Is Allscripts Healthcare Solutions Inc (MDRX) a Buy After Intensive Insiders Buys?

When insiders purchase the shares of their company, they feel confident that their company could experience a decent rise in the near future. Thus, investors could benefit substantially by following insider buys. On March 11, five insiders, including the CEO, bought 117,225 shares of Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) worth nearly $5 million. Since December 2012, Allscripts has risen dramatically, from more than $9 per share to around $14 per share. Is Allscripts a buy at its current price? Let’s find out.Allscripts Healthcare Solutions Inc (NASDAQ:MDRX)

Business snapshot

Allscripts is considered a leading provider of healthcare clinical, financial, connectivity and, information solutions to hospitals, physicians, and nursing homes It operates in five main business segments: Software Delivery, Services Delivery, Client Support, Pathway Solutions, and IT Outsourcing. The majority of its revenue, $458.4 million or 31.7% of the total 2012 revenue, was generated from the Client Support segment. The Software Delivery segment ranked second, with $320.9 million in revenue, while the Services Delivery segment and the Pathway Solutions segment generated $265.2 million and $172.4 million in revenue, respectively.

Interestingly, Allscripts generated majority of its revenue from transaction processing and maintenance activities, with more than $1 billion in revenue in 2012. Thus, it could indicate that customers are quite sticky, providing a stable recurring revenue for the company.

The Software Delivery segment was the second-biggest revenue contributor. However, because it had the lowest operating margin at nearly 9%, it was contributing the lowest operating income. The biggest income generator was the Client Support segment, with $310.4 million in 2012 operating income, while the Pathway Solutions segment ranked second, generating $105.2 million in operating income.

Both Client Support and Pathway Solutions enjoyed extremely high operating margins of 67.7% and 61%, respectively. The company has a quite diverse customer base, as no customer accounted for more than 10% of its total revenue.

Tremendous top line growth with a conservative balance sheet

In the past ten years, Allscripts has experienced tremendous growth in its top line, from only $86 million in 2003 to nearly $1.45 billion in 2012. The bottom line has also risen quite quickly, from a loss of $5 million in 2003 to a profit of $74 million in 2011. However, the company generated a net loss of more than $1 million in 2012.

The loss was due to higher cost of revenue, a 55% increase in R&D expenses, and an asset impairment charge of $11.1 million. However, the operating cash flow and the free cash flow were not affected much. For the past ten years, its operating cash flow increased from $5 million in 2003 to $223 million in 2012, while the free cash flow advanced 20 times, from $5 million to $100 million in the same period.

What interests me is the conservative capital structure that Allscripts employs. As of December 2012, it had $1.29 billion in total stockholders’ equity, $104 million in cash, and only $442 million in long-term debt and capital leases.

Cerner (NASDAQ:CERN) might be a better pick

At a current trading price of around $14 per share, Allscripts is valued at around $2.4 billion. The market values the company at more than 20.3 times EV/EBITDA. Compared to its peers, including Athenahealth (NASDAQ:ATHN) and Cerner , Allscripts is the smallest company, and has the cheapest valuation among the three.

Athenahealth is trading at around $95 per share, with a total market cap of $3.45 billion. It has the most expensive valuation at 65.3 times EV/EBITDA. Cerner has the highest market cap of nearly $16 billion. At around $91 per share, Cerner is valued at 21.2 times EV/EBITDA.

Among the three, Cerner seems to be the most profitable company with the highest operating margin of nearly 22%. Athenahealth ranked second, generating 7.3% operating margin, while the operating margin of Allscripts is only 2.7%. Income investors might not like any of those three companies, as all three companies do not pay any dividends.

My Foolish take

Among the three, I like Cerner the most, as it is the most profitable company and it does not have a relatively high valuation compared to the other two companies. Allscripts is the cheapest, but it is trading at only 4.4% discount from Cerner’s EV multiple. I would demand a much lower valuation before buying into Allscripts.

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