Is This Stock Overvalued?
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cerner (NASDAQ: CERN) has been a popular name in the stock market with the federal government’s drive to modernize health records. Its stock, however, hasn’t been doing well recently as it appears to be overvalued at these levels.
Cerner’s trailing 5 year valuation metrics suggest that the stock is overvalued, in my opinion. Cerner’s current P/B ratio is 4.6 and it has averaged 3.9 over the past 5 years with a high of 5.3 and low of 2.4. Cerner’s current P/S ratio is 4.9 and it has averaged 3.5 over the past 5 years with a high of 5.6 and low of 1.9. Cerner’s current P/E ratio is 36.4 and it has averaged 30.8 over the past 5 years with a high of 41.5 and low of 17.0.
On a forward basis, the conclusion is about the same. Cerner is trading at about $60 a share and analysts are expecting EPS of $2.25 next year for a forward P/E of 27. Revenues are expected to rise 13.5%. Other publically traded competitors include: Allscripts Healthcare Solutions (NASDAQ: MDRX) and Quality Systems (NASDAQ: QSII). Quality Systems is trading for a forward P/E of 22 while revenues are expected to jump 17%. Allscripts is trading at a forward P/E multiple of 17 and revenues are expected to jump 11%. This suggests that Cerner is overvalued as other close competitors are trading at much cheaper forward multiples.
Analysts are in agreement as their upside is nothing to get excited about. The consensus price target for the analysts who follow Cerner is $72. That is upside of 20% and suggests that the stock is fairly valued at these levels and has little upside from here.
Note, analysts have a pretty solid idea about the company. Cerner has beat earnings estimates the past 4 quarters by small margins, ranging from 1-2 cents a share. This suggests that analysts have a very good idea on forecasting Cerner’s results and upside earnings surprises will be limited.
The company made a key announcement earlier in January. On January 9, 2012, Hamad Medical Corporation (HMC) and Cerner signed a landmark agreement to digitize the entire public health system of Qatar, including all HMC hospitals and Primary Health Care centers (PHCs). Acting as a prime contractor and CIS integrator, Cerner will deliver cutting edge health IT solutions from Cerner and third party suppliers that will bring the HMC Hospital Information Management into the 21st century. This is Cerner’s first project in the region to digitize an entire country’s public health system on a single computing platform.
In my opinion, the stock has struggled since October. The stock rallied 50% from January of last year to its peak in September, before struggling to keep its momentum going and falling lower. After reaching a high of over $74 a share in September, the stock has struggled and is now trading at about the $60 level. The stock is sitting right in between its 50 day moving average, which sits at just below $61, and its 200 day moving average, which is just below $62. Resistance on the upside includes $64 followed by $66. On the downside, $60 should continue to play an important level followed by the $56-58 level.
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