Here's Why You Should Hold on to Cerner (CERN) Stock Now

Cerner Corporation CERN is well poised for growth on the back of big data-based electronic health records (EHR) system and strategic deals. However, sluggishness in both gross and operating margins remains a concern.

Shares of Cerner have gained 11.7% compared with the industry’s growth of 0.8% in a year’s time. Meanwhile, the S&P 500 Index has fallen 1.7% in the same timeframe.

The company, with a market capitalization of $21.3 billion, offers healthcare information technology (HCIT) solutions worldwide. It anticipates earnings to improve 12.5% over the next five years. Moreover, the company surpassed estimates in the trailing four quarters by 1.5%, on average.

Let’s take a closer look at the factors that substantiate the company’s Zacks Rank #3 (Hold).

What’s Deterring the Stock?

Cerner has been witnessing sluggishness in gross margin in the last couple of quarters.

In fourth-quarter 2019, gross margin was 80.8%, down 180 bps on a year-over-year basis thanks to higher third-party services primarily related to its federal business and a lower margin mix within technology resale.
Further, competition in the global MedTech space remains a concern.

What’s Favoring the Stock?

Cerner has been benefiting from the prospects of the EHR services in the U.S. MedTech space. Notably, Cerner's HealtheIntent is a big data platform, which provides the company with significant exposure to AI trends in the medical world. Per management, the company’s prospects of expanding presence of EHR-agnostic CareAware and HealtheIntent solutions beyond EHR base are significant.

The company has strengthened foothold in the Healthcare Information Technology (HCIT) space through both organic and inorganic means. Further, it plans on collaborating with leading companies and academic institutions to provide a wider portfolio of EHR solutions.

In fact, the company announced an investment and partnership with i2i Systems in third-quarter 2019. i2i holds 25% market share within the federally qualified health centers segment, which covers nearly a third of all Medicaid patient data and has a strong payer business with 13 managed care clients.

Moreover, Cerner follows a strategy of acquiring complementary businesses that enables the company to expand solutions, device offerings and services, and strengthen market and client base.

In fourth-quarter 2019, the company completed the buyout of AbleVets for about $75 million (in cash consideration). Cerner has started to integrate AbleVets’ service offerings into its portfolio to accelerate growth in the federal space. Per management, the buyout is anticipated to contribute about $90 million to revenues in 2020. On the basis of expertise and the importance of Cerner’s federal business, AbleVets seems a suitable fit.

Strong outlook for first-quarter 2020 instills investor optimism in the stock. For first-quarter 2020, Cerner expects revenues between $1.42 billion and $1.47 billion. The mid-point of this range indicates growth of 4% from the prior-year quarter.

Adjusted earnings per share are projected to range between 69 cents and 71 cents. The mid-point of this range is 15% higher than prior-year quarter. For the full-year 2020, adjusted earnings per share are expected between $3.09 and $3.19, with the mid-point of this range suggesting growth of 70% over 2019.

Which Way Are Estimates Headed?

For 2020, the Zacks Consensus Estimate for revenues is pegged at $5.85 billion, indicating an improvement of 2.8% from the prior-year period. The same for earnings stands at $3.02 per share, suggesting growth of 12.7% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks from the broader medical space include ResMed Inc. RMD, Merit Medical Systems, Inc. MMSI and DexCom, Inc. DXCM, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ResMed has an estimated long-term earnings growth rate of 14.4%.

Merit Medical has an estimated long-term earnings growth rate of 12.1%.

DexCom has a projected long-term earnings growth rate of 36.7%.

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