Background: Computer Programs and Systems, Inc. (NASDAQ:CPSI) is a small-cap information technology company focused on supplying needs of small, community, rural and specialty hospitals and other healthcare institutions and organizations throughout the United States. Yahoo! Finance has a cogent writeup of its business lines, as does the company on its website. The company is a leader in its niche. As evidence, it features the following on its website:
CPSI Leading EHR Vendor for Fourth Consecutive YearFebruary 17, 2014
MOBILE, Ala.--(BUSINESS WIRE)--Feb. 17, 2014-- Computer Programs and Systems, Inc. , a leading provider of health information systems and services, today announced it has been recognized as the top ranked inpatient EHR vendor for hospitals under 100 beds by Black Book Rankings. This is the fourth consecutive year that CPSI has been recognized as the top overall inpatient EHR vendor for small and rural hospitals under 100 beds and critical access hospitals.
CPSI also received the honor of top vendor in the following subsets: Patient Health Data Management & Administrative Processing, Communications and Connectivity, and Order Entry and Management.
In addition to these honors, from an investment standpoint I have generally found it a plus when the Value Line Investment Survey opens coverage on small cap companies such as CPSI with positive attributes. (This is where I was introduced to this investment opportunity.)
While I have not spoken to management, as a physician I am familiar enough with CPSI's field and its financial and business accomplishments to have felt comfortable both investing significant amounts of capital in its stock and in reporting on the company to Seeking Alpha readers.
Introduction: Please review the company's description of itself, linked to above and again here. In this article, I'm going to assume a basic knowledge of this company. Now that the Great Recession has passed into history (though some continue to believe it has not ended) and "Obamacare" is the (malleable) law of the land, we can see the outline of the future: healthcare funding has a broad societal consensus that it is worthy of support. Thus the smaller and often financially weaker hospitals and other institutions and organizations that CPSI serves comprise in my view a good market opportunity that can allow CPSI to provide comprehensive and well-margined services. The smaller the hospital, the less competitive the situation. Indeed, Value Line data shows a general uptrend in CPSI's operating and net profit margins. The company has been free of long-term debt at least as far back as 2004 and has seen its net profit margin increase from 8.5% in 2004, 13.4% in 2005, 14.9% in 2011, to a projected 17.6% in 2014. At the same time, shares outstanding have barely risen, from 10.49 MM in 2004 to 11.16 MM last year.
In other words, this is an old-fashioned company. The company went public in 2002 around $18 with a P/E around 25X and initiated dividends in 2003. The stock is trading at roughly 20X forward expected earnings with a current quarterly dividend of $0.57, providing a current dividend yield of 3.40% at the current price of $67/share. Here is the long-term chart, and note that there have been a total of about $14 in dividends paid out since 2003 in addition to the price appreciation.
In the 12 years since CPSI went public, the share price has appreciated at a CAGR of about 11%, with an average dividend yield of at least 3% providing a superior total return.
Growth metrics and potential: Value Line reports that the company has increased earnings at a 10.0% rate over the past 10 years and at an 11.0% rate over the past 5 years, each of which is mildly faster than sales growth, reflecting improved margins. Earnings predictability in the 80th percentile is a positive for investors, and so is the recent uptrend in earnings expectations among analysts:
EPS Trends Current Qtr.
Current Estimate 0.80 0.84 3.32 3.50 7 Days Ago 0.80 0.84 3.32 3.50 30 Days Ago 0.80 0.85 3.32 3.50 60 Days Ago 0.72 0.78 2.98 3.24 90 Days Ago 0.72 0.78 2.99 3.29
Per the corporate website and discussions in the Seeking Alpha transcript of the Q4 conference call, the company believes that it has enhanced its growth prospects by creating its TruBridge subsidiary.
Without getting into too many details, we can all appreciate that because of the increasing involvement of the Federal government in healthcare and especially in large stationary "targets" such as hospitals, a complicated variety of requirements have been placed on these institutions that companies such as CPSI are necessities for the hospitals. Various strictures and inducements for medical records to go electronic are in place. Important and onerous privacy requirements pervade the industry. Malpractice issues and often-vigorous oversight of diagnostic coding technical considerations mean that hospitals must get matters right the first time, every time, or suffer potentially serious consequences. Thus a high quality, award-winning, sales-oriented company such as CPSI fills a critical need. Once a hospital or other organization has gone with CPSI, there are high barriers to switching, and CPSI has a good record of client retention.
