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Two Healthcare Tech Stocks to Buy Now

Posted
7/15/2010 10:41:00 AM
By: David Sterman
Referenced Stocks:ATHN;ECLP;MDRX

"You can lead a horse to water, but you can't make him drink." That's the conundrum that the Obama administration faces as it tries to get doctors, pharmacies, hospitals and patients into the 21st Century. Too many medical professionals have been wary of the digital age, preferring to scribble out their work on scraps of paper. As all of those scraps get entered into the system, you get occasional errors in data entry and lots of extra costs in terms of administrative overhead .

So to get the proverbial horse to drink, the Obama administration as of this week is making it easier to qualify for federal funds to migrate billing practices onto a central national platform where information can be shared by all medical service professionals. For example, instead of needing to handle 75% of drug prescriptions electronically in order to get financial support, that threshold just dropped to 40%. Not only do health care providers get tens of thousands of dollars to make the change, they'll start paying penalties by 2015 if they don't do so. You may quibble with the need for more government spending on this initiative in these cash-strapped times, but health care economists broadly agree that the plan will yield significant cost savings down the road.

The industry has been slow to embrace the federal mandates. It did not have looming deadlines and it did have an unclear threshold to receive financial support. So the Obama administration clarified the steps necessary to comply with the program, and also made it a bit easier. Now, health care professionals can begin in earnest to figure out how to jump on the e-health bandwagon.

Luckily for these health care professionals, there is a range of companies that focus solely on helping migrate this industry into the electronic age. And several of them have seen their shares trade down sharply, despite an expected surge in sales and profits during the next few years ahead of that 2015 deadline.

Here are two that stand to benefit:

Allscripts (Nasdaq: MDRX)

This company, an early leader in the field, can certainly brag of impressive growth. Sales have shot up from $100 million in 2004 to more than $500 million in 2009. Trouble is, per-share profits have barely budged, and shares that traded for about $30 back in 2007 now trade for about $17.

But that's about to change. About a month ago Allscripts and Eclipsys (Nasdaq: ECLP) announced plans to merge, creating an industry behemoth. Allscripts has made major inroads with doctors, and now has nearly 200,000 physicians using its software. Eclipsys has focused on hospitals and healthcare facilities. By combining and establishing a unified technology platform, yet more steps will be removed from the laborious data entry process.

The deal should provide strong organic growth in 2011 and 2012 as federal mandates kick in. Despite the deal's compelling synergies, Allscripts' shares have barely budged in the five weeks since the deal was announced. That may be due to the fact that Allscripts will need to unwind a previous merger with U.K.-based Mysis. A secondary offering of Misys' shares is expected to come just before or after Labor Day.

By joining forces, these two firms will better withstand intense competition from privately-held Epic Systems, which has thus far been the industry leader. But there's plenty of room for several giants in this industry. And it's not just about the top line: Allscripts estimates that it will achieve $25 million in cost savings in 2011 from the elimination of duplicate company costs, SG&A and other factors. It believes the savings will improve to $35 million in 2012, and max out at $40 million in 2013.

Action to Take --> It may take until later in the year to get government approval for the merger. At that time, analysts likely will sharply boost their forecasts and share prices should react accordingly. Savvy investors will want to get into this stock well ahead of that event.

athenahealth (Nasdaq: ATHN)

This company has emerged as the fastest-growing player in the medical billing business, boosting sales at least +30% in each of the past five years. But expenses have risen even faster. Recent weak profit reports have pushed shares down to just half of their 52-week high.

The good news: it's a lot easier to get a grip on expenses than it is to find ways to boost sales. And athenahealth should have no problem on the latter front -- sales are expected to rise at least +25% in both 2010 and 2011.

Action to Take --> Shares aren't cheap, at about 27 times next year's profits. Then again, they used to trade for 40 to 50 times projected profits. With a still-strong growth profile, investors are likely to warm up to this stock again in coming quarters. Shares may move back into the $30s or $40s, once athenahealth proves it can actually exceed profit forecasts.


-- David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and has made numerous media appearances over the years, primarily on CNBC and Bloomberg TV. David has a master's degree in management from Georgia Tech. Read More...

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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