The purpose of this report is to provide a brief investment analysis of the Cerner Corporation. The analysis described below based on information retrieved from available online resources (see references) and the 2011 Cerner annual report. Further, this investment was guided by the outlined points presented by the teacher. 1. Company History: Cerner was founded in 1979 by Neal Patterson, Paul Gorup, and Cliff Illig, who were colleagues at Arthur Andersen. This company was originally named PGI & Associates. In 1984 it was renamed as Cerner, and it was at that time when it rolled out its first system, PathNet.
After which, in 1986; it became public. In 1995 the company initiated Cerner Millennium architecture, revolutionary software in the healthcare industry. In2005, it was reported that the company passed $1 billion in sales. As of that, the Cerner was able to attain the Riverport Campus complex on the site of what was formerly the Sam’s Town Casino; above the Missouri River in North Kansas City, Missouri. The world headquarters (WHQ) is across the street from North Kansas City Hospital, which was Cerner’s second hospital client.
Later in 2006, it also acquired the former Marion Laboratories complex for a South Campus in southeast Kansas City, Missouri. The South Campus products include Power Chart and Millennium e-Booking, which is providing a code base for “Choose and Book”. In July 2010, president Trace Devanny left the company. Consequently, Devanny’s responsibilities have been absorbed by the current organization. Neal Patterson became the company’s president, in addition to his current role as Cerner’s chairman and chief executive officer. (Wikipedia, 2013).
Cerner Corporation (Cerner) is a supplier of healthcare information technology (HCIT) solutions, services, devices and hardware. Cerner solutions are known to organize and facilitate processes for healthcare organizations. These solutions are licensed by approximately 9,300 facilities globally, including more than 2,650 hospitals; 3,750 physician practices 40,000 physicians; 500 ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers; 800 home health facilities; 40 employer sites and 1,600 retail pharmacies.
The Company is noted to operate in two segments: domestic and global. The domestic segment incorporates revenue contributions and expenditures associated with business activity in the United States. In contrast, the global segment compromises and organizes revenue contributions and expenditures associated with business activities in Argentina, Aruba, Australia, Austria, Canada, Cayman Islands, Chile, China (Hong Kong), Egypt, England, France, Germany, Guam, India, Ireland, Italy, Japan, Malaysia, Morocco, Puerto Rico, Qatar, Saudi Arabia, Singapore, Spain, Sweden, Switzerland and the United Arab Emirates.
The Cerner Corporation has witnessed a remarkable development and widespread its corporation and investment. Indeed, on the 23rd of May 2011, the Company procured the Resource Systems, Inc; and later on the 17th of October of the same year, the Company acquired Clairvia, Inc. (Cerner Corporation, 2012). From the preceded information, it can be clearly seen that the Cerner Corporation is a strong, well-established company. This company has proven to retain high-quality privileges at both local and global domains of business. 2. Leadership Profiles.
As reported in the Cerner 2011 annual report (2012) that this company has been led by various leaders, chairmen and presidents. In the section below, a brief description of each leader will be provided. Neal Patterson is the Chairman of the Board Directors, President and the chief executive officer of the Cerner Corporation. Mr. Patterson is a co-founder of the Cerner and has been a director of the Company since 1980. Mr. Patterson has been chairman of the board of directors and chief executive officer of the Company for more than five years.
He has served as president of the Company since July 2010 till now, a position he also held from March 1999 until August 1999. The vice chairman of the board directors of the Cerner Corporation is Mr. Cliff Illig. Together with President Patterson, Mr Illig is also a co-founder and has been a director of the company since 1980. He was appointed as Vice Chairman of the Board of Directors in March 1999. Mr. Illig previously served as Chief Operating Officer of the Company until October 1998, and as President of the Company until March 1999.
Further, he is a member of the Board of Directors of The Stowers Institute. The chief operating officer executive vice president of the Cerner Corporation is Nill, Michael. As of the annual 2011 report, it stated that Mr Nill joined the company in November 1996. Since that time he has held several positions in the Technology, Intellectual Property and CernerWorks Client Hosting Organizations. In 2000, he was promoted to executive vice president and to senior vice president in April 2006.