For these reasons, Value Line projects mildly rising operating and net profit margins 3-5 years from now, along with a continuation of the company's lack of long term debt.
if TruBridge can be a true growth vehicle, the combination of the "steady Eddie" recurring revenue and moderate intrinsic growth nature of CPSI's basic business plus TruBridge could both increase earnings faster than expected in the future, which in turn could feed back to a P/E in the mid-20's; i.e. closer to that of its healthcare IT peers.
Profitability: CPSI is strongly cash flow positive. Value Line estimates for this year are for $3.55 (all data are per share) in cash flow with no net debt repayments and only $0.55 in capital spending. This suggests $3.00 in free cash flow. The current price of $67 means that FCF yield is relatively low at around 4.5%. However, the healthcare IT industry typically trades much richer than even that. A larger peer, Cerner Corp. (NASDAQ:CERN), is trading at more like 26X FCF. Athenahealth, Inc. (NASDAQ:ATHN) trades at an almost infinite P/E and has virtually no FCF at all. In other words, CPSI is reasonably valued given its industry positioning. It is not, however, "cheap." I find the high and sustainable dividend payout an adequate offset for the somewhat rich valuation, however.
Insider ownership and actions: Given CPSI's small cap status with a market cap under $800 MM, it would be nice to see high levels of insider ownership and/or insider buying. Alas, both are absent. Insiders own 3% of the shares outstanding; institutions own 85%. Insiders sell moderate amounts of stock periodically and in recent times appear to acquire stock through options grants or other stock awards, but have not bought on the open market since three insiders bought a total of about 12,000 shares on the open market in February, 2013 at a price around $47.41.
Overall I would say that this is a neutral consideration for investors, though it would have been nice to have placed it in the "positives" camp.
Independent rating services opinions: Value Line's computerized stock price appreciation system rates CPSI a '2' on a 1-5 scale. VL's analysts foresee about a 10% annual total return, including price and dividends, through 2018. Fidelity's aggregate of analyst opinions shows CPSI with a very high average rating of 9.4 on a 0-10 scale. This is unusually high and, I suspect, reflects some informed knowledge of the company. Zacks carries CPSI as a #1 (Strong Buy). EvaDimensions finds CPSI to be an unusually good value for stocks within its industry and thus gives it a very high 'PRVit' score of 91. ThomsonReuters and Verus each rate CPSI as '5', or average.
Value Line gives CPSI a mildly above average financial strength rating of B++. This is basically a strong rating given the company's small size, with net profits only expected to be around $37 MM this year.
Risks: CPSI carries a beta of 0.95, so even though it operates within the healthcare industry, it has moved with the general market. It often assists its clients with financing, and its focus on small hospitals drives up sales, travel and support costs. If another recession comes, its clients may force it to cut margins and suffer issues with profit growth or even profitability. This has occurred to some extent before. After rapid growth until 2006, earnings dropped and did not exceed the 2006 level until 2011, when they surged strongly to a new record. (The dividend was maintained throughout the period of sluggish earnings.)
Competition from larger, better-financed companies is always a risk. So is competition from small, hungry companies.
Summary and conclusions: While I have not spoken with management and have not yet had the opportunity to visit a facility served by CPSI, I find what I have learned of the company and its stock to be attractive. There are high switching costs to any hospital or other organization that goes with CPSI in a major way, so I believe that there are bond-like characteristics to its current 3.4% dividend yield. I anticipate that patient shareholders are likely to be rewarded by a combination of moderate dividend increases over time along with some degree of share price appreciation. There also is the omnipresent possibility of a buyout, given CPSI's small size and resultant possible view of a large company that synergies could result from acquiring the company at a premium.
CPSI operates at the nexus of two popular industries, information technology and healthcare. Despite that, individual investors only own a very small amount of the float. Thus, Seeking Alpha readers may find it worth their time to perform independent research of this company on their own to see if they wish to join me as a shareholder of CPSI.
Disclosure: I am long CPSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.