Zacks_Analysts' Blog : Earnings Preview: Cerner - Analyst Blog

Leading electronic health record (“EHR”) and healthcare IT (“HCIT”) services provider Cerner (CERN) is expected to report third-quarter 2011 results on Thursday, October 27. The current Zacks Consensus Estimate is 45 cents, representing a 26.16% annualized increase.

Second Quarter Flashback

The company’s second-quarter 2011 earnings per share of 42 cents beat the Zacks Consensus Estimate by a penny. Cerner had revenues of $524.2 million in the quarter, which was better than the Zacks Consensus Estimate.

Cerner derived a minor portion of its revenues from overseas operations. As a result, it is not simply a play on the U.S. stimulus. Instead, it offers a limited exposure to worldwide healthcare automation. Besides, Cerner enjoys a multitude of burgeoning growth drivers, other than international sales.

Estimate Revision Trends

Agreement

Estimates for the third quarter have been largely stagnant. Out of a total of 14 analysts covering the stock, there were no revisions in the prior week while there was only one revision in the past month, in the downward direction.

With regard to estimates for fiscal 2011, no analyst (out of 14) raised or lowered his/her estimate over the past week and month. The current Zacks Consensus Estimate for fiscal 2011 is $1.73, representing an estimated 24.36% year-over-year increase.  

Magnitude

Given the lack of estimate revisions, the magnitude of revision for the third quarter, as well as fiscal 2011, has been static over the prior week as well as the past month.  

Cerner has generated positive surprises in three of the previous four quarters while it met the Zacks Consensus Estimates on the other occasion. Based on this trend, we expect the company to meet or beat expectation in the third quarter. The company produced an average positive earnings surprise of 3.5% over the four preceding quarters, meaning that it beat the Zacks Consensus Estimate by that measure.    

Outlook

Cerner remains the trendsetter among pure-play, publicly-traded HCIT vendors. The company has domain expertise and its wide foot-print, large reference-able client base and composite array of solutions make it an ideal candidate for investors seeking an exposure to the industry.

We believe Cerner is one of the better placed clinical technology vendors to benefit from high HCIT spending over the next few years besides tapping into the robust replacement market. Most of the risk associated with the company is perceived as industry-wide in nature with few predictable company specific risk factors. 

Cerner is diversified not only on a global basis but serves both hospitals and ambulatory outfits. It is one of only two vendors that are reportedly gaining market share in the medium- to large-hospital space.

We believe long-term investors may consider Cerner, which serves a sizeable installed hospital base that requires composite clinically-focused applications complying with “meaningful use” requirements, reimbursement problems and complex coding challenges. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.

On the negative side, the federal Stimulus program will gradually wind down. Moreover, the favorable growth prospects are already factored into the stock price and the risk-reward trade-off is fairly poised. Cerner faces stiff competition from established HCIT players, such as Athenahealth (ATHN), Allscripts-Misys (MDRX) and Quality Systems (QSII) and many others in a crowded field. We are currently Neutral on Cerner.