No Obamacare, No Problem For This Health Care Stock
Obamacare may be on the defunding chopping block, but not every health care stock out there depends on the success — or even the existence — of the Affordable Care Act.#-ad_banner-#
A law enacted in 2009 called the Health Information Technology for Economic and Clinical Health Act — the HITECH Act, for short — requires the U.S. health care system to transition to electronic recordkeeping. It’s a done deal and will live on regardless of what happens to Obamacare. In fact, parts of it are already in place.
The real quantum leap called for by the HITECH Act, however, has yet to come.
A wide swath of older health care information management systems must comply with the new accounting and disclosure rules by January of next year. Another key technical-capability deadline is slated for 2016. Translation: Health care IT companies have been doing well lately — but they’re about to enter an even stronger period of growth. And few investors see it coming.
The statistics are stunning:
- The Department of Health and Human Services estimates more than $60 billion in errant insurance payments are doled out every year.
- In 2012, the FBI and the Department of Justice opened more than 1,300 new criminal health care fraud investigations.
- Post-surgical complications for patients with private insurance is somehow 20 times more profitable for hospitals than post-surgical complications for patients with stingier Medicare insurance (and privately insured patients are somehow more likely to have complications than are patients covered by less-generous Medicaid).
Some companies are specifically seeking to fix these costly problems and disparities. HMS Holdings (Nasdaq: HMSY) is one of them. This medical billing specialist exists solely to catch billing mistakes like double payments or unbilled-but-performed services. It found and recovered $2.5 billion worth of errant insurance claims in 2011.
Cerner (Nasdaq: CERN) is another one. In fact, this $18.5 billion diversified health care IT company is considered to be the best for good reason — the company turned a profit of nearly $400 million last year, up 29% from 2011’s bottom line of $307 million. It was not only the 10th straight year of net operating profits, but the 10th straight year of similar profit growth. Cerner’s annual net income has grown more than 500% since 2004; that’s come partly from acquisitions along the way, but it’s mostly been fueled by Cerner just doing its job.
Point being, it’s possible to do very well in the health care IT arena. It just takes the right leadership and the right approach.
With that in mind, while the industry’s biggest names are also the most stable in the bunch, there’s a more potent (if more speculative) health care IT stock out there: Quality Systems (Nasdaq: QSII).
Then And Now
No need to dance around the facts: Quality Systems’ shares were trashed in the first half of 2012, as disappointing quarterly results were exacerbated by the company’s unwillingness to affirm its full-year outlook. Shares fell 36% that day alone — after having already been cut in half during the five months leading up to that announcement.
QSII has managed to crawl back from the post-plunge price of around $16 to its current price near $22, but that’s nowhere close to its early-2012 peak near $44. Holding the stock down was a combination of doubt about the company’s direction (which was an indirect shot at the company’s management) and downgrades from analysts last year that were followed by a decrease in earnings that justified those downgrades.
But that was then, and this is now.
It took an ugly battle to make it happen, but an activist investor organization/hedge fund named the Clinton Group has increased its presence on Quality Systems’ board of directors. This renewed oversight should keep enough pressure on Quality Systems’ management team to repair what is a company with a lot of potential but not a lot of execution.
With new leadership in place, the untapped value of QSII can start to be unleashed. Indeed, it already has to some degree, as Sterne Agee, Baird, J.P. Morgan, and Morgan Stanley have all upgraded the stock on the heels of the Clinton Group’s increased involvement.
QSII is up about 20% since the board’s partial overhaul. That’s a lot, but there’s more potential here.
As it stands right now, Quality Systems is projected to post another earnings dip this year, with income falling from last year’s profit of $0.99 a share to $0.94 this year. That translates into a forward-looking price-to-earnings (P/E) ratio of 22.2. That’s not great, but it’s not bad either.
What must be understood, however, is that the projected earnings of $0.94 per share this year is a lowball estimate that doesn’t fully factor in Clinton’s increased involvement. This underestimation is the core of the current investment opportunity.
As for where it’s all going, the acquisition chatter has already started — and the Clinton Group has helped stir the pot. The firm’s president said earlier this year that Quality Systems’ board has agreed to a full review of the company’s options, some of which “may offer stockholders significant benefits.” It’s not exactly a veiled allusion to a buyout, but the company looks positioned to rejoin peers like Cerner and HMS Holdings on what’s been an amazingly fruitful gravy train.
Risks to Consider: Although the HITECH law has nothing to do with Obamacare, some investors are lumping these health care IT stocks in those linked with the controversial Affordable Care Act. Rightly or wrongly, this could prove to be a drag on Quality Systems.
Action to Take –> Although this year has been better for Quality Systems than 2012 — QSII is up 20% year to date versus last year’s 53% dip — there’s still plenty of ground to make up. And though QSII may be priced a bit richly, this is a case where the turnaround story in addition to the possibility of an acquisition could spur more bullishness. By this time next year, if Quality Systems hasn’t yet been acquired, the stock could be worth as much as 40% more than today’s value.
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