Investment Funds Are Circling
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Private equity firms are positioning for a buyout of Allscripts Healthcare Solutions (NASDAQ: MDRX), as confirmed by management on their third quarter conference call. The company is the result of the 2010 merger between Allscripts and Eclipsys, a leading provider of IT solutions to the hospital market segment. Post-merger results haven’t lived up to expectations though, causing investors to question management’s direction. After the introduction of a poison pill defense was met by a shareholder lawsuit earlier this year, both sides came to an agreement and three new independent directors were installed in the boardroom. Given recent performance, private equity sees an interesting opportunity to wring some value from this fallen star.
What’s the Value?
Allscripts is a leading provider of IT solutions and professional services to the healthcare sector, including 1,500 hospitals and 50,000 physician practices as of December 2011. The company’s mission is to provide a “connected community of health” for all stakeholders. This has been a high growth business, as healthcare providers have a constant need for technology solutions to manage their rapidly expanding customer base caused by an aging population. The industry received a further growth catalyst from the American Recovery and Reinvestment Act, passed by Congress in 2009, which provided roughly $30 billion in funds for healthcare providers to upgrade technology and move to electronic records. The law also provided penalties to providers who don’t upgrade systems by curtailing future reimbursements from government insurance programs. President Roosevelt's famous quote to "speak softly and carry a big stick" seems relevant, as the government has a very big stick with which to effect change in the healthcare arena.
In the latest fiscal year ended December 2011, Allscripts reported revenues and operating income of $1.4 billion and $136.5 million, increases of 105.0% and 30.6%, respectively, over the previous fiscal year. The company benefited from rising total sales as a result of the merger with Eclipsys, but these gains were offset by rising personnel and R&D expenses. During the period, Allscripts’ revenue mix shifted away from system sales and toward professional and transaction processing services. Delivery of IT services continued to migrate toward subscription based services provided via the internet, and away from software licensing. The company’s hospital segment, the former Eclipsys business, generated revenues and operating income of $628.3 million and $138.4 million, respectively, in FY2011. Given Allscripts’ $1.2 billion purchase price for Eclipsys, it paid a rich price to get into the hospital market. In 2012, the company’s results have been pressured by operating issues and competitive pressures. While revenues rose 3.7% during the first nine months, both gross and operating margins declined as Allscripts incurred higher systems integration and R&D expenses. However, the company continues to generate meaningful operating cash flows and has a large installed base of customers, which is a good foundation for a business turnaround.
What’s an Investor to Do?
Since Allscripts’ current stock price is pricing in a takeover premium, investors should be looking elsewhere within the sectors. Two of the leading companies winning market share in the current environment are Cerner (NASDAQ: CERN) and Athenahealth (NASDAQ: ATHN). Cerner has provided IT services to healthcare providers since 1980, and has a long track record of delivering returns for shareholders. The company grew revenues by 44.9% over the past four fiscal years, while increasing operating and net margins each year. During the first nine months of 2012, it has continued to build on its success, with revenues and operating income of $2.0 billion and $411.2 million, increases of 23.1% and 27.7%, respectively, over the prior year period. Meanwhile, Athenahealth is a relative upstart in the sector, founded in 1997, but has attracted a strong base of roughly 27,000 physicians to its practice management and electronic health record services. It has had an even faster growth trajectory than Cerner over the past four fiscal years, with revenues rising 232.0% over the time period. During the first nine months of 2012, the company continued to grow its business, with revenues and adjusted operating income of $306.0 million and $45.8 million, increases of 32.1% and 20.5%, respectively, over the prior year period. Given the strong industry fundamentals and a captive customer base, Cerner and Athenahealth should be primed for continued growth in the future. However, both companies’ stock prices are priced at premium P/E multiples and investors should wait for a good opportunity to buy into this important sector.
rghanley owns shares of Allscripts Healthcare Solutions and Cerner. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Athenahealth. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
