Cerner (CERN) is Jefferies' Top Pick in Healthcare IT; athenahealth (ATHN) Cut on Deterioration

Jeffries analyst, Sean Dodge, assumed coverage for the Healthcare IT sector today and, not surprisingly, Cerner (NASDAQ: CERN) is his top stock pick. Perhaps more importantly though is the downgrade for athenahealth (NASDAQ: ATHN). Key points from the note follow:

In 2009, when the HITECH Act was passed, half of all hospitals have replaced their EHR systems. This has enabled the top vendors to rapidly consolidate market share. Looking forward, they estimate remaining replacement opportunities to be from 1,100-1,400 hospitals or 25% of the market.

Over the next 3+ years, they expect: (1) a larger proportion of revenue to be tied to patient outcomes; and (2) to spend more money on PopHealth solutions to manage the transition. Also notable, the adoption of managed services is on the upswing. They believe both trends benefit vendors with large installed-bases since providers look first to their EHR vendor when searching for new solutions.

Cerner's (NASDAQ: CERN) industry-leading investments in R&D and streamlined implementations have helped triple its win rate vs. Epic over the last 5 years. He projects CERN bookings to grow in the low-double-digits for the next 3+ years. The 13% pullback from recent highs gives investors an opportunity to own the highest-quality name in the space. Maintain Buy rating and $78 price target.

athenahealth (NASDAQ: ATHN) has been a refreshing and disruptive force in the ambulatory market, however: (1) the pricing model continues to show both QoQ and YoY deterioration; (2) return on sales and marketing investments are declining; and (3) its EV/S valuation resembles that of other SaaS stocks with similar revenue growth trajectories despite ATHN having a less attractive operating leverage profile. Downgraded from Hold to Underperform with a price target of $105.00 (from $125.00),

Allscripts (NASDAQ: MDRX) — Maintaining Buy rating, but lowering PT to $15.50 (from $17). A growing proportion of bookings are coming from both new clients and subscription/SaaS sales. The latter is ‘layering’ into revenue, resulting in an increasingly stable base.

Quality Systems (NASDAQ: QSII) — Maintaining Hold rating and lowering PT to $12 (from $15). We have doubts concerning QSII’s ability to defend its currently large installed-base over the LT. This lack of confidence warrants a discounted valuation, in our opinion.

You May Also Be Interested In

• Jefferies Downgrades Calix (CALX) to Hold
• WesBanco (WSBC) PT Lowered to $35 at DA Davidson
• Goosehead Insurance Inc. (GSHD) PT Lowered to $65 at Piper Sandler