Later in February 2009, he was named “Chief Engineering Officer” and was appointed Chief Operating Officer in May 2011. The other leader who joined the Cerner Corporation in the mid of 1985, is the Executive vice president and chief of staff; Mr Jeff Townsed. Since June of 1985, Mr Townsend has held several positions in the Intellectual Property Organization and was promoted to Vice President in February 1997. In March 1998, he was assigned Chief Engineering Officer and was promoted to Senior Vice president in March 2001.
Further, he was named Chief of Staff in July 2003 and was promoted in Marsh 2005 to Executive Vice President. Although, the information provided little about leaders’ personal characteristics; it can be inferred that those leader hold special and recognized qualifications that enable them to successfully guide and lead this largely incorporated company to be one of the top best companies in today’s business of the health care arena. 3- Strategic Vision. As previously mentioned, the Cerner Corporation is a supplier of healthcare information technology (HCIT) solutions, services, devices and hardware.
Thus, for more than 30 years; Cerner has been implemented its vision to make health care easier, safer and more efficient. Cerner’s vision has developed from a fundamental thought: “Healthcare should revolve around the individual, not the encounter”. This concept produces to the Cerner’s vision of the unified Cerner Millennium Architecture and the Community Health Model, which is based on four steps. The first step is “automate the care process”. This process assures the provision of a longitudinal, person-centric HER.
Accordingly, this HER ease the health care process for clinicians as they can electronically access the right information for the right patient at the right time and place. This indeed assures the optimal health outcomes for target patients. In the second step, a connection between physicians and individuals is mediated and maintained though a personal health system. This system make medical information and care regimens accessible from home, which in turn empower consumers to successfully manage their conditions and assure adherence to treatment plans.
The third step is “structure the knowledge”. This model assure to provide and bring the best information entailed with every medical decision by structuring, storing, organizing and studying the content surrounding each care decision to reach and attain the optimal clinical and financial outcomes. Finally, as stated in the report, this model is able to provide systems of care that implement and maintain evidence-based medicine. Assuring that reduces the gap and the average time between innovations of a new method to a change in the standard of care.
This step was referred to as “close the loop”, in which this model is able to incorporate innovations in every day practice of medicine over a short period of time compared to long times of 10 years or longer in other models. (Cerner 2011 annual report, 2012). 4- Business model: The core of Cerner’s business model is the augmentation of intellectual property (IP) in the form of software and other types of digital contents. Cerner’s software is bundled with other technologies and services to enhance inclusive and absolute clinical and business solutions for health care providers.
In short, Cerner Corporation build the software solutions, sell them, deliver them, run and support them for health care provider organizations around the world At the top of Cerner’s business model is the “Sales Pipeline” of potential future business opportunities they have identified in the marketplace. This pipeline has increased considerably over the past several years. This in turn reflects a strong market for Cerner’ solutions, as providers invest in health care information technology (HCIT) to meet regulatory requirements, comply with government reimbursement requirements, and qualify for more incentives.
(Cerner 2011 annual report, 2012). During each quarter, Cerner Corporations sign new contracts to deliver their solutions to clients. These contracts are reported as New Contract Bookings and become part of their contract backlog. A typical new contract will influence Cerner’ revenues in the current quarter and for the next several quarters, or even years. The influence of the new contract on Cerner’ revenues depend on how the licenses, technology, subscriptions/ transactions, managed services, and professional services are delivered.
For longer term contracts, such as for Cerner’ Remote Hosting, ITWorks, and RevWorks offerings, contract lengths are typically more than 5 years. As mentioned in the 2011 annual report (2012), the value of the new contract bookings and support contracts revolves into the Contract Backlog and Support Backlog, respectively. Even though the majority of the company systems are in service for decades, the reported Support Backlog only includes the expected value for one year of support revenue for all of the client support contracts.
Cerner’s corporations report the value of these backlogs because they believe of how importance they are to company shareholders’ ability to interpret the overall health of their business. The company total backlog (signed contracts with unrecognized revenues and one year of support for all support contracts) ended 2011 at $6. 1 billion and has grown at healthy compounded annual rates of 21%, 18% and 23% over the past 3, 5 and 10 years. At the core of Cerner’s business model are their various revenue streams and the contribution each stream makes toward the profitability of Cerner.
The contribution is stated as the recognized revenue less the direct cost to produce that revenue. According to the Cerner’s business model graphic, they have depicted six revenue categories that roll into the two revenue line items on the company income statement. Licensed Software, Technology, and Subscriptions/Transactions make up the System Sales line of the income statement. Whereas, the Professional Services, Managed Services, and Support & Maintenance make up the Services, Support & Maintenance make up the Services, Support & Maintenance line. Here is a description of each of the revenue streams.
