Cerner (ticker: CERN) is well positioned to benefit from increased information-technology (IT) spending by health-care providers in both the U.S. and globally. Over the last three years, Cerner was a primary beneficiary of increased electronic medical record (EMR) adoption as providers seek to qualify for government Meaningful Use (MU) incentive payments.
While MU-related purchasing is slowing, the company is well positioned to continue to benefit from increasing utilization of its wide range of other software and related services. Generally, we believe investors do not necessarily appreciate Cerner’s product and service breadth and growth potential.
While MU-related demand has driven results over the last two to three years, Cerner has other growth drivers beyond MU. These opportunities include device integration, revenue cycle, IT outsourcing, population health management, payer and employer, cloud and global. Assuming Cerner can reach the mid to high end of its expected 10-year revenue forecast, its compounded annualized growth rate (CAGR) will be in the low-double-digit range, which is well above our long-term forecast and most investor expectations.
In late September, Cerner announced a new strategic initiative with Intermountain Health. We view this contract as a significant endorsement by one of the largest U.S. health-care delivery networks.
We expect free cash flow to decline this year but to improve to about $500 million-$550 million in 2014. The company has almost $1.5 billion in cash and long-term investments, providing it significant flexibility to pursue niche acquisitions to expand its product offering or to increase its customer footprint.
Our price target is based on our long-term discounted cash flow (DCF) model, which assumes revenue growth of 6% to 14% over the next 10 years, modest margin improvement, slower growth in capital expenditures (compared with 2013), normalized growth of 3.5%, and a discount rate of 8%.
We believe our DCF assumptions are relatively conservative. We would argue that the company’s longer-term outlook has never looked better, and we believe premium valuation levels are certainly warranted. source
