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Tickers in this Article: CERN, MDRX, HLTH, GE, WLP, WBMD
It's sad but true. Its 2007 and most hospital patient records are still paper-based, not electronic. However, change is slowly being made. In this article we'll look at three companies at the leading edge of the electronic file conversion.

Bulging Client Backlog
Cerner Corporation
(Nasdaq:CERN) is the largest of this trio with a market capitalization of about $4.5 billion and sales approaching $1.5 billion. The company is well-positioned to take advantage of the low market penetration of healthcare information systems in hospitals. The company has a backlog of orders totaling roughly $3 billion, which is about 32% higher than it was a year ago.

Cerner's flagship product is its Millennium Platform. As an example of Millenium's effectiveness, it can reduce the transactional cost on reimbursement rates from $8 to 10 cents. The company's plan is to make a version of this system affordable and available to small physician practices, thereby increasing the network effect along with cross-selling opportunities for other products.

From a financial perspective, Cerner is doing well. Its revenue growth rate hovers around 18% while earnings can be a bit more volatile, averaging 31.4% for the last three years but coming in at not quite 22% last year. The firm enjoys almost a 79% gross margin and a 12.7% net margin and devotes 17.3% of sales to research and development which helps it reach a 12.2% return on equity.

An Underused Technology
Allscripts Healthcare Solutions
(Nasdaq:MDRX) has done well because of the movement to electronic prescriptions to prevent deaths and injuries caused by adverse drug events. The company's clinical solutions division accounts for about three-quarters of its revenue by servicing small and mid-sized physician practices. Allscripts is well positioned to exploit this market even more as currently, only 11% of physicians use an electronic platform for prescriptions.

The potential of this market is not a secret, but Allscripts is in a leading position, counting about 3,500 organizations with 30,000 physicians. It faces two major risks. First, General Electric (NYSE:GE) bought IDX, Allscripts' former partner, which leaves it vulnerable to demands for better terms by such outfits as WellPoint (NYSE:WLP) and Per-Se Technologies. Secondly, additional government influence on reimbursement rates is an unknown.

Recent financial results for this company are a mixed bag. Allscripts's revenue has seen a growth rate averaging 38.5% for three years to an impressive 89.1% last year, with operating income seeing a growth rate of over 115%. Which begs the question, why has earnings growth been zero for the past three years and -4.3% last year? While Allscripts sees a net margin of 10.7% from a gross margin of 50.7% the company sees a return on equity of 5.4%.

What Are They Thinking?
HLTH Corporation's (Nasdaq:HLTH) recent financial numbers are all but useless. The company recently sold two subsidiaries and this has skewed numbers considerably. HLTH also has a 48% interest in Emergent Biosolutions (NYSE:EBS), whose income is therefore recognized as equity, further clouding the financial picture. The company also owns an 84.6% stake in WebMD (Nasdaq:WBMD), which accounted for $73 million of its $781 million in revenue, an increase of almost 46%. Look for an even larger contribution in 2007.

Management's future plans are somewhat fuzzy. The company has taken on $1.55 billion in debt to leverage the company by buying back about 35% (about 129 million shares), thereby increasing its overall debt level but reducing its $2.5 billion equity market capitalization.

Room to Grow

This is a business where there is plenty of room to grow. The big question of course is, where is the market placing its money? HLTH trades at 11-times earnings, however convoluted its earnings may be, and the shares have appreciated about 100% over the prior three years. Cerner trades at about 37-times earnings and has risen about 150% during the last three years and lastly, Allscripts has a price-earnings multiple of 70-times and has appreciated about 250% the last three years. While the past is not prolog, it does give you something to hang your hat on.

For greater insight, see The P/E Ratio Tutorial.

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