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Health Care Winners: Eclipsys

Eclipsys becomes the latest health care information stock to recover from an early 2010 plummet, after its Thursday after-market earnings.

(Eclipsys story updated for Friday market close information)



) -- Health care information technology company



traded at five times its average daily volume on Friday, and Eclipsys' shares were up 7.5% at the Friday close, on the strength of its earnings, reporting after-market on Thursday.

The Eclipsys gain of $1.27 on Friday raised the share price of Eclipsys to $18.24. While that's still off Eclipsys' 52-week high of $21.15, the gain was a notable relief rally in the health care IT stock after the plummet in health care IT shares earlier in 2010. Eclipsys hadn't closed above $18 in a month, and had fallen below $16 in early January.

Eclipsys passed the 2 million share trading threshold for the first time this year on Friday -- its average volume of shares traded daily is 561,000. In fact, the 2.5 million Eclipsys shares traded on Friday were one million shares above its previous 2010 heaviest trading day, of 1.3 million shares on Jan. 4.

Health care IT stocks have recovered from significant losses earlier this quarter, after a

pullback that was triggered by healthy stock run ups in 2009 .

Bellwether health care IT stock


(CERN) - Get Report

delivered on its earnings, and

Cerner also recovered from a short-term swoon, though it also remains off its 52-week high.

Recovery in most of the health care IT stocks, but not to the level of the previous 52-week highs, has been the rule over the past few weeks for the health care information sector.

Allscripts-Misys close at $18.45 on Friday -- off its 52-week high of $22.21 -- but still much-improved from a share price that had fallen as much as $4 earlier in the year to the range of $16.

Quality Systems


had fallen as low as $51 in late January -- versus a 52-week high above $68 -- though

Quality Systems has recovered to a share price of $57.61 on Friday.

Cerner, which had fallen as low as $74 at the beginning of February -- versus a 52-week high of $91.49 -- has since recovered to close at $81.72 on Friday.

The 52-week highs reflected a significant run up in these stocks in 2009, as health care information was the only health care subsector unaffected by pending health care reform.

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The more recent recovery may suggest that these health information shares are now more fairly valued, and in the case of Eclipsys, that would mean that Friday's rally is not a sign to buy in to the stock -- that short-term entry point may have already passed.

In fact, Eclipsys guidance for 2010 was mixed -- its earnings per share guidance bracketed the street estimates, but its revenue guidance was actually short of a street consensus revenue estimate.

The biggest positive in the Eclipsys' earnings was that it managed to increase operating margins in the most recent quarter -- improving operating margins to the range of 12% to 13% has been a stated goal for the health care information company's relatively new management team.

Eclipsys improved operating margins from 9.3% in the third quarter to 11.4% in the most recent quarter. However, that improvement has not been in every consecutive quarter -- in the second quarter operating margins were 10.4%, higher than the third quarter. What's more, the fourth quarter is typically the strongest quarter for health care information companies, and Eclipsys' gross margin number was in-line with estimates.

"Eclipsys had pulled back with the rest of the group, and a better than expected bottom line, squeezing out more of the bloated cost structure, led to today's relief rally," said Anthony Vendetti, analyst at the Maxim Group.

The Maxim analyst said he gave credit to Eclipsys management for continuing to focus on cost improvements -- a plan that Eclipsys hopes will result in the operating margins of 12% to 13% by the end of 2010 -- however, given that Eclipsys revenue guidance was a little below expectations for 2010, the level of Friday's rally was a little surprising. "They are doing what they need to do, but this is not a blow out beat the street quarter," Vendetti said.

The Maxim analyst described the Eclipsys earnings as a slight beat on the top line and a slightly better than expected improvement in operating margins, but at its current share price, Vendetti doesn't think Eclipsys is a buy.

"At the end of the day, we are still talking about a company with a half billion dollars a year in revenues, and still not driving enough to bottom line in my opinion. There was nothing heroic this quarter," Vendetti said.

Maxim Group has Eclipsys at a hold, and its p/e ratio is the main reason. Even before Friday's rally, Eclipsys was trading at 25.7 times 2010 Maxim Group earnings estimates, on a non-GAAP basis, and 44 times earnings on a GAAP basis, based on Friday's closing price. Maxim Group has a 73 cent earnings per share estimate for Eclipsys in 2010, versus a street consensus of 71 cents.

"It's still not a cheap, bottom-line stock, and we think it is fairly valued at this point," Vendetti said.

Stifel Nicolaus analyst Todd Weller was more positive on Eclipsys after what he called solid margin performance in the fourth quarter and bookings guidance for 2010 of 20% to 30% growth year over year.

Stifel Nicolaus increased its 2010 and 2011 revenue estimates to $565 million and $636 million, respectively, from $544 million and $612 million.

Stifel Nicolaus also increased its 2010 and 2011 EPS estimates to 74 cents and 98 cents, respectively, from 71 cents and 93 cents, while reiterating its price target of $24 based on a trading multiple 24 times its 2011 earnings estimate.

Eclipsys guided to 2010 revenues between $550 million and $560 million.

-- Reported by Eric Rosenbaum in New York.


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