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Cerner (CERN)

In the last few stock reports we’ve done we’ve focussed a lot on stocks that have seen some sort of recent pullback, putting them into prime buying range. If the company concerned has strong fundamentals and good management in place, a stock price fall, whether it be from external circumstances or internal issues, can still provide a great opportunity. As long as you still believe that long term the stock will continue to be successful. Every stock will have a bad run now and then, it’s our job to decipher which ones are just in a dip and which are going to continue to struggle.

Today’s stock report subject, Cerner, has a lot of great things going for it. For one, it’s part of the booming healthcare industry. An industry that is expected to grow exponentially in coming years thanks to an aging boomer population. It’s no surprise that as people age they require more medical treatment. And according to the US Census Bureau, the Boomers have been the largest generation the US has ever had, peaking at 78.8 million in the late ’90s. They were still the largest age cohort until they were overtaken by the Millenials just last year – the children of Boomers. That’s the great thing about investing in the healthcare sector. A constant source of new customers churning off the production line.

For years now global healthcare costs have been rising faster than incomes, and it has been no more pronounced than in the US. And the trend is set to continue. Cerner benefits from this by providing solutions to healthcare providers to help them cut costs in their business models. They are the main supplier of health information technology services, as well as being producers of medical devices and hardware. They provide an important service in that they assist in getting important medical information to the areas that need it, but also play a critical role in stemming the increasing costs of providing healthcare to an aging population.

The company has big plans to grow its data-as-a-service offering. It currently manages the systems of almost 3 million healthcare providers globally, with the data of approximately 250 million patients at their fingertips. When collated and examined this data is critical in predicting health outcomes for all. From cancer drugs to covid vaccines, this information helps to speed up discoveries and improve testing accuracies. It was already a growing business pre-covid but is now seen as even more important as stakes were raised by the pandemic. It’s a market that’s expected to grow to $11 billion by 2024.

The recent acquisition of Kantar Health, a life sciences data analytics research firm, will help move Cerner’s data business into a billion-dollar revenue stream by the middle of the decade. The company estimates it will add $125 million in revenue by the end of the year. Deutsche Bank analyst George Hill has written that the deal “will significantly expand its capability in clinical research support, commercial planning, branding guidance, and marketing insights to serve life science customers”. While there are many competitors moving into the space, Cerner is far and away the leader in the clinical data market and have been doing it successfully for decades. It gives them a massive advantage to grab a big chunk of the growing pie.

Cerner’s recent price stumble has been surprising. Wall Street has been in a strong bull market since August last year, yet Cerner has gone backwards. Yes, earnings were slightly disappointing but it also made a great move in selling its software products in Germany and Spain to Compugroup for EUR 225 million. This should see a more lean outfit in 2021 and increased sales growth of around 4%. Its fall from its 28th of January high of $84 back to around the current $72 mark seems like overkill.

Its finances are solid, the newly installed CEO has been buying up stock in the company, which is generally a positive sign, and 15 analysts out of 23 have it as a buy recommendation with the rest giving it a hold. It’s recently installed a dividend of 1.22% which isn’t a dealbreaker but is better than a poke in the eye. And it has a forward PE ratio of around 22 is on the low side for what is essentially a tech company. We like holding Cerner in our portfolio long term.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.
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