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Earlier today I replaced my holding of Concur Technologies (CNQR) with a purchase of 120 shares of Cerner (CERN). Cerner closed today at $50.61, up $4.81 or 10.5% on the day. (I actually purchased shares at $49.67, shortfly before the close of trading. I believe that this stock 'fits the bill' better than the Concur shares and promised you I would review this company and share with you my thinking.
What exactly does this company do?
According to the Yahoo "Profile" on Cerner, the company
"...supplies healthcare information technology solutions worldwide. It designs, develops, markets, installs, hosts, and supports software information technology and content solutions for healthcare organizations and consumers. The company implements and supports software solutions and hardware that provide healthcare providers with secure access to clinical, administrative, and financial data in real time."
How did they do in the latest quarter?
Yesterday, on February 1, 2007, after the close of trading, Cerner announced 2006 4th quarter results. It was this announcement that actually drove the stock higher today! Fourth quarter 2006 revenues climbed 17% to $380.8 million from $325.8 million in the year-ago same quarter. Net earnings, on a GAAP basis, were $39.1 million with diluted eps coming in at $.48/share. In the prior year, net earnings were $27.4 million, and diluted eps were $.34.
The company beat expectations: analysts were expecting earnings of $.41/share on revenue of $363.9 million. In addition, the company raised guidance for the 1st quarter 2007 to earnings of $.34 to $.35/share, on sales of $365 to $375 million. Analysts are looking earnings of $.35/share on sales of $359.3 million.
What about longer-term financial results?
Examining the Morningstar.com "5-Yr Restated" financials, we can see that revenue has been steadily increasing from $561 million in 2001 to $1.2 billion in 2005 and $1.3 billion in the trailing twelve months (TTM). Earnings have been a bit more erratic early on with a loss of $(.61)/share in 2001 to a gain of $.65, then a dip to $.59/share in 2003. Since then earnings have been on the rise with $.86/share reported in 2004, $1.10/share in 2005 and $1.22/share in the TTM. The company has grown its outstanding shares very slowly, with 69 million in 2001 increasing five years later to 78 million, a just under a 15% increase while revenues have increased more than 100% and earnings have crown similarly by almost 100% since 2002.
Free cash flow has been positive and basically growing with $51 million in 2003, $112 million in 2004, $128 million in 2005 and $126 million in the TTM.
The balance sheet also appears solid, with $276.7 in cash and $407.0 million in other current assets. This total of $683.7 million, when compared to the current liabilities of $264.1 million, yields a current ratio of 2.59. Generally current ratios of 1.25 or higher are considered healthy.
How about some valuation numbers?
Reviewing the Yahoo "Key Statistics" on Cerner, we can see that this is a mid cap stock with a market capitalization of $3.95 Billion. The trailing p/e is a bit rich at 41.69, but with earnings growing rapidly, the forward p/e (fye 31-Dec-07) is estimated at a more reasonable, but not cheap, 29.95. Thus the 5-yr expected PEG ratio is a nice 1.36.
According to the Fidelity.com eresearch website, the Price/Sales (TTM) ratio works out to a reasonable 2.59, with the 'Industry Average' being 5.13. Cerner is also more profitable than the average company in its industrial group with a Return on Equity (TTM) calculated at 12.88 with an industry average listed at (77.54)%. So in addition to being reasonably priced relative to the sales, the company apparently is more profitable than other companies in the same industrial group!
Finishing up with Yahoo, we find that there are 78.14 million shares outstanding with 64.58 million that float. As of 1/9/07, there were 10.57 million shares out short representing 16.30% of the float (!) and the short ratio is an impressive 27.1. That means, considering 5 trading days/week, that it would take over 5 weeks of average trading volume just for the short-sellers to cover their shorts. I suspect very strongly that we are witnessing a 'short squeeze' on this stock that may well continue into next week or longer (?).
No cash dividends are reported and the stock split 2:1 last year on January 10, 2006.
What does the chart look like?
If we review a "Point & Figure" chart on Cerner from StockCharts.com, we can see that as we reported earlier, the period between 2002 and 2003 was a bit erratic (as was the earnings), with the stock dropping from $19.50 in August, 2002, to a low of $8.50 in April, 2003. Since that time, the stock has fairly steadily moved ahead and actually appears only now to be once again breaking into new high territory. The chart looks encouraging to me!
Summary: What do I think about Cerner?
First of all, let me qualify this entire entry and remind everyone that I have purchased shares of Cerner and this stock is part of my trading portfolio now. That being said, the reason why I bought shares is first of all, the stock is showing good daily momentum today, making the top % gainers list. The latest quarter was solid, with strong revenue and earnings growth that both exceeded expectations. In addition, the company raised guidance for the upcoming quarter.
The Morningstar.com report is solid with steady revenue and earnings growth the past few years, steady shares outstanding, nice free cash flow which is basically increasing, and a solid balance sheet. Valuewise, the p/e is indeed a bit rich, but with earnings growing strongly, the PEG is under 1.5, the Price/Sales is cheap for its group, and the ROE is higher than the average company in its group as well. Finally, there is a TON of shares out short that need to be purchased. It will literally take weeks for the short-sellers to cover their bets against the company without a large increase in average daily volume. Finally, the chart looks strong. There is little not to like about this stock! And that's why I made the switch!
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