- Founded in 1979 - Computer Programs and Systems Inc. is a software and technology provider to the health care industry
- A well run business positioned adeptly for the future
- Good domestic and international opportunities for growth
- Revenue mix shifting to higher value managed services
- Limited impact from sequestration
- Good understanding and effective management of ARRA programs are yielding both revenue and cash flow growth
- No debt and strong cash position allow for flexible financing of solutions for healthcare customers who are facing shrinking budgets
- 5% forward dividend yield is attractive for income investors
- Healthy new product and subscription in the pipeline
Computer Programs and Systems Inc. (NASDAQ: CPSI) has had a fairly tough year by comparison to previous stellar results. System sales revenues have been dropping amidst the Medicare cutbacks and budgets are tight in the health care arena. This, coupled with their one year outlook has caused a sharp drop in share prices - one we believe is unwarranted.
The first reason for this is their focus on managed services. While this almost always has an impact on short-term revenues in any sector, it always has long-term benefits for customers and shareholders alike. It also offers the opportunity to leverage additional products and services out of a highly skilled, fixed price workforce that often isn't fully utilised. Given how this aspect of the business has grown by over 12% and that it now represents over 27% of revenues, we are excited by how this part of the business might develop in the future. Ultimately, this offering makes sense for hospitals: get a long-term, fixed price contract to take care of your IT infrastructure, billing and collections. CPSI has positioned itself brilliantly here, offering services around all aspects of IT and finance management - basically allowing hospitals to focus on their core competencies instead of the peripheral aspects to the provision of their services.
Our second reason comes from their own forecast and view of the two year/2016 picture where they see continued growth in managed services and see a return to growth in system sales due to refresh cycles. Interestingly, with the small shrinkage outlook in 2015 and the growth outlook in 2016, they end up in almost the same place as our growth forecast overall with a 2016 outlook of $3.20 to $3.44 versus our 2016 outlook of $3.42.
The business has no debt and a fantastic cash position which allows them to provide flexible financing for their solutions. This has proven very effective in closing business this last year and I'm sure this will continue to do the same in the future.
Income investors will appreciate the 5% dividend yield that is financed directly out of Operating Cash Flow.
Finally, the focus on new subscription / mobile products and services should help accelerate the long term growth potential in this well run, prudently financed business.
STRIDE scores for the business are looking fantastic. For more info on how the scores work, take a look at the scores and ratings video.
The strength rating is 100 and we can see that the Z-score reflects the safety and relative strength of this business. Liquidity and solvency ratios are all fantastic and the business is prudently run with a great net working capital / net current asset position.
The timing rating shows that the business is right in the middle of the stable rating - demonstrating how the share price has stabilised following the drop caused by the earnings announcement.
The returns score is 100 and we can see that this is reflected in the Greenblatt rank / Magic Formula investing position. ROA is 32% while ROC is a massive 61% and ROE is 44%.
The intrinsic value score of 33 is low but still allows for entry and is to be expected with a software company, with around 14c in every $1 being hard, tangible assets. The business is clearly not a book value / intrinsic asset value play.
The dividend score is 51 as the yield is good but we don't think a 77% payout ratio is all that healthy in a business that is still trying to drive growth. Still, it's healthy enough and there are no major warning signs here.
Earnings predictability is 100 - showing how this business has continued to grow the top, middle and bottom line figures at both an overall and per-share level. As always, past performance is not a guarantee of future performance, but it sure helps one feel more confident.
Our fair value comes in at $63.40. While the business looks expensive on the last full year basis, our forecast growth number of 8% coupled with the high scores received above allow us to paint a picture forward that still demonstrates good value. We are seeking an $8 / 12.7% discount to our fair value as an entry / consider buy price to ensure an adequate margin of safety. Our consider sell price has been pushed up by the RISE factor - more on this in our detailed analysis video.
Income statement growth has been good as depicted below.
The company continues to build shareholder equity and the balance sheet is evolving beautifully.
The cash flow also continues to evolve meaningfully. We feel the $25m in the financing column could be limited a little with a little more focus on growth, but it's really nit-picking.
Currently, CPSI is a hold due to timing but it's very close to being a buy. We're eager to see the market start responding to the potential of this business - as soon as our timing score hits 60, we'll be looking to open a position.
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