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Health-Care Reformer: Under the Radar

BOSTON ( TheStreet) -- TheStreet's stock model upgraded MedQuist (MEDQ) to "hold" on Tuesday after the medical-transcription company posted a fourth-quarter profit.

MedQuist is larger than rival Transcend Services (TRCR), which is rated "buy," though the entrance of larger competitors is a concern. Wal-Mart (WMT - Get Report) began a digitization partnership with eClinicalWorks and Dell (DELL - Get Report) last year.

Still, MedQuist and Transcend are worth consideration.

MedQuist swung to a fourth-quarter profit of $5.9 million, or 16 cents a share, from a loss of $60 million, or $1.61, a year earlier. The company's operating margin widened from 6.8% to 15%. Its balance sheet contains $25 million of cash, equating to an ample quick ratio of 1.3, and no debt. Still, cash fell 37% from a year earlier. Return on equity, a measure of profitability, climbed to 20%.

MedQuist sells voice-recognition software, translating physicians' words into electronic documents, which are then edited and formatted in its proprietary platform. This process improves workflow productivity by an estimated 50%. MedQuist's suite of products reduces the need for hospitals' technical staff, which raises objections from professionals with self-preservation instincts.

President Barack Obama allocated $20 billion of stimulus money to medical-record digitization, hoping to transform all paper to code by 2014. Companies like Cerner (CERN - Get Report) capitalized on the stimulus. MedQuist offers the next logical step in the process of overhaul. The company's net cash position, proven platform and growing customer base make it an attractive investment. Philips Electronics was once a majority shareholder, but divested its 70% stake in 2007.

India- and Maryland-based CBay Systems acquired the majority ownership from Philips, but MedQuist continues to operate as a publicly traded entity. Between the two companies, there is a customer base of more than 1,700 hospitals. CBay's other subsidiary, Mirrus Systems, provides medical billing and receivables management. In a country where health care costs are exorbitant, these three firms, which offer tangible savings, are poised to grow.

During the past three years, MedQuist has boosted profit 50% annually, on average. Its stock, however, has fallen 4.4%, on average, over the same period. The poor performance has deterred investors from bidding up the shares. MedQuist stock sells for a price-to-book ratio of 2.9, a price-to-sales ratio of 1.1 and a price-to-cash-flow ratio of 7.4, reflecting 45%, 79% and 76% discounts to industry averages. The stock has jumped 23% this year.

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