Gov't. Cost-Containment: Under the Radar

HMS Holdings may benefit from the 'public option' health care plan recently passed by the House.
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HMS Holdings

(HMSY) - Get Report

provides cost-containment and payment-accuracy services to government health-care programs. HMS, based in New York, may benefit from the "public option" plan, recently passed by the House, since officials are promising to deliver expanded coverage at minimal cost.

The company's ties to public funds garnish the shares with an ultra-low beta of 0.1, demonstrating low volatility. HMS has racked up an impressive record of growth, boosting revenue 44% annually, on average, over the past three years. Sales growth is rare during business contractions.

Third-quarter net income increased 36% to $8.4 million and earnings per share climbed 30% to 30 cents, restrained by a higher share count. Revenue grew 21% to $59 million. HMS's gross margin rose from 40% to 42% and its operating margin ascended from 22% to 24%.

Profit spreads benefitted from a decrease in the cost of services as a percentage of revenue. Earnings were boosted by lower quarterly interest expenses and a decrease in the tax rate since the year-earlier quarter. HMS has an ideal financial position, with $70 million of cash and just $6.3 million of debt.

The company's most obvious flaw is its share price. HMS trades at a trailing price-to-earnings ratio of 43 and a forward price-to-earnings ratio of 32, significant premiums to the market and health-care-service peers. The shares are also expensive when considering book value, sales and cash flow.

Another downside is that HMS doesn't pay dividends. So income-oriented investors should invest elsewhere. The good news: HMS has demonstrated a pattern of rapid growth and, as the U.S. government expands its role in health care, demand for the company's services will grow.

HMS Holdings has surged 42% in 2009, outpacing major U.S. indices. The stock has risen 80% over the past year. We rate HMS "buy."

Our picks from the past three days:

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-- Reported by Jake Lynch in Boston.