Market Overview

Allscripts: Falling Knife or Value Proposition?


On Thursday, April 26, Allscripts Healthcare Solutions (NASDAQ: MDRX), a large provider of health IT products and services, released its fiscal first-quarter earnings results. The company reported non-GAAP earnings per share of $0.12 versus $0.21 in the prior year period. This missed Wall Street analysts' consensus EPS estimates of $0.24 badly.

Revenues in the quarter were $365.5 million versus $346.1 million in last year's corresponding quarter. This also badly missed consensus estimates of $387.70 million.

Looking ahead to fiscal 2012, the company lowered sharply lowered its guidance. Allscripts said that it expected adjusted EPS of $0.74 to $0.80 and revenues of $1.48 billion to $1.52 billion. This compared to analysts' consensus EPS estimates of $1.09 on revenues of $1.64 billion for fiscal 2012.

Previously, Allscripts had guided for EPS between $1.06 and $1.10 on revenues of $1.62 billion to $1.65 billion.

Making matters even worse, the company also said that its CFO was leaving, effective May 18, 2012. If that wasn't enough, Allscripts also said that Phil Pead's service as Chairman of the Board, director, and officer of the Company had been terminated the prior day. Three other directors also resigned as a result of the boardroom shakeup.

Needless to say, the quarterly report presented multiple negative catalysts for the stock price. The combination of very bad Q1 results, terrible guidance, and the departure of the CFO, Chairman of the Board, and three board members took a toll on the stock.

On April 27, the day after the disastrous report, MDRX shares plunged 41%, erasing more than $1.26 billion in market value.

Analysts weighed in with decisively negative commentary on the stock as well. "These actions leave the company in nothing less than a state of crisis, which will be an enormous management distraction, cause heightened concerns among customers, and make it increasingly difficult to sign new business," said Sean Wieland, analyst at Piper Jaffray. "Our rule of thumb is to downgrade on any CFO turnover," Wieland said. "Add to that the board shakeup, missed quarterly numbers, lowered guidance, and poor execution, and we have nothing left to defend."

The weak results were blamed on a challenging sales environment whereby "several current and potential customers delayed purchase commitments in order to wait for new releases," according to the Wall Street Journal. The company's recent reorganization of its sales and service teams also contributed to its lower sales numbers, according to the report.

Allscripts CEO Glen Tullman said "In my career, I can tell you I haven't had a quarter as tough as this one."

The trouble at Allscripts comes at an unfortunate time for the company, as its industry is seeing strong growth and competitors are picking up market share. Judy Hanover, research director at IDC Health Insights, told that electronic health record (EHR) adoption is proceeding rapidly this year.

"These problems have meant that Allscripts is not competing well against vendors like Epic and Cerner in the marketplace at a critical time, and Allscripts has failed to garner as much market share as these competitors," Hanover told InformationWeek Healthcare. "Long term, Allscripts will need to fight a more difficult battle to win back lost customers and/or find replacement opportunities as the market becomes more saturated."

In the wake of the significant internal turmoil at the company, and its terrible Q1 results and slashed guidance, MDRX shares are now down more than 44% in 2012. On the 52-week chart, MDRX has lost more than 50%. The stock, however, has bounced back from its recent lows. On Friday, MDRX is trading at around $10.60.

One potential sign of better times ahead for the company came on Monday, when MDRX announced that it had selected a new chairman in current board member Dennis Chookaszian. The rapid transition in the wake of the dramatic board shake up is being interpreted as evidence of the company's commitment to restore internal order. Mr. Chookaszian was formerly the CEO and Chairman of mPower Inc., a financial advice provider focused on the online management of 401(k) plans.

In addition to swiftly appointing a new Chairman, MDRX also announced that the board had authorized an additional $200 million to repurchase outstanding stock. The extra $200 million brings the total amount of the company's buyback plan to $400 million. It is likely that the company has used the steep sell-off in recent days to actively buy back its shares, thereby reducing the outstanding share count - a move which rewards existing investors.

Despite the company's best efforts to take immediate steps to rectify the situation that it has found itself in, this is still a very risky stock. On a valuation basis, MDRX now looks fairly cheap on a forward looking basis. Using the company's EPS guidance for 2012, implies a forward P/E ratio of between 14.3 and 13.3 at today's prices. Given that the company is still growing its top-line, this valuation could prove to be cheap.

Do not be fooled. When a company faces a pile-up of negative news of this magnitude, the best bet for most investors is to stay far, far away. Who cares if it is cheap? It could get considerably cheaper.

In sum, MDRX is a falling knife with multiple downside catalysts and simply not worth investors' time even after the huge sell-off. For the average investor, there are just too many great companies and stocks to sift through to waste time on a train-wreck like Allscripts.

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