Activist Investors are Betting on Allscripts Healthcare Solutions Inc. (MDRX)

Activist investors Ricky Sandler of Eminence Capital and Clifton S. Robbins of Blue Harbour Group increased their stakes in Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) during the fourth quarter of 2013, controlling 4.8% and 4.5%, respectively, of the healthcare technology company at the end of the year.

Ricky Sandler

Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) is a $3.3 billion market capitalization company that provides clinical, financial, connectivity and information solutions and related professional services to hospitals, physicians and post-acute organizations (such as nursing homes). In addition to its core electronic health records (EHR) solutions, the company has been generating strong growth with its population health management product, which aggregates and analyzes patient medical data to better manage and improve their outcomes.

The company has been trying to turn around its operations after a dismal 2012, when the stock took a dive due to deteriorating financial performance. Following pressure from hedge fund manager Arthur Cohen of HealthCor Management (who is currently the third largest shareholder), several members of its management team and board left that year. Allscripts Healthcare Solutions had also reviewed strategic options, including a possible sale, but in late 2012 decided, it would be best to continue operating as an independent company under new management.

More recently, Allscripts Healthcare Solutions Inc (NASDAQ:MDRX)’s results have been on the mend, as its turnaround plans have resulted in strong bookings, improving earnings and a higher stock price (which increased 64% in 2013 and another 21% so far in 2014). For the next three years, management expects revenue growth of 5-8% (as bookings recorded thus far convert to revenue in subsequent years), modest improvement in gross margins, flat spending and higher yields related to research and development, and a decline in selling, general and administrative expenses in 2014 (versus 2013) and steady expenses thereafter. These should all translate into EBITDA growth of 18-22% and improved free cash flows over the near-to-intermediate term.

On a forward EV/EBITDA basis, Allscripts’ multiple of 16.5X is in-line with its peer group of healthcare technology companies. At the same time, the company’s debt burden is higher, with a debt / capital ratio of 29.9% (versus 8.4% for peers), an interest expense coverage ratio (EBITDA / interest expense) of 1.1X (versus 5.2X for peers) and a net debt / EBITDA of 16.2X (versus 6.1X for peers). Given the expected improvements in its earnings over the next three years, these metrics should improve over time. Its near-term debt maturities are limited, with only $17 million coming due in 2014, which should also provide a cushion to its balance sheet.

Allscripts Healthcare Solutions Inc (NASDAQ:MDRX)’s progress on delivering its intermediate goals will be key for the stock to maintain its momentum. Management is well aware of the three activist investors with large stakes in the company. Should the company’s financial performance deviate from plan, we would not be surprised if either Eminence Capital or Blue Harbour Group – its seventh and eighth largest shareholders, respectively – file 13D filings disclosing an increase in their stakes above the 5% threshold along with their plans to improve shareholder value.

Disclosure: none

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