Cerner Overhauls America: Under the Radar

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BOSTON (TheStreet) -- Despite impressive second-quarter results, Kansas City-based Cerner(CERN Quote) has fallen about 3% since its earnings release at the end of July. A reduced revenue forecast prompted a flurry of selling.

Cerner was founded in 1979 as "PGI" and its first products, Health Network Architecture and Pathnet Laboratory Information Systems, were designed to simplify the process of health-care record-keeping. Initially, the company was dependent on venture-capital funds. Then management elected to go public in 1986. If you had purchased 1,000 shares following the initial offering (at a split-adjusted price of $1 a share), today you would have $63,000.

In spite of the recession, Cerner's second-quarter earnings rose 24% to $44 million, or 52 cents a share, as revenue increased marginally to $404 million. Profit margins widened, with the operating margin stretching from 15% to 16%, helped by lower expenses.

A larger portion of quarterly revenue was derived from maintenance and services than system sales compared with the year-earlier quarter, a sign hospitals aren't shelling out for new computer systems. Yet near-term growth prospects are strong due to the "Health Information Technology for Economic and Clinical Health" provision of the federal stimulus package, which is intended to spur the digitization of health-care records.

Cerner's record of growth is impressive, even relative to tech peers. The company has achieved a three-year compounded annual growth rate of 10% for revenue and 27% for net income, indicating strong demand and pricing power. Best of all, the shares aren't particularly expensive. At a trailing price-to-earnings ratio of 26, the stock is at a premium to the overall market, but a 51% discount to its peer group.