At the end of September, Healthcor Management’s largest 13F position by market value was its 14 million shares of Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) (check out more of their stock picks). Since then, the fund- which invests the majority of its capital in healthcare- has increased its stake to close to 16 million shares, giving it 9.3% of the outstanding shares of the provider of healthcare software and information services. Healthcor is managed by Tiger Cub Arthur Cohen and Joseph Healey, who had previously worked together at billionaire Steve Cohen’s SAC Capital Advisors.
According to the company’s most recent 10-Q, revenue was about flat in the third quarter of 2012 versus a year earlier, as lower sales of systems offset generally higher revenue in Allscripts’ other segments. Operating income was down, though this was mostly due to an asset impairment charge and an increase in research and development expenses (which could arguably be considered an “investment” for a technology company). However, Allscripts recorded high interest expenses and as a result reported a pretax loss. Pretax income would have been positive without either the charge or the increase in R&D, though even if we ignore both the number would be down significantly from Q3 2011.
Allscripts Healthcare Solutions Inc’s stock price has reflected the company’s troubles, down 51% in the last year. Between this and recent financial performance, the trailing P/E is 34. That is high, though there should be some improvement in net income as long as the company does not have to record any more charges. Wall Street analysts seem to be expecting much better results in 2013, as the forward P/E is 11. That might be a good price for a company seeing no growth on the top line, but we’re skeptical that it can hit the analyst target to get to that point.
Allscripts Healthcare Solutions Inc was one of the five largest positions in Kingstown Capital Management’s 13F portfolio, with the fund owning 2.5 million shares at the end of the quarter (see more of Kingstown’s favorite stocks). Billionaire David Shaw’s D.E. Shaw nearly doubled the size of its own stake in the company to a total of 2.7 million shares (find more stocks D.E. Shaw owned).
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.
