When Will it Be Safe to Buy Allscripts?
Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Triple Whammy
Allscripts (NASDAQ: MDRX) experienced a triple whammy last week. First, there was upheaval in their board with the chairman ousted and three directors apparently resigning in protest. Second, the company announced that its CFO was departing to go to another company outside of the healthcare industry. Third, Allscripts revealed that its earnings for the previous quarter were half of what was expected. It’s no wonder that the market reacted harshly with Allscripts stock plunging over 35% in one day.
Sometimes the market overreacts to bad news, presenting investors a good buying opportunity. Earlier last week, the market priced the stock at an expected annual earnings growth of 18%, based on my calculations. A drop in the stock’s price of 35% implies expected growth of only 11.7%. If Allscripts can actually grow at a significantly higher rate than 11.7%, it could be a buy after the dust settles.
Estimated Growth for Peers
Providers have been scrambling to get federal incentives for Meaningful Use (MU) of certified electronic health record systems. This has fueled the rise of most stocks in the healthcare technology industry. While the growth rates of these stocks are expected to taper off somewhat, analysts still project relatively strong growth across the sector as shown in the following table.
| Company | Estimated 5-Year Annual EPS Growth |
| Allscripts (NASDAQ: MDRX) |
20.94% |
| athenahealth (NASDAQ: ATHN) |
25.26% |
| Cerner (NASDAQ: CERN) |
18.97% |
| CPSI (NASDAQ: CPSI) |
17.17% |
| McKesson (NYSE: MCK) |
14.00% |
| Quality Systems (NASDAQ: QSII) |
20.50% |
Even if Allscripts earnings growth is on the lower end of the range of its primary competitors, the stock is undervalued by nearly 20% at its current price. However, let’s analyze what growth Allscripts can realistically expect.
Hospital Market
Any hospitals that have not yet been certified for MU incentive payments and are not already Allscripts customers would be potential new customers. The graph below merges data from the American Hospital Association (AHA), Centers for Medicare & Medicaid Services (CMS) and Allscripts to identify how many hospitals are potential prospects.
This analysis shows that 1,066 hospitals that are not already Allscripts customers are potential prospects. There is no way to know for sure how many of these hospitals Allscripts would be able to pick up. The most realistic estimate is to use Allscripts’ current hospital market share of 26%. Using this as our basis, Allscripts could sign up 277 new hospitals through 2015 when the financial incentives for buying certified systems ends. This would reflect 18% growth in the hospital customer base, which translates to an average 4.5% annual growth rate.
Allscripts will gain additional revenues from the 1,210 hospitals that are already customers but have not been MU certified. If we assume that all of these hospitals will purchase the modules needed for certification and that this represents 30% of the revenues that would have been gained from a new customer, Allscripts could conceivably gain another 6% in annual sales growth. Therefore, my high end estimate for the total annual hospital sales growth for new customers and add-on sales to existing customers is 10.5%.
Physician Practice Market
The graph below blends data from the National Institute for Health (NIH), CMS and Allscripts to identify how many physician practices are potential prospects. 
Allscripts currently has around a 31% market share of the U.S. physician practice market. Assuming that the company could gain around this same share of the 56.5K available prospects, it could possibly add around 17.5K physician practices through 2015. This would mean a 4-year growth of 8.8% on top of the 50K practices Allscripts currently has as customers. If this occurs, Allscripts’ average annual physician practice growth would be 2.2%.
Allscripts has nearly 43K physician practice customers that have not yet attested for MU. If we assume that all of these practices will attain MU certification using Allscripts products and that this represents 30% of the revenues that would have been gained from a new customer, Allscripts could conceivably gain another 6.4% in annual growth in the physician market. The combined estimated annual physician practices sales growth for Allscripts would then be 8.6%.
Final Analysis
The initial premise was that if Allscripts can grow earnings at a faster rate than 11.7%, the current price of just over $10 per share could be attractive for some intrepid investors. My calculations, though, are that the company will only be able to grow annual sales by 10.5% for hospitals and 8.6% for physician practices. These are optimistic projections since they assume (1) that all of the available providers that have not already attained MU certification will do so, and (2) that Allscripts will be able to grow at the same rate as its current market share.
Realistically, there will be some portion of providers who choose not to pursue MU certification. Also, in light of recent comments by Allscripts CEO Glen Tullman, it appears questionable if Allscripts will continue to obtain the market share as they have in the past. Mr. Tullman stated that a number of clients and prospects “delayed commitments as they wait for us to introduce new releases and demonstrate more robust integration.” This apprehensiveness by current customers and prospects can have a damaging effect on the interest level of other prospects.
Additionally, the earnings conference call held by Allscripts indicated that the company would need to make significant investments to improve product delivery and customer experience. Investments already made hurt earnings for the previous quarter and could continue dragging down results even if solid sales gains are achieved. Earnings growth will probably continue to trail revenue growth in the near term.
I suspect that the market did not overreact in the 35% markdown of Allscripts stock. Allscripts does not seem likely to exceed the earnings growth rate baked into the current price. With the management turmoil and future growth levels in question, it might be quite a while before buying Allscripts will be a safe bet.
Keith Speights (www.keithspeights.com) has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Athenahealth, McKesson, and Quality Systems. 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.
