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Fidelity Guru Pounces On Cerner

Fidelity Contrafund Manager Will Danoff is arguably one of the best stockpickers of all-time. With $65B under his belt, you better hope he's not napping under his desk in the middle of the trading day.

That said, we were delighted to discover this past weekend that Danoff is loading the boat with our top medical IT play, Cerner (CERN).

You'll recall our bullishness on this name in a story we did 2 weeks ago:

Medical errors are unfortunately still running rampant in America, so the need for clinical /administrative data automation in the health care industry is greater than ever. According to IDC, hospital-related IT spending is expected to rise considerably within the next 3-5 years as health care providers look to implement safey metrics across the board. The Center for Information Technology Leadership (CITL) says the health-care system could save more than $77 billion annually if it gets its act together.

Naturally, the market for medical software is white hot and our favorite player is Cerner Systems (CERN). Cerner's brand visibility is a competitive advantage we think the firm enjoys.

Cerner's revenue streams come from software sales and the ancillary/follow up services it provides for its clients. Clients include large hospitals, but Cerner has recently penetrated the tighter, smaller private physician space in order to diversify it client base and augment its long term contractual agreements. Currently, Cerner lacks the scale its rivals enjoy, and as a result, Cerner has to spend more in order to develop content solutions and haul clients through the door. Nevertheless, Cerner has done an exceptional job turning the orders it has received into recurring revenues.

Should hospital budgets loosen up -- and the firm carve out an inpenetrable niche in this terribly fragmented category -- we think Cerner could see great upside. But now may not be the best time for investors to get in. Cerner trades at 25x forward earnings and 12x EBITDA -- 30% of Cerner's float is currently being shorted...Cerner's balance sheet is far from perfect, and the company has already announced much higher R & D expenses going forward as it tries to grapple with increasing competition from the likes of formidable stalwarts like IBM (IBM) and Accenture (ACN), who could arguably blow Cerner out the water if they decided to leverage their name and deploy cash on acquisitions. Record-keeping software maker Quality Systems (QSII) must also be watched closely. A small but powerful player, Quality Systems is cash flow positive and growing at a torrid pace.

We're initiating coverage on the stock with a nuetral rating.

Cerner reports earnings on 4/20.

posted by Catablast! Media Group @ 12:30 PM