Valuation of Healthcare Information Systems & Software Providers

With the constant pressure on health care costs one would think that information systems and software and solutions providers that promise to streamline the processing of medical records would be attractive companies to invest in. Using ZenValue software, we decided to analyze five of these companies to see if they provided an attractive investment on both a growth and valuation basis.
The five companies we looked at are : Athenahealth, Inc (
ATHN); Cerner Corp. (CERN); McKesson Corp. (MCK); and Allscripts Heathcare Solutions, Inc. (MDRX), Quality Systems, Inc. (QSII). Using the analysts's average 5-year projected growth rates for each company, the output gave us the following for price vs. intrinsic value for each company (sorted in ascending order).


The trailing 5-years FCF per share growth rate of each of the 5 companies is below for reference:
ATHN: 20% (4 years of data), CERN: 17%, MCK: 8%, MDRX: 65%; QSII: 24%.
The initial pass shows MCK to be priced at 70% of intrinsic value, CERN priced close to intrinsic value, and the others at a premium of 40% to 70% of intrinsic value.

The valuation page has the following highlights:

The PEG ratio of all companies is greater than one. Looking at most ratios, MCK seems to be the most fairly priced of these stocks. The price/sales ratio of 0.14 stands out and needs further looking into, though.

The return on investments page has the following highlights:


QSII is head and shoulders above the other companies with ROIC consistently above 20% for the last 5 years. However, ROIC has been steadily declining over the last 3 years from a high of close to 35%. The ROIC of CERN and MCK has held steady or grown over the last few years, although running around half that of QSII.


Finally, the debt and liquidity page has the following highlights:


Only MCK and MDRX have significant debt. That of MDRX has declined over the past 5 years from a high of 0.8, while MCK's debt has actually risen from a low of 0.15 to its current level. Also, MCK's current ratio is less than 1, and has been for the last 5 years, which might indicate problems paying their current liabilities.


In summary, among the stocks we've looked at in the information systems/software and solutions providers for the healthcare industry, only one company seems selling at a discount to its intrinsic value: MCK. However there are other issues around the company's rising debt and ability to pay its obligations that are causes for concern or at least monitoring. CERN seems to combine a fair value with a decent growth rate and no red flags in the areas we looked at. QSII has a very high ROIC and decent growth rate, but that comes at quite a premium to its intrinsic value.
ZenPrime has no positions in any of the stocks discussed above, and no plans to create positions in the next 90 days.
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