Presentation is loading. Please wait.

Presentation is loading. Please wait.

1 2013 CFA Institute Research Challenge Kansas State University Target Company: Cerner Corp. Ticker: CERN (NASDAQ) Industry: Healthcare Information Technology.

Similar presentations


Presentation on theme: "1 2013 CFA Institute Research Challenge Kansas State University Target Company: Cerner Corp. Ticker: CERN (NASDAQ) Industry: Healthcare Information Technology."— Presentation transcript:

1 CFA Institute Research Challenge Kansas State University Target Company: Cerner Corp. Ticker: CERN (NASDAQ) Industry: Healthcare Information Technology (HCIT)

2 Leader in HCIT Industry Solid Core Business Model Significant Growth Opportunities Current Price: $90.76 (as of 3/19/2013) Investment Thesis: Investment Overview

3 12.89 % $ Leader in HCIT Industry Solid Core Business Model Significant Growth Opportunities BUY Recommendation: Target Price: Potential Upside: Current Price: $90.76 (as of 3/19/2013) Investment Thesis: Investment Overview

4 Industry Overview Core Business Model Growth Opportunities ValuationCERN 4 Company Overview  Founded in 1979, based in Kansas City, MO  11,900 employees worldwide  Provides information technology solutions to healthcare providers  Core product offering is Millennium Software Platform  Sets up Electronic Health Record (EHR) Systems  Combines clinical, financial and general IT system solutions

5 Industry Overview Core Business Model Growth Opportunities ValuationCERN 5 Regulatory Environment Driving Industry Growth  HITECH Act and Meaningful Use  Passed as part of ARRA Stimulus Act of 2009 $32.7B Total Amount Allocated By HITECH Act Source: Healthcare IT News (Data as of December 2012)

6 Industry Overview Core Business Model Growth Opportunities ValuationCERN 6 Regulatory Environment Driving Industry Growth  HITECH Act and Meaningful Use  Passed as part of ARRA Stimulus Act of 2009 EHR System Implementation Meaningful Use Stage 1 ( ): Interoperability & Health Information Exchange Meaningful Use Stage 2 ( ): Performance-Based Reimbursement Meaningful Use Stage 3 ( ): $32.7B Total Amount Allocated By HITECH Act $10.3B Total Amount Spent as of Dec Source: Healthcare IT News (Data as of December 2012)

7 Industry Overview Core Business Model Growth Opportunities ValuationCERN 7 Regulatory Environment Driving Industry Growth  HITECH Act and Meaningful Use  Passed as part of ARRA Stimulus Act of 2009 EHR System Implementation Meaningful Use Stage 1 ( ): Interoperability & Health Information Exchange Meaningful Use Stage 2 ( ): Performance-Based Reimbursement Meaningful Use Stage 3 ( ): $32.7B Total Amount Allocated By HITECH Act $10.3B Total Amount Spent as of Dec  Other Regulations Impacting Industry:  ICD-10 and Computerized Physician Order Entry (CPOE)  Affordable Care Act (ObamaCare) Source: Healthcare IT News (Data as of December 2012)

8 Industry Overview Core Business Model Growth Opportunities ValuationCERN 8 Industry Overview Top 5 EHR Vendors in 2006 Large Hospitals ( >200 Beds) RankVendor Market Share 1Meditech19% 2Cerner16% 3McKesson14% 4Siemens9% 5Epic7%

9 Industry Overview Core Business Model Growth Opportunities ValuationCERN 9 CERN & Epic: Becoming Clear Market Leaders Top 5 EHR Vendors in 2006 Large Hospitals ( >200 Beds) RankVendor Market Share 1Meditech19% 2Cerner16% 3McKesson14% 4Siemens9% 5Epic7% Top 5 EHR Vendors in 2011 Large Hospitals ( >200 Beds) RankVendor Market Share 1Epic24% 2Cerner21% 3Meditech19% 4McKesson13% 5Siemens8%

10 Industry Overview Core Business Model Growth Opportunities ValuationCERN 10 % Bookings from Outside of Installed Client Base CERN Capitalizing on Displacement Opportunities

11 Industry Overview Core Business Model Growth Opportunities ValuationCERN 11 % Bookings from Outside of Installed Client Base CERN Capitalizing on Displacement Opportunities  User satisfaction/Ease-of-Use  Single-Vendor capability  Meaningful Use attestation  Interoperability Cerner’s Key Competitive Strengths:

