A Hedge Fund Really Likes Allscripts Healthcare

Peers in the healthcare information and software business include athenahealth, Inc (NASDAQ:ATHN), McKesson Corporation (NYSE:MCK), Cerner Corporation (NASDAQ:CERN), and Quality Systems, Inc. (NASDAQ:QSII). athenahealth reported double-digit percent increases in revenue and earnings in the third quarter compared to the same period in 2011, but at its current valuation it trades at 62 times consensus earnings for 2013. It’s not surprising that 30% of the outstanding shares are held short; we wouldn’t buy the stock and if anything it could be worth investigating if the company’s growth rates should be slowing soon. Cerner has also been delivering good growth numbers; its forward P/E is 28, and that’s probably too high to make it a good value at this time, but it could be worth watching to see if it can continue to do well.

McKesson and Quality Systems seem like more interesting targets for value investors, as they both trade at 15 times trailing earnings. Quality Systems’ financials look similar to those of Allscripts, in that its net income has been down; it does, however, offer a high dividend yield. McKesson has been growing its bottom line, but revenue has been about flat and so we’d doubt that its earnings growth is sustainable. Still, it’s cheap enough that it requires very little improvement to be undervalued at the current price.

Healthcor seems quite confident in its evaluation of Allscripts, and the sell-side also expects the business to turn in a strong performance in 2013. However, while we’d expect at least somewhat higher earnings next year we would be wary of depending on it to do quite as well as analysts project.