Licensed Software. The Cerner corporation develop and license IP (architectures, application software, executable and referential knowledge, data and algorithms) to their clients. Cerner’s standard license is continuous, as it provides their clients permanent rights to use the software they purchase. In 2011, this type of revenue represented 15% of the company total revenues with a profit contribution of 87%. Revenues from licensed software grew 21% in 2011 compared to 2010. Technology. Cerner company has bundle licensed software with other companies’ IP (e. g.
, that of HP, IBM, Microsoft, Oracle) in the form of sublicenses to create complete technology solutions for their clients. Further, they resell bundled computer equipment (hardware) from technology companies to create a completely functional system. More recently, they have begun to resell medical devices for a growing list of medical device companies. Indeed, this part of business has shown strong growth since it was launched in 2007. Technology revenue increased 39% in 2011, as growth in device resale offset flat results in traditional hardware resale and sublicensed software.
The Cerner Company recognizes revenues from technology resale as the equipment is delivered to our clients. Subscriptions/Transactions. Another method by which Cerner provide IP is based on a subscription model that has a periodic usage charge. This is the primary way to package and provide medical knowledge, which changes frequently based on research and can be updated independently from the software in which it is entrenched. Subscription and transaction revenue streams are generally recognized monthly.
As of 201, these revenues streams grew 28% and represented 6% of Cerner company total revenues with a profit contribution of 56%. Professional Services. Cerner company provide a wide range of professional services to assist its clients in the implementation of its information systems of their organizations. These services are in the form of project management, technical and application expertise, clinical process optimization and education and training of clients’ workforce to assist in the design and implementation of its systems. Managed Services. Under CernerWorksSM suite of solutions, the company
offers a set of technical services that include Remote Hosting, Application Management Services, Operational Management Services, and Disaster Recovery. Managed Services revenue grew 20% in 2011 and represented 16% of the company total revenue with the profit contribution increasing from 29% to 31%. Support & Maintenance. The final business model is comprised of the ongoing support and maintenance services Cerner provide after its systems are in use by their client organizations. In 2011, support and maintenance revenues grew 6%. This revenue stream represented 25% of total revenue with a profit contribution of 76%.
5- Industry Sector and Competitors/Peers: The market for HCIT solutions, devices and services is extremely competitive, quickly growing and subject to rapid technological change. The company principal competitors in the health care solutions and services market include: Allscripts Healthcare Solutions, Inc. , Computer Programs and Systems, Inc. (CPSI), Epic Systems Corporation, GE Healthcare Technologies, Healthcare Management Systems, Inc. (HMS), Healthland, Inc. , Computer Sciences Corporation (iSoft), Keane, Inc. , McKesson Corporation, Medical Information Technology, Inc.
(Meditech), Siemens Medical Solutions Health Services Corporation, and Quadramed Corporation. Each of those competitors offers a suite of software solutions that compete with many of Cerner software solutions and services. Other competitors focus on only a portion of the market that Cerner address. For example, competitors such as Accenture plc, Affiliated Computer Services (ACS), Cap Gemini S. A. , Computer Task Group, Inc. CTGHS), Dell, Inc. , Deloitte Consulting LLP, Hewlett-Packard Company, IBM Corporation and maxIT Healthcare LLC offer HCIT services that compete directly with some of Cerner service offerings.
MazingCharts. com, Inc. , Athenahealth, Inc. , eClinicalWorks LLC, e-? MDs, Inc. , Greenway Medical Technologies, MED3000, Inc. , Quality Systems, Inc. , Sevocity (a division of Conceptual MindWorks, Inc. ) and Vitera Healthcare Solutions (formerly Sage Software Healthcare LLC) offer solutions to the physician practice market but do not currently have a significant presence in the health systems and independent hospital market. 6. Financial Highlights: Strong revenue growth and margin expansion drove adjusted net earnings growth of 28% in 2011.
As reported, the 3-, 5-, and 10-year compound annual earnings growth rates of 21%, 23%, and 25%, respectively. These percentages reflect Cerner’s ability to drive long-term earnings growth. Going forward, the company top-line growth strategies accompanied with continued focus on productivity enhancements and margin expansion place Cerner well for sustained strong earnings growth. (Cerner 2011 annual report, 2012). A healthy business generates cash flow. According to Cerner, perhaps its most significant improvement in recent years has been in cash flow performance.