12 Industry Overview Core Business Model Growth Opportunities ValuationCERN 12 % Bookings from Outside of Installed Client Base CERN Capitalizing on Displacement Opportunities  Continued displacement opportunities  Potential to capture additional 15-25% market share over next 3-5 years  User satisfaction/Ease-of-Use  Single-Vendor capability  Meaningful Use attestation  Interoperability Cerner’s Key Competitive Strengths:

13 Industry Overview Core Business Model Growth Opportunities ValuationCERN 13 Porter’s Five Forces Analysis Threat of Substitute Products/Services Competitive Rivalry Within Industry Bargaining Power of Clients Threat of New Entrants Bargaining Power of Suppliers 4 = Most Favorable to CERN 1 = Least Favorable to CERN

14 Industry Overview Core Business Model Growth Opportunities ValuationCERN 14 CERN Core Business Segments System Sales: 34% Support, Maintenance & Services: 66%

15 Industry Overview Core Business Model Growth Opportunities ValuationCERN 15 Revenue Mix Breakdown

16 Industry Overview Core Business Model Growth Opportunities ValuationCERN 16 Business Model Generates Recurring Revenue 45% Recurring

17 Industry Overview Core Business Model Growth Opportunities ValuationCERN 17 Projected Revenue Mix 5-Year Total Revenue CAGR = 13%

18 Industry Overview Core Business Model Growth Opportunities ValuationCERN 18 Projected Revenue Mix Non-Recurring Recurring 45% 55% 54% 53% 52% 51% 46% 47% 48% 49% 5-Year Recurring Revenue CAGR = 15%

19 Industry Overview Core Business Model Growth Opportunities ValuationCERN 19  Projecting margin expansion of bps per year  Leveraging R&D and SG&A expenses  Increasing proportion of revenue from higher-margin segments Operating Leverage Driving Margin Expansion Total Revenue Operating Expenses

20 Industry Overview Core Business Model Growth Opportunities ValuationCERN 20 Artist’s rendering of completed campus Strong Financial Position from Significant Excess Cash New Kansas City, KS campus construction as of Dec Current Cash Deployment Initiatives  Stock Repurchase Plan authorized for up to $170M  Spending approx. $150M per year to construct new campus  Investing heavily in organic growth opportunities Potential Additional Cash Deployment Initiatives  Expanding Stock Repurchase Plan  Continuing to pursue strategic acquisitions  Low probability of dividend in foreseeable future Total Cash & Investments: $1.5B

21 Industry Overview Core Business Model Growth Opportunities ValuationCERN 21 ITWorks RevenueRevWorks Revenue 21 CernerWorks Solutions Create Up-Selling Opportunity  CERN currently captures only 17% of clients’ total IT spending  Increasing integration of clinical, financial and IT solutions  Significant up-selling opportunity within existing client base ▫ITWorks▫RevWorks +580% +106% +71% +23% +60% +110%

22 Industry Overview Core Business Model Growth Opportunities ValuationCERN 22  Major client priority as reimbursement structure shifts  Seeking to develop first comprehensive PHM solution with HealtheIntent platform ▫Predictive algorithms ▫Integrated decision support tools  Expecting significant earnings impact in 2-3 years  Per-member-per-month subscription fee is probable monetization model  Potential new market with Employee Health Management Population Health Management is Future of HCIT

23 Industry Overview Core Business Model Growth Opportunities ValuationCERN 23 CERN Positioned for International Growth  13% of total revenue from international segment  Presence in 25+ countries Current International Footprint

24 Industry Overview Core Business Model Growth Opportunities ValuationCERN 24  13% of total revenue from international segment  Presence in 25+ countries  Global economic recovery will stimulate industry growth  Leader in adapting software to foreign languages CERN Positioned for International Growth Potential Future International Footprint

25 Industry Overview Core Business Model Growth Opportunities ValuationCERN 25 CERN Positioned for International Growth

26 Industry Overview Core Business Model Growth Opportunities ValuationCERN 26 Pro-Forma Earnings Expectations  Revenue growth to remain between % through 2017  Earnings growth at 5-Year CAGR of 19.28% from  2013 Basic EPS projection of $2.71 ▫16.81% growth over 2012 EPS

27 Industry Overview Core Business Model Growth Opportunities ValuationCERN 27 Weighted Average Price Target P/E MultipleDCF $100.38$ %60% Method Valuation Weight Target Price = $ % of Price 60% of Price  Short-Term Perspective  Driven by Market Sentiment  Long-Term Perspective  Value-Oriented Investors R 2 = 0.40 Regression Analysis: CERN Price Change vs. S&P 500

