Credit Suisse Initiates HMS Holdings With Outperform Rating

Credit Suisse started coverage of HMS Holdings Corp HMSY with an Outperform rating and $19 price target on potential growth in its commercial business and cost-cutting efforts.

"Revenues may grow only 4% in 2016 on declining government contributions, but the performance masks strong double-digit growth for its commercial business that now accounts for one-half of its revenues. The ongoing mix-shift, coupled with cost-cutting efforts, should drive accelerating EPS growth into 2017," analyst Robert Willoughby wrote in a note.

Willoughby estimates commercial business should grow 18-20 percent this year, topping $200 million. The revenue growth should be stronger in the second half of 2016.

The analyst said HMS is well positioned, as the incumbent for New Jersey's Medicaid contract lost to a competitor that subsequently withdrew its bid. Medicare contributions may also continue after July 31.

Further, the company's improving cash conversion cycle is a healthy trend, with less Medicare exposure and growing returns on its efficiency initiatives. The cash conversion cycle fell to 78 days as of the first quarter, and the EBITDA margin up 160 bps yoy.

On the valuation front, the analyst said, at a 2017 EV/EBITDA multiple of 10.8x, HMSY currently trades below comparable health care IT/business services companies (11.1x).

"A higher multiple should stem from success growing revenues and profits more rapidly after disappointing performances over the past three years," Willoughby highlighted.

Willoughby expects EPS of $0.63 for 2016 and $0.75 for 2017. Street estimates earnings of $0.65 a share for 2016 and $0.75 a share for 2017.

At time of writing, shares of HMS Holdings rose 6.44 percent to $17.59.