The Real Deal on Wall Street: Healthcare IT Spending was a Bust

It feels as if it was only yesterday that incoming President Obama was touting the virtues of making the healthcare system more efficient through the utilization of technology. I vividly remember shares of Cerner, AthenaHealth, and McKesson catching nice bids on a supposed healthcare IT spending boom in 2010. While the market will forever be a forward-looking mechanism, participants obviously neglected to account for the near-term bumps in the road; for example hospitals are notoriously resistant to change (ever notice how that physician’s assistant is still writing your prescription on a piece of paper?), spending budgets were being kept under control, and headline risk existed from calls to repeal Obamacare.

The new year has begun, and with it has come testy Republican primary debates and an economy that didn’t fall off a cliff in 2011. In today’s Real Deal column, spotlight is on the healthcare industry for it seems to be a friend of each political party (what politician wants to get on his/her soapbox and say leaving the paper using healthcare industry alone is adequate) and the financial performances of the key sector plays has been increasingly solid.

My interest rests with industry leader Cerner, which has a cash rich balance sheet that is positioned to acquire smaller competitors or complementary businesses that will only strengthen its standing. The stock isn’t exactly my cup of tea (I am an “Intelligent Investor” with a twist type of dude) as it trades on a P/E multiple of 28x forward earnings in a broader market that has shown an unwillingness to pay up for growth, but the industry characteristics are finally starting to crystalize. Moreover, Cerner’s order backlog growth in the third quarter was impressive, as was the sequential improvement in return on equity. Going back and investigating further, Cerner has done a good job of reducing its trade cycle, no small feat when dealing with hospitals and physician offices and evidence of its market-leading position in the industry.
 

Key sector trends:
• Virtualization
• Remote access to medical records
• Compliance
• Payor system upgrades
• Rising spending by the Federal government on healthcare (think Veterans)