28 Industry Overview Core Business Model Growth Opportunities ValuationCERN 28 Relative Valuation Summary: P/E Bands Average P/E Band x EPS 2013 = Target Price 37 x $2.71 = $100.38

29 Industry Overview Core Business Model Growth Opportunities ValuationCERN 29 Relative Valuation Summary: P/E Valuation HIGH MEAN LOW Current Price: $90.76

30 Industry Overview Core Business Model Growth Opportunities ValuationCERN 30 Intrinsic Valuation Summary: DCF Model (DCFF) WACC = kd(wd) + ke(we) 7.83% = 4.02%(4.76%) %(95.24%) Stage 2 Growth Stair-Step Growth Rate (7%-2%) FY Year FCF 25% FCF CAGR Terminal Value 2% Terminal Growth Rate Based on Real GDP Growth $ % Target Price = $ $ % $ %

31 Industry Overview Core Business Model Growth Opportunities ValuationCERN 31 Other Valuation Methods Analyzed Comp Group P/E Multiple Comp Group EV/EBITDA Multiple CERN Historic EV/EBITDA Multiple CERN Historic P/E Multiple Residual Income Model DCF Model (DCFF) Current Price: $90.76 Target Price: $102.46

32 Industry Overview Core Business Model Growth Opportunities ValuationCERN 32 Comprehensive Risk Overview LowMediumHigh Minor Moderate Significant  Significant regulatory changes Probability Impact  Slower margin expansion  Further system crashes  Abrupt executive turnover  Slower growth in new initiatives

33 Industry Overview Core Business Model Growth Opportunities ValuationCERN 33 BUY Risk Analysis: Monte Carlo Simulation Key Variables Revenue Growth Margin Expansion Terminal Growth WACC Shares Outstanding Probability of Future Service Outages 71% SELL 15% H O L D 14% # of Simulations 5,000

34 Leader in HCIT Industry Solid Core Business Model Significant Growth Opportunities Current Price: $90.76 (as of 3/19/2013) Investment Thesis: Conclusion  Regulation Driving Industry Growth  Displacement Opportunities  Significant Up-Selling Opportunity  Population Health Management  International Expansion  Recurring Revenue Growth  Operating Margin Expansion  Cash Deployment Initiatives

35 12.89 % $ Leader in HCIT Industry Solid Core Business Model Significant Growth Opportunities BUY Recommendation: Target Price: Potential Upside: Current Price: $90.76 (as of 3/19/2013) Investment Thesis: Conclusion

36  Industry Overview ▫Company OverviewCompany Overview ▫Industry OverviewIndustry Overview ▫Regulatory Environment Driving Industry GrowthRegulatory Environment Driving Industry Growth ▫CERN Competitive PositioningCERN Competitive Positioning  Core Business Model ▫Business Model OverviewBusiness Model Overview ▫Projected Revenue MixProjected Revenue Mix ▫Operating Leverage Driving Margin ExpansionOperating Leverage Driving Margin Expansion ▫Cash Deployment OptionsCash Deployment Options  Growth Opportunities ▫CernerWorks Solutions Create Up-Selling OpportunityCernerWorks Solutions Create Up-Selling Opportunity ▫Population Health Management Is Future of HCIT IndustryPopulation Health Management Is Future of HCIT Industry ▫CERN Positioned for International GrowthCERN Positioned for International Growth ▫Potential International Market OpportunityPotential International Market Opportunity ▫Pro-Forma Earnings ExpectationsPro-Forma Earnings Expectations  Valuation ▫Weighted Average Price TargetWeighted Average Price Target ▫Relative Valuation Summary: P/E BandsRelative Valuation Summary: P/E Bands ▫Intrinsic Valuation SummaryIntrinsic Valuation Summary ▫Other Valuation MethodsOther Valuation Methods ▫Comprehensive Risk OverviewComprehensive Risk Overview ▫Risk Analysis: Monte Carlo SimulationRisk Analysis: Monte Carlo Simulation Presentation Slide Navigator

37 Appendix  Pro-Forma Financial Statements ▫Pro-Forma Income StatementPro-Forma Income Statement ▫Pro-Forma Balance SheetPro-Forma Balance Sheet ▫Pro-Forma Statement of Cash FlowsPro-Forma Statement of Cash Flows  Intrinsic Valuation ▫DCFF AnalysisDCFF Analysis ▫WACC CalculationWACC Calculation ▫Sensitivity AnalysisSensitivity Analysis  Industry Overview ▫EP Payment AdjustmentsEP Payment Adjustments ▫Meaningful Use TimelineMeaningful Use Timeline ▫Medicaid AdoptionMedicaid Adoption  Business Overview ▫CERN Business ModelCERN Business Model ▫Business Segment Revenue MixBusiness Segment Revenue Mix ▫Jargon BusterJargon Buster ▫Historic Stock PriceHistoric Stock Price

38 Appendix 1: Pro-Forma Income Statement

39 Appendix 2: Pro-Forma Balance Sheet

40 Appendix 3: Pro-Forma Statement of Cash Flows

41 Appendix 4: DCF Analysis

42 Appendix 5: WACC Calculation

43 Appendix 6: Sensitivity Analysis

44 Appendix 7: CERN Business Model

45 Appendix 8: EP Payment Adjustments

46 Appendix 9: Meaningful Use Timeline

47 Appendix 10: Medicaid Adoption

48 Appendix 11: Business Segment Revenue Mix

49 HCIT Useful Terms [AAFP – HIPAA] AAFP: American Academy of Family Physicians ACO: Accountable Care Organization AHA: American Hospital Association AHRQ: Agency for Healthcare Research and Quality AHIP: America’s Health Insurance Plans – national trade association representing the health insurance industry AMA: American Medical Association ARRA: American Recovery and Reinvestment Act – law that directed approximately $150B in new funding to the healthcare industry. CCHIT: Certification Commission for Health Information Technology CDS: Clinical Decision Support – process to enhance health related decisions with pertinent clinic and patient information to improve healthcare delivery CHIME: College of Healthcare Information Management Executives Cloud Computing: delivering hosted services over the internet. CMS: Centers for Medicare & Medicaid Services CPOE: Computerized Physician Order Entry CAHs: Critical Access Hospitals – organizations certified to receive cost-based reimbursement from Medicare. ECM: Enterprise Content Management - strategies, methods and tools used to capture, manage, store, preserve and deliver content and documents related to organizational processes EDI: Electronic Data Interchange EDIS: Emergency Department Information Systems – EHR systems designed to specifically manage data and workflow in support of Emergency Department patient care. EHR: Electronic Health Record - collection of patient health information generated by one or more meetings in any care delivery setting EMR: Electronic Medical Record ERP: Enterprise Resource Planning – business management software that allows organizations to use an integrated system HCIT: Healthcare Information Technology HHS: Department of Health & Human Services HIE: Health Information Exchange – transmission of healthcare-related date among facilities, organizations, and government agencies. HIMMS: Healthcare Information and Management Systems Society HIPAA 5010: Health Insurance Portability and Accountability Act – requires Medicare and all other health insurance payers to comply with EDI standards. Appendix 12: “Jargon Buster” (AAFP – HIPAA)

50 HCIT Useful Terms [HITECH Act – VBPP] HITECH Act: Health Information Technology for Economic and Clinical Health – part of the 2009 ARRA, promoting the adoption and meaningful use of health information technology ICD-10: International Classification of Diseases, 10 th Revision. IHE: Integrating the Healthcare Enterprise - global initiative that creates framework for passing vital health information, whether from application to application or system to system, seamlessly IDN: Integrated Delivery Network - network of facilities and providers that work together to offer a continuum of care to a specific geographic area or market. Interoperability: ability of health information systems to work together within and across organizational boundaries in order to advance the effective delivery of healthcare Medicare vs. Medicaid MU: Meaningful Use – guidelines for receiving compensation upon implementation of EHR MDI: Medical Device Integration NHIN: Nationwide Health Information Network - set of standards, services and policies that enable secure health information exchange over the Internet PHM: Population Health Management RCM: Revenue Cycle Management - process that manages claims processing, payment and revenue generation Stage 7 Hospitals: completely paperless facilities VBPP: Value Based Purchasing Program Cerner Product Offerings: Ambulatory EHR: system designed by physicians to minimize clicks, provide comprehensive yet flexible documentation, and automate reporting processes. CareAware iBus: next generation solution that connects medical devices to the electronic health record to support the entire care process. Healthe Intent: bundle providing access to three powerful cloud based services ITWorks: business unit that provides a full suite of strategic and information technology sercvices to Cerner clients RevWorks Services: provide a unique combination of health care finance experience and information technology intelligence to examine and optimize your operations. Smart Room: incorporates technology and workflow solutions to improve patient care and clinician efficiency Appendix 13: “Jargon Buster” (HITECH Act – VBPP)

51 Appendix 14: Historic Stock Price Chart


Download ppt "1 2013 CFA Institute Research Challenge Kansas State University Target Company: Cerner Corp. Ticker: CERN (NASDAQ) Industry: Healthcare Information Technology."

Similar presentations


Ads by Google