Stifel Nicolaus & Co. Analyst Steve Rubis says the game-changing opportunity for athenahealth, Inc (ATHN) will be in its efforts around developing a cloud-based EHR for the acute space. Rubis says the replacement cycle is not underway in a robust way because core vendors like Allscripts, Epic and Cerner continue to go to market with the value proposition that led the HITECH/ARRA-driven adoption super-cycle.
“The EHR adoption super-cycle was based on the idea that there are government dollars, so vendors can charge high installation fees and significant maintenance as well, and at the end of the day vendors wanted to sell as many EHRs as possible,” Rubis says. “The problem with that environment is that there is no incentive to change even if your EHR is broken, because you have to pay a significant sum of money to switch on top of your sunk costs.”
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By contrast, Rubis says athenahealth is building a better, cheaper and faster solution that could lead to a robust replacement cycle. In addition, he says athenahealth is developing a physician-focused EHR, which will also create an opportunity for the company.
“In our view, athenahealth’s physician-focused development strategy makes the acquisition of webOMR and RazorInsights insightful and forward thinking,” Rubis says. “We believe the acquisitions are likely transformative for athenahealth’s business because in webOMR they have purchased the Rosetta Stone for building an acute-focused EHR that physicians are going to want to use.”
Nicholas Jansen, Analyst with Raymond James & Associates, says WebMD Health Corp. (WBMD) is one of a few companies that are benefitting from the re-emergence of the pharmaceutical drug pipeline.
“With all the new drugs that are being launched, there are all kinds of targeted therapeutics going after smaller disease classes,” Jansen says. “And these pharmaceutical manufacturers need to market the product to the consumer and to the doctor, so they are utilizing WebMD’s websites, both webmd.com for consumers and medscape.com for physicians, to spend money on for advertising purposes.”
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Jansen has a “strong buy” rating on WebMD, which he says is largely a function of the company’s revenue acceleration. He says 60% of WebMD’s revenue comes from the biopharma and medical device sector advertising on its sites. He says that sector grew 8% in 2014 and appears to be growing about 12% to 15% in 2015.
“And then you layer on the fact that this model is highly scalable, so their margins have hundreds of basis points for improvement, and the fact that they have a sizable NOL, which they are effectively generating stronger free cash flow than they are reporting as GAAP net income, which enables them to continue to chip away at the equity in terms of buying back stock,” Jansen says. “Yet given the growth profile, forecasted at mid-teens EBITDA growth in both 2015 and 2016, it trades at around 11 times or so EBITDA on 2015 numbers. I think the risk/reward is pretty attractive from an improving fundamentals basis.”
Nicholas Jansen, Analyst with Raymond James & Associates, says consumers have been spending more on pet care over the last two years. Against that backdrop of an improving market, he says IDEXX Laboratories, Inc. (IDXX) has grown revenue with new product introductions.
“IDEXX is the number one player in diagnostics globally for veterinary care, and they have launched several innovative products over the last few years which has resulted in their revenue growth accelerating from, let’s say, the mid-to-high single digits probably when the last time we spoke, to more recently to the low double digit,” Jansen says.
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Jansen says IDEXX significantly increased its sales force last summer as part of a plan to sell products and services directly rather than through distributors. He says the company’s goal with this change is to showcase its accelerating revenue growth.
“In the very near term the stock could be somewhat range-bound as investors digest not only the FX impact, but also the potential for some modest share erosion at the low end given the increased competition,” Jansen says. “But longer term, they are well-positioned to capitalize from the continued increased utilization of diagnostics in the veterinary space.”
Analyst Nicholas Jansen of Raymond James & Associates upgraded Laboratory Corp. of America Holdings (LH) to an “outperform” at the start of the year. Jansen says the acquisition of Covance, a clinical research organization, has afforded LabCorp a new growth outlet to diversify the business model.
“What’s the underappreciated aspect of the story is the revenue-synergy opportunity. As the CRO of Covance helps pharmaceutical manufacturers enroll patients into clinical trials, LabCorp has a gigantic database of patients that they can help the CRO with to help enroll these patients faster into clinical trials, which should ultimately result in more pharmaceutical manufacturers utilizing Covance for their CRO work relative to others,” Jansen says.
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Jansen says LabCorp has the ability to return to growth after three years of flat to stagnating earnings trends. While there are still some longer-term structural headwinds in the core lab business, Jansen says the acquisition should enhance LabCorp’s ability to grow through those challenges.
“I think you have the opportunity for LabCorp not only to beat on numbers as the synergies of this acquisition play out, but also the ability to get some multiple expansion because it’s trading at a significant discount versus a large chunk of its external peer group,” Jansen says.
April was somewhat of a mixed month in relation to executive turnover as tracked by Liberum Research. A number of key categories (All C-level, CEO, CFO and board of director changes) we focus on saw increases while others were just the opposite. Overall executive turnover in the month of April was a bit more robust than the last few months but far from very positive in terms of total numbers. Liberum’s executive turnover numbers dovetailed closely with ADP’s April Employment Report released early last week whose numbers were below most analysts’ expectations. Liberum Resarch views the level of executive turnover as a key economic indicator for the ecoonomy. It appears from Liberum and ADP’s latest numbers for April, the American economy is struggling to find its legs once again. ADP’s lackluster results were eclipsed by the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) April Employment Report which was released at the end of last week. Liberum had predicted the BLS numbers would be much better than those of ADP and would come in closer to analysts’ expectations which is exactly how it played out. The BLS employment numbes helped create a sigh of relief in the market about how the American economy was performing.
Morningstar Analyst Vishnu Lekraj says current challenges within the health care market actually create an opportunity for companies like Cerner Corporation (CERN) that help health care service providers make their operations as efficient as possible. Lekraj says companies like Cerner ultimately help providers capture savings.
“So for instance, electronic records management makes a lot of provider networks more efficient, which theoretically will cut down on administrative and medical costs,” Lekraj says. “In addition to that, Cerner provides a lot of other patient population type of services, integrate those services into a provider’s network more easily, and therefore the provider can work with the insurance company more easily to help save on treatment cost and things of that nature.”
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Lekraj says services like the ones Cerner provides are going to be in great demand, and he expects that demand to grow over the next several decades. As such, Lekraj says Cerner is a smart longer-term investment.
“If someone is looking to make an investment within this field or to take advantage of a lot of these tailwinds, Cerner is not a bad company to own over the longer term, and it’s a highly positive story when we couple this with what we call an economic moat at Morningstar, or in other words, Cerner’s competitive advantages,” Lekraj says. “And I currently rate Cerner with a wide moat, meaning that over the longer term it should produce excellent economic profitability for shareholders.”
Morningstar Analyst Vishnu Lekraj says Express Scripts Holding Company (ESRX) is one of his top stock picks at the moment. He says the company is poised to see an increase in demand for its services.
“It’s a pure-play pharmacy benefit manager, but the services this firm provides again push us through, or at least helps clients capture as much savings as possible from their drug benefit plan,” Lekraj says.
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In addition, Lekraj says Express Scripts also helps clients run their drug benefit plans significantly more efficiently than they can do on their own — a service clients will increasingly be seeking in the coming years.
“So the services Express Scripts provides will be in great demand over the next several decades,” Lekraj says.
He says Express Scripts is one of the key opportunities that investors should keep an eye on if they want to benefit from the health care industry’s positive economics. And, he says if there were significant discount to the share price, he would “be a buyer of their equity all day.”
Analyst Nicholas Jansen of Raymond James & Associates says Alere Inc (ALR) is his favorite name of the year in the diagnostic space. He says the company has an opportunity to improve its operating margin profile over the next two to four years, largely due to the company’s new management.
“The reason why I like it now is you have a brand new management team in place that has effectively enacted a meaningful amount of change in a very short period of time. If you delve through the details they had at an analyst day in mid-March, they highlighted the opportunity to drive meaningful improvement in operating performance as organic growth recovers alongside new product initiatives like molecular,” Jansen says.
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Jansen says Alere is about to emerge as a midsingle or high-single-digit grower, and should see a re-emergence of the top line.
“When the top line recovers you should be able to leverage that into more meaningful operating margin expansion, as you have a better management team in place to be disciplined on spending and focusing on gross margin improvement through better sourcing, manufacturing footprint consolidation and the newer products have better margin,” Jansen says. “So needless to say, I think there is a great opportunity to improve their operating margin profile over the next two to four years.”
Portfolio Manager Marian Kessler of Becker Capital Management says the firm recently bought Newmont Mining Corp (NEM). It is the fund’s first venture into the gold mining space, she says, as Newmont has numerous things working in the company’s favor.
“A third of Newmont’s costs are energy-related. They’re a heavy energy consumer; thus, if one-third of your corporate costs falls 50% in a nine-month period, that’s an enormously margin-enhancing and cash-flow positive event,” Kessler says.
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Kessler says that secondly, wage inflation in Newmont’s mining geographies has declined. Globally, wage inflation was running approximately 7% to 8% from 2010 to 2013, and is now down to around 2% to 3%, Kessler says.
“Since wages are also about a third of total expenses, their decline is also positive for overall company profitability,” Kessler says.
She adds that Newmont also reached an agreement with the Indonesian government to return copper concentrate shipments to normal levels after disagreements that stopped them in 2014.
“These three virtually simultaneous events should greatly enhance EBITDA in 2015 from depressed 2014 levels. EBITDA should be significantly higher in 2015, even if the price of gold remains unchanged from current $1,200-per-ounce levels,” Kessler says.
CEO Nadir Ali of Sysorex Global Holdings Corp (SYRX) says that over the past two years, the company has changed its focus from IT services to data analytics and location-based products.
“Our focus really is all about the data analytics. You hear a lot about Big Data today from a variety of companies, and our positioning in the marketplace is that Sysorex blends digital data — which you would collect from traditional sources, whether it’s enterprise apps or your website, etc. — with real-world data. And what I mean by real-world data is location or temperature or other data in the environment around you,” Ali says.
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Ali says Sysorex is focused on blending the real world and digital world together to complete a data set for a company to look at, and generating analytics that result in actionable insights from that data. He says the company’s three acquisitions have resulted in a wide range of customers.
“It’s over 1,500 customers that vary from life sciences to online gaming companies to high tech, retail, newspaper and media publishing companies and, of course, Federal government agencies, which is where Sysorex started out. Not every customer is buying something every year from us, but we typically have a 60% customer-repeat rate, and I would say 25% to 30% of our revenues are recurring,” Ali says.
