Equity research: Computer Programs and Systems, Inc. (Part 1 of 5)
Computer Programs and Systems, Inc. (CPSI)
Computer Programs and Systems (CPSI) passes our 3-Ms test with flying colors. This is a great business and we hardly could have been more impressed with our conversation with CFO David Dye. They have a niche in an industry that is growing nicely with near-term catalysts. A nice dividend, insider buying, strong moat, and relative value our all positives. CPSI has grown top-line revenues at greater than 12% in the last three years. This is likely to accelerate due to legislative catalysts and the recent launch of its subsidiary TruBridge, yet valuation multiples are below historical levels and that of peers.
- Recurring revenues represent 60% to 65% of CPSI’s top line. This recurring revenue is from support and maintenance, and business management services.
- ROE (return on equity) for 2012 was over 50% and the ten-year average has been almost 40%.
- CSPI sales and earnings are growing at almost 9% and 15% annually.
- The dividend has been growing at a healthy rate; the 2013 dividend was increased 11%.
- Strong balance sheet with virtually no long-term debt.
- The backlog is almost $150 million.
Computer Programs and Systems Inc. (CPSI) is a healthcare information technology company that designs, develops, markets, installs, and supports computerized information technology systems. The company’s tart market includes acute care community hospitals with 300 or fewer beds and small specialty hospitals, with its primary focus on hospitals with 100 or fewer acute care beds. CPSI is providing software and hardware products, complemented by data conversion, installation, support and information technology management, and professional services. Its integrated, enterprise-wide system automates the management of clinical and financial data across the primary functional areas of a hospital. In addition, it provides services that enable its customers to outsource certain data-related business processes.
In 2009, at the depths of the great recession, Congress enacted legislation in an effort to stimulate the economy. A component of that legislation requires hospitals to implement Electronic Healthcare Record systems (or EHRs). Astute market participants took notice by gobbling up Cerner (CERN) which has nearly quadrupled in the last three years (see chart below). As the premier player in the space, this made perfect sense. It was a near certainty they would benefit greatly, as hospitals spent tens of millions in the coming years to install and implement these electronic record systems. It was less clear to what extent this legislation would benefit smaller competitors like Computer Programs and Systems (CPSI). Investors were left questioning whether the legislation would similarly be a boon. Or, conversely a catalyst for hospitals to upgrade to competing, more robust solutions, and consequently the beginning of prolonged market share declines.
That was the thinking in 2009. Fast-forward to today, and we can clearly see a dynamic that has developed that leaves a clear, definable, and very profitable niche for CPSI. This niche has gone unnoticed by the markets. The driving factor for this was the timetable and attestation standards outlined by the legislation, as all hospitals must meet the first stage of EHR implementation requirements by 2015 or face penalties. Since these are such huge projects, Cerner and their larger competitors have been focusing on the largest and most profitable hospitals—rightly so! In the meantime, CPSI has benefited by maintaining its focus on hospitals with less than 100 beds, a market that has been widely neglected by CPSI’s larger peers. CPSI provides a product that better fits the needs of the smaller hospitals in terms of service and value proposition. This is evidenced by CPSI’s increased market share and the fact that they have helped more hospitals attain this first level of implementation (called Meaningful Use) than their next five competitors combined (inside of their primary rural hospital market). This research report argues that this business is both sticky and profitable for CPSI and that the market has been ignored by investors, creating the opportunity to buy the stock at a meaningful discount to its intrinsic value.
The Market Realist Take
For 2Q 2013, CPSI beat expectations on revenues and EPS. Total revenues for the second quarter, ended June 30, 2013, were $53.3 million, compared with total revenues of $45.7 million for the prior year’s second quarter. Net income for the quarter ended June 30, 2013, increased 2.7%, to $8.5 million. The company anticipates sales of $47.63 million for 3Q 2013. The EPS estimate is at 0.72. It has a trailing P/E of 21.15 and a forward P/E of 20.77. The company has reported robust revenue, EPS, and dividend growth, and its earnings prospects appear strong.
The company said in its 2Q 2013 10K filing that as a result of the recent economic recession, continued economic uncertainty, and tightened lending standards, hospitals have experienced reduced availability of third-party credit and an overall reduction in their investment portfolios. Plus, healthcare organizations largely dependent on Medicare and Medicaid populations (such as community-based hospitals) have been impacted by the challenging financial condition of the federal government and many state governments and programs. Accordingly, the company recognizes that prospective hospital customers often don’t have the necessary capital to make investments in information technology. In response to these challenges, hospitals have become more selective regarding where they invest capital. This has resulted in a focus on strategic spending that generates a return on their investment.
Despite challenging economic conditions—including continued tightened lending standards—CPSI said it hasn’t experienced a decline in demand for its products and services. Its collections of receivables remain consistent with historical trends.
The company stated in its 10K filing that its market is characterized by rapidly changing technology, evolving user needs, and the frequent introduction of new products. Going forward, electronic health record (or EHR) vendor stocks could benefit from the increased spending in healthcare due to regulatory changes—namely, the Affordable Healthcare Act (Obamacare) and Health Information Technology for Economic and Clinical Health (HITECH) Act, which provided financial incentives for healthcare organizations to implement electronic health record systems. CPSI’s competitors include Cerner Corporation (CERN), Quality Systems Inc. (QSII), McKesson Corporation (MCK), Veeva Systems (VEEV), and Quadramed Corp (formerly QD, which was recently purchased and went private in June).
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