce Medicare reimbursements if rehospitalizations are too numerous for certain diseases. There has been intense studies which identify this "revolving door" effect of chronically diseased patients and the U.S. healthcare system. One such study found that 1 in 5 elderly patients is readmitted to the hospital 30 days after leaving (approximately 2.3 million rehospitalizations/year). This created over $17 billion in annual Medicare costs, a big strain on the Medicare system. This is why these new guidelines are being implemented.

The question has been, how do hospitals keep patients healthy once they leave their facilities? Some systems have developed nursing programs, mainly visiting nurses that assist a patient with their health needs for a period of time in the comfort of their own home. Others even go as far as contacting a patient by phone to monitor their symptoms, diet, and medication. Even though these programs can contribute to lowering readmission rates thus will also reduce Medicare payment penalties - there is an even better solution which is perhaps so basic it is overlooked.

Before I give it away, think about this common situation: A single patient regularly visits several specialists and different facilities for testing, ranging from blood work to x-rays to ultrasounds. This data, which is often years of valuable medical history, is now scattered within the filing cabinets and software systems of these different offices and facilities. Now, when this patient is eventually hospitalized with a serious chronic condition, how can a hospital expect to access this patient's medical history in a timely manner? The sad truth is they often can't. The solution is simple: Provide a better network of data sharing between doctors and facilities.

By collaborating and sharing patient information into a more uniformly accessible database, hospitals and physicians can efficiently share information and thus keep patients healthier as well as better treat them if they are hospitalized. But how can healthcare networks assemble these complex databases and varying software into a more uniform, collaborative system? This is where Cerner Corporation (NASDAQ:CERN) comes in.

This $11.7 B technology company develops, implements, and supports healthcare information technology, healthcare devices, and content solutions for healthcare organizations worldwide. These solutions are licensed by 9,300 facilities globally, including more than 2,650 hospitals and 3,750 physician practices containing 40,000 physicians.

Put simply, Cerner's technology stores patient data locally and in the cloud, then offers a useable platform in which to access and share this data by hospitals as well as physicians, which facilitates the improvement of patient care and therefore hospital efficiency.

When investors think of data cloud and network companies, popular tech titans like EMC Corp (NYSE:EMC), F5 Networks (NASDAQ:FFIV), VMWare (NYSE:VMW) and Equinix Inc. (NASDAQ:EQIX) often pop into their heads. There is no denying these companies are fantastic in their own right. However, they don't really have a unique niche like Cerner does with healthcare, in which new Medicare regulations are forcing hospitals to be more efficient, and therefore making Cerner's systems and services desired.

So we have discussed Cerner's product, the need for it, and its niche. But how does Cerner stand up against these popular cloud and networking companies in terms of valuation?

Stock

CERNEMCFFIVVMWEQIX
Market Cap$11.7 B$51 B$6.5B$36.8B8.9B
P/E ttm33.56x20.0327.14x50x92.2x
P/S ttm4.75x2.41x5.55x8.36x5.05x
PEG ttm1.72x1.46x1.43x2.19x3.0x
'12 EPS Est.2.361.724.372.72.68
'13 EPS Growth Est.18%16%18%14%46%
'13 EPS Est.2.781.975.173.153.83
'14 EPS Growth Est.17%16%18%16%32%
'14 EPS Est.3.272.296.133.675.05

At a quick glance, it appears like EMC has the most reasonable valuation. However considering EMC owns roughly 80% of VMW, which has a more expensive valuation, EMC may not be so cheap. FFIV appears cheaper than CERN as well, with lower P/E and PEG ratios. However, I feel due to increasing pressure from Medicare regulations going forward and Cerner's position in this niche market, it's well worth the price.

Recent Earnings

On October 25th 2012, CERN reported phenomenal 3Q earnings, extending a double-digit earnings growth streak to more than two years, as well as strong revenue growth, as more health professionals and hospitals convert to electronic records. Let's look at some major highlights:

  • 25% earnings increase.
  • Increased lower end of 2012 full year earnings range by two cents, projecting $2.34 to $2.36 a share.
  • Raised revenue guidance, forecasting between $2.63 billion and $2.66 billion, up from $2.58 billion to $2.63 billion.
  • Bookings totaled $769.9 million, up 18% from $650.3 million a year earlier.
  • Total backlog rose 20% from a year ago to $6.79 billion.
  • Profit of $98.9 million, or 56 cents a share, up from $78.8 million, or 45 cents a share, a year earlier.
  • Revenue grew 18% to $676.5 million.
  • Operating margin widened to 22.1% from 21.1%,
  • Support, maintenance and services revenue rose 16%, while system sales revenue was up 22%.

Summary

It seems to me like Cerner is already firing on all cylinders, even though hospitals are just beginning to see Medicare pull in the reins on efficiency and readmission rates. These new Medicare restrictions and guidelines offer incentive for hospitals to increase spending on data technology, since this can increase the quality of patient care, reduce readmission rates, and increase efficiency. Because of this, Cerner's products and services have never been more relevant than today. Also, shares are relatively attractive compared to similar tech companies, considering Cerner is a big player in their niche market. Because of these factors, Cerner is a long term buy in my opinion.

Source: Cerner: This Niche Tech Stock Is A Strong Buy

Additional disclosure: I may initiate a position in CERN within the next 72 hours.