Editor's Choice

Buy This Small-Cap Healthcare Company Before It Takes Off

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Small-cap companies can be risky, but with the right catalyst they can knock one out of the park for your portfolio. I’ve found a small-cap company in the healthcare industry that I believe has two strong catalysts to grow the company and take the stock price along with it for a ride.

Greenway Medical Technologies (NYSE: GWAY) is healthcare software company that specializes in providing business services solutions to ambulatory care providers. Those are the healthcare providers you find in strip malls that you might go to if you need an inexpensive clinic.

Last week, the company reported earnings for the quarter ended September 30. While the company fell shy of analysts' earnings expectations of $0.02 per share and barely broke even, the company did show great sales growth. Revenue came in at $32.8 million, up 28% year-over-year. Additionally, the company saw improved margins, where gross margin improved 262 basis points to 54.4%.

As a result of the earnings miss, the stock fell sharply and currently trades about 5% lower than it did at its close last Thursday. I believe this recent price decrease represents a good buying opportunity for investors looking for a good small cap play.

The company operates on both a recurring and non-recurring revenue basis. In these types of businesses I like to see recurring revenue systems outperform non-recurring because they are reliable profit generators. Sure enough, Greenways recurring revenue system sales outpaced its non-recurring growing at 36% year-over-year. Recurring revenues now account for 51% of the company's total sales and I expect that number to move higher as more subscribers come on board.

Greenway's most recent big name subscriber is Walgreen (NYSE: WAG). The companies signed an agreement a couple months ago for Greenway to provide Walgreen's stores with electronic health records management software. The company will see its PrimeSUITE software installed in over 8300 Walgreen stores in the coming years.

Walgreens expects the new software to improve record keeping from pharmacists who found its previous system difficult to use. Greenway's reputation for its easy-to-use software coupled with its award winning system service provides the company with a more reliable record keeping system.

Additionally, Cerner (NASDAQ: CERN) certified Greenway's PrimeSUITE software earlier this month. Essentially, the certification ensures interoperability between Greenway's products and Cerner's to provide increased data liquidity. Information is now more easily transferred from one system to another, and the two company's softwares work in conjunction with one another. This is another way the company is making its products easier to use than the competition. 

The Cerner certification creates an opportunity for the company to provide additional business solutions to healthcare providers already using Cerner’s products or to companies who work closely with other healthcare providers using Cerner’s products. For example, if a hospital is using Cerner for their medical records system, Greenway's cloud-based system would now be an option for Doctor's to connect to the Cerner system remotely.

The way Greenway operates, its application platform is based on recurring revenue. Thus, as more companies sign on to use Greenway technologies, it will continue to see revenues from each client every quarter. The boost from Walgreen’s stores and Cerner customers will not cause a one-time spike, but a sustained increase in earnings for Greenway.

A quick glance at the company's balance sheet shows that the company currently operates with no debt. Its current ratio is 2.01 and its "Foolish flow" ratio (a measurement of how well the company manages its inventory created by Fool co-founder Tom Gardner) is at 0.99. (Anything under 1.25 is considered excellent.) In my opinion, the company sports a stellar balance sheet.

At a forward P/E over 35 and a PEG around 2.15, Greenway may look unattractive to some. Certainly, the company has been shorted quite a bit recently. Yet, with an expected growth rate of 64.3% next year, and a 5-year expected growth rate of 27.5%, in addition to the company’s great balance sheet, I see the recent pull back from a missed earnings report as a good buying opportunity.

adamlevy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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