The 2011 was a record year for cash performance, with $546 million of operating cash flow and $359 million of free cash flow (operating cash flow less capital expenditures and capitalized software). Operating cash flow increased 20% in 2011 and free cash flow increased 31%. Cerner expected capital expenditures to increase in 2012 compared to 2011, which will influence the free cash flow growth. Nevertheless, the Cerner still expect to generate strong free cash flow. (Cerner 2011 annual report, 2012). As Wettlaufer (2012) stated that, the fair value estimate for Cerner is $98 per share.
This implies a 2012 price/earnings multiple of 42 times, an enterprise value to EBITDA multiple of 20 times, and a free cash flow yield of 2. 3%. This reflects Cerner base-case assumption of 17% revenue growth over five years. Accordingly, this growth is driven by regulatory mandates, expansion into adjacencies, international growth, and market share gains. On the margin line, Cerner believe a gross margin of 80%, contribution margin of 49%, and incremental margins of 29%-38% over the last two years. Indeed, these indicate the potential for pronounced margin expansion over the coming five years.
Cerner anticipates EBIT margin expanding from 21% in 2011 to 29% in 2016 and 36% in 2021. This translates midteens revenue growth over our five- and 10-year time horizons to EPS growth of 24% and 19%, respectively. Over the coming 1-3 years, Cerner predict an average revenue growth of 18% and 150 bps of average annual EBIT margin expansion as new licenses are signed and software support and maintenance streams flow from these. Potential headwinds include the hospital industry successfully lobbying federal agencies to advance or permanently relax Meaningful Use regulations.
Cerner assumes this as a lower probability with operational, financial, and regulatory momentum squarely behind these mandates. Further, Cerner company consider margin expansion to enhance ROICs from an already respectable level into rates enjoyed by other wide-moat technology producers. Cerner ROIC over the last five years has averaged percentage of 18%. They predict this expanding to reach an average of 25% over the coming five years. They believe all these levels are supportive of value creation versus Cerner WACC assumption of 10%.
Further, Cerner will convert an average of 88% of its net income to free cash flow over the time horizon, which will eventually support dividends or sizable share repurchases. (Wettlaufer, 2012). 7. Investment Risks: Risks Related to Cerner Corporation. Cerner incurs substantial costs related to product- ? related liabilities. Cerner may be subject to claims for system errors and warranties. It may experience interruption at data centers or client support facilities. Cerner proprietary technology may also be subject to claims for infringement or misappropriation of intellectual property rights of others.
It may also be infringed or misappropriated by others. In addition, Cerner may become subject to legal proceedings that could have a material adverse impact on their financial position and results of operations. Further, Cerner is subject to risks associated with its non-U. S. operations. Its failure to effectively hedge exposure to rapidly changes in foreign currency exchange rates that could unfavorably affect its performance. Cerner is also subject to tax legislation in numerous countries; tax legislation initiatives or challenges to tax positions could adversely influence its results of operations and financial condition.
Cerner rely on third party suppliers and its revenue and gross margin that could suffer if it fails to manage suppliers properly. Thus, Cerner intend to continue strategic business acquisitions, which are subject to inherent risks. Further, Cerner could suffer losses due to asset impairment charges. The ongoing uncertainty in global economic conditions could negatively affect Cerner’s business, results of operations and financial conditions. (Cerner 2011 annual report, 2012). Risks Related to the Health Care Information Technology, Health Care Device and Health Care Transaction Industry.
The health care industry is highly regulated at the local, state and federal level. Cerner is known to operate in intensely competitive and dynamic industries and its ability to successfully compete and continue to grow its business, depends on Cerner’s ability to respond quickly to market changes and changing technologies and to bring competitive new solutions, devices, features and services to market in a timely fashion. (Cerner 2011 annual report, 2012). Risks Related to Our Stock. The quarterly operating results may vary, which could adversely affect Cerner’s stock price.
Sales forecasts may vary from actual sales in a particular quarter. The trading price of Cerner common stock may be volatile. Further, Cerner directors have authority to issue preferred stock and their corporate governance documents contain antitakeover provisions. (Cerner 2011 annual report, 2012). 8. Growth Strategy: Cerner’ business strategies are anchored by their industry-leading solutions and device architectures, the breadth and depth of the solutions and services, the proven ability to deliver value, and, most importantly, the success of their clients.
A core strength that has led to this strong market position is Cerner’s proven ability to innovate, which has driven consistent expansion of solutions and services, entry into new markets and strong long-term growth. Cerner believe that strengths enabled them to gain market share in the United States during a period of expected strong demand driven by the HITECH provisions of ARRA and the nation’s focus on improving the efficiency and quality of healthcare. Further, they have a strong global brand and a presence in more than 25 countries and believe to have a good opportunity to attain market share outside of the United States.
They also have a significant opportunity to grow revenues by expanding solution footprint in existing clients. In addition to the opportunity to expand penetration of Cerner’ core solutions, such as EHRs and computerized physician order entry, Cerner has a broad range of complementary solutions that can be offered into an existing client base. Additionally, they have introduced new services targeted at capturing a larger percent of their clients’ existing IT spending. These services leverage Cerner’ proven operational capabilities and the success of CernerWorksSM managed services business.
Where of which, they have demonstrated the ability to improve clients’ service levels at a cost that is at or below amounts they were previously spending. Cerner has made good progress over the past several years in reducing the total cost of ownership of their solutions. These solutions enhance and expand end market opportunities by allowing the Cerner to offer lower-cost, higher-value solutions and services to smaller community hospitals, critical access hospitals and physician practices. (Cerner 2011 annual report, 2012).
Assume that you have $100,000 either to spend, or invested in either company: After analyzing Cerner Corporation I would like to use the $100,000 and BUY shares in Cerner. As shown in the analysis I can see that Cerner Corporation designs, develops, installs, hosts, and supports healthcare information technology service. Not only that, it markets these services to healthcare devices, and supports content solutions for healthcare organizations and consumers worldwide. Cerner Corporation has a market cap of $13. 76 billion and is part of the computer software and services industry.
The company has a P/E ratio of 37. 3, above the S&P 500 P/E ratio of 17. 7. Shares are up 3. 5% year to date. Currently, there are 11 analysts that rate Cerner Corporation a “buy”, one analyst rates it a “sell”, and five rate it a “hold”. TheStreet Wire (2013). TheStreet Ratings (2013) rates Cerner Corporation as a “buy”. The company’s strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, solid stock price performance and impressive record of earnings per share growth.
Although the company may encounter some minor weaknesses, I feel they are unlikely to have a significant impact on results. Further, Cerner is not simply a play on the US Stimulus. Instead, it is a play on worldwide healthcare automation. The company has a large reference that enable client base and broad product footprint. Cerner continues to be a winner in the market for hospital clinical information technology services, and also in building a significant contribution in the rapidly growing ambulatory clinical IT market.
Cerner’s ambulatory products gained traction during FY12. Cerner’s proven implementation and ability to deliver results to its clients at a predictable cost continue to distinguish it in the marketplace. The company has shown a reliable steady capability to grow its business organically. Cerner has typically moved ahead of events such as the need for accountable care organizations (ACO) and health information exchange. Cerner has developed multiple sources of revenue that reduce company-specific risks.
The company enjoys market share gains including strides in the replacement market. From what preceded, I can make the conclusion that Cerner is a promising company to invest this large amount of money and assure the success of buying Shares in this widely multidimensional business company. References Cerner 2011 annual report (2012). 2011 annual report. Retrieved January 27, 2013, from http://www. cerner. com/uploadedFiles/Content/About_Cerner/Investor_Relations/Cerner_Annual_Report_2011. pdf Cerner Corporation (2012). Cerner announces share repurchase program.
Retrieved January 27, 2013, from http://www. cerner. com/about_cerner/newsroom/cerner_announces_share_repurchase_program/ TheStreet Wire (2013). Cerner corporation (CERN): Today’s featured technology winner. Retrieved January 27, 2013, from http://www. thestreet. com/author/1190833/TheStreet%20Wire%20/all. html Wettlaufer, D. (2012). Cerner is developing as the main beneficiary in an epochal shift in EHR software. Alacrastore Wikipedia: The free encyclopedia (2013). Cerner. Retrieved January 27, 2013, from http://en. wikipedia. org/wiki/Cerner