Options Trade – Cerner (CERN) Wednesday, October 31, 2012

Cerner Corp. (CERN) Keeps Delivering!

**OPTION TRADE: Buy the CERN Jan 2013 85.000 call (CERN130119C00085000) at or under $1.25, good for the day. Place a protective stop limit at $0.50 and a pre-determined sell at $2.50.

by Ian Harvey

October 31, 2012

Introduction

With new Medicare regulation changes approaching the healthcare sector, it may be more important than ever for hospital systems to keep a former patient healthy. In fact, as of a few weeks ago, new medicare guidlines may reduce Medicare reimbursements if rehospitalizations are too numerous for certain diseases.

There have been intense studies which identify this "revolving door" effect of chronically diseased patients and the U.S. healthcare system. One such study found that 1 in 5 elderly patients are readmitted to the hospital 30 days after leaving (approximately 2.3 million rehospitalizations/year). This created over $17 billion in annual Medicare costs, a big strain on the Medicare system. This is why these new guidelines are being implemented.

The question has been…..how do hospitals keep patients healthy once they leave their facilities? Some systems have developed nursing programs, mainly visiting nurses that assist a patient with their health needs for a period of time in the comfort of their own home. Others even go as far as contacting a patient by phone to monitor their symptoms, diet, and medication. Even though these programs can contribute to lowering readmission rates thus will also reduce Medicare payment penalties - there is an even better solution which is perhaps so basic it is overlooked.

One such instance is: a single patient regularly visits several specialists and different facilities for testing, ranging from blood work to x-rays to ultrasounds. This data, which is often years of valuable medical history, is now scattered within the filing cabinets and software systems of these different offices and facilities. Now, when this patient is eventually hospitalized with a serious chronic condition, how can a hospital expect to access this patient's medical history in a timely manner? The sad truth is they often can't. The solution is simple: Provide a better network of data sharing between doctors and facilities.

By collaborating and sharing patient information into a more uniformly accessible database, hospitals and physicians can efficiently share information and thus keep patients healthier as well as better treat them if they are hospitalized. But how can healthcare networks assemble these complex databases and varying software into a more uniform, collaborative system?

This is where Cerner Corporation (CERN) comes in.

This $11.7 B technology company develops, implements, and supports healthcare information technology, healthcare devices, and content solutions for healthcare organizations worldwide. These solutions are licensed by 9,300 facilities globally, including more than 2,650 hospitals and 3,750 physician practices containing 40,000 physicians.

Put simply, Cerner's technology stores patient data locally and in the cloud, then offers a useable platform in which to access and share this data by hospitals as well as physicians, which facilitates the improvement of patient care and therefore hospital efficiency.

Zane M. Burke, executive vice president of client organization, said in a conference call with investors that ”our pipeline for additional new footprints is very strong," as stages two and three of the government's "meaningful use" criteria for information technology implementation raise the bar for healthcare providers.

"We believe Cerner is the only company with the comprehensive and scalable platform that will position our clients for success, as the industry transitions from a fee-for-service model, revolving around treating people when they get sick, to a pro-active model that keeps people well. We believe our primary competitors' narrow focus on simply being an EHR (electronic health records) product company will become a problem for both them and their clients, as they realize their antiquated platform will not be sufficient in the evolving health care landscape," he said.

Earnings

On October 25th 2012, CERN reported phenomenal 3Q earnings, extending a double-digit earnings growth streak to more than two years, as well as strong revenue growth, as more health professionals and hospitals convert to electronic records. Let's look at some major highlights:

• 25% earnings increase.

• Increased lower end of 2012 full year earnings range by two cents, projecting $2.34 to $2.36 a share.

• Raised revenue guidance, forecasting between $2.63 billion and $2.66 billion, up from $2.58 billion to $2.63 billion.

• Bookings totaled $769.9 million, up 18% from $650.3 million a year earlier.

• Total backlog rose 20% from a year ago to $6.79 billion.

• Profit of $98.9 million, or 56 cents a share, up from $78.8 million, or 45 cents a share, a year earlier.

• Revenue grew 18% to $676.5 million.

• Operating margin widened to 22.1% from 21.1%,

• Support, maintenance and services revenue rose 16%, while system sales revenue was up 22%.

Analysts Opinions

Shares of Cerner Corp. surged to double-digit gains last

Friday after reporting earnings that exceeded estimates, and Cerner got a ratings upgrade. Jefferies Group upgraded shares of Cerner Corp from a hold rating to a buy rating in a report issued on Friday. They currently have $82.00 target price on the stock, up from their previous target price of $80.00.

A number of other firms have also recently commented on CERN. Analysts at Piper Jaffray reiterated an overweight rating on shares of Cerner Corp in a research note to investors on Monday, October 8th. They now have a $84.00 price target on the stock. Separately, analysts at Cowen reiterated a neutral rating on shares of Cerner Corp in a research note to investors on Friday, September 28th. Finally, analysts at Morgan Stanley downgraded shares of Cerner Corp from an overweight rating to an equal weight rating in a research note to investors on Friday, August 17th.

Technicals

Cerner Corp traded up 13.00% on Friday, hitting $77.37. Cerner Corp has a 52-week low of $55.69 and a 52-week high of $88.32. The company has a market cap of $13.250 billion and a price-to-earnings ratio of 31.85.

A price target of $95 is possible, based on applying the trailing 12 months' price-to-earnings multiple of 33 to the average estimate for 2013 EPS. The current forward PE is about 25. The stock price has fluctuated between $55.69 and $88.32 in the past 52 weeks and is up 11.79% year to date.

Also, Cerner is in a powerful bull channel that began in November 2010.

Last week, CERN retreated to the bottom of its bull channel under $68, and on Friday, popped by almost $9 on better-than-expected earnings per share of 58 cents versus an estimated 45 cents for the quarter. The company also raised its long term-earnings and revenue estimates.

It seems to that Cerner is already firing on all cylinders, even though hospitals are just beginning to see Medicare pull in the reins on efficiency and readmission rates. These new Medicare restrictions and guidelines offer incentive for hospitals to increase spending on data technology, since this can increase the quality of patient care, reduce readmission rates, and increase efficiency. Because of this, Cerner's products and services have never been more relevant than today. Also, shares are relatively attractive compared to similar tech companies, considering Cerner is a big player in their niche market. Because of these factors, Cerner has definite qualities to provide us with a good options trade.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the CERN Jan 2013 85.000 call (CERN130119C00085000) at or under $1.25, good for the day. Place a protective stop limit at $0.50 and a pre-determined sell at $2.50.



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