Medical Stocks

Cerner Corporation Valuation – August 2016 $CERN

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Cerner Corporation (CERN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Cerner Corporation is a supplier of healthcare information technology (HCIT). The Company offers a range of intelligent solutions and services that support the clinical, financial and operational needs of organizations. Its segments include Domestic and Global. The Domestic segment includes the business activity in the United States. The Global segment includes the business activity in Aruba, Australia, Austria, Belgium, Brazil, Canada, Cayman Islands, Chile, Denmark, Egypt, England, Finland, France, Germany, Guam, India, Ireland, Luxembourg, Malