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Is Quality Systems, Inc. (QSII) a Good Buy After Being Upgraded?

Recently, Quality Systems, Inc. (NASDAQ:QSII) had advanced significantly, up more than 12%, from nearly $20 per share to nearly $22.40 per share in only one trading day. The positive momentum was due to the fact that Baird upgraded the company from neutral to outperform with the target price of $26 per share. According to analyst Eric Coldwell, Quality Systems, Inc. (NASDAQ:QSII) was trading at a discount now. Should we be bullish about Quality Systems, Inc. (NASDAQ:QSII) along with the recent upgrade? Let’s find out.

Quality Systems, Inc. (NASDAQ:QSII)

Recurring revenue and a good balance sheet

Quality Systems, Inc. (NASDAQ:QSII), incorporated in 1974, is the provider of healthcare information systems in the U.S., operating in four business divisions: the QSI Dental Division, the NextGen Division, the Hospital Solutions Division, and the RCM Services Division. Most of its revenue, $344.3 million – 74.9% of the total revenue – was generated from NextGen, while RCM Services ranked second, accounting for 14% of its total sales in fiscal 2013. NextGen was also the largest operating income contributor, with nearly $121 million in operating income.

Customers of Quality Systems, Inc. (NASDAQ:QSII) might be familiar with NextGen’s products, which include ambulatory products, products that streamline patient care with standardized, real-time clinical and administrative workflows, and NextGen Community Connectivity to exchange patient data within the healthcare organization community. The company believed that the NextGen division would experience good growth, thanks to a strong brand name and an increasing demand for electronic health records.

What investors might like about the company is its high percentage share of recurring revenue. In fiscal 2013, a combination of maintenance, electronic data-interchange services, revenue-cycle management and other services represented as much as 73.1% of the total sales.

Quality Systems, Inc. (NASDAQ:QSII) managed to consistently grow its top line in the past five years. Revenue increased from $246 million in fiscal 2009 to $460 million in fiscal 2013. However, the operating income fluctuated in the range of $69 million to $116 million during the same period. In fiscal 2013, its operating income stayed at $69 million. What I like about Quality Systems is its strong balance sheet. As of March 2013, it had $307 million in equity, $118 million in cash and no debt. At $22.40 per share, Quality Systems is worth $1.33 billion on the market. The market values Quality Systems at 10.30 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization).

Profitable, with high return on invested capital

Compared to its peers, including Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) and McKesson Corporation (NYSE:MCK), Quality Systems does not seem to be expensive at its current trading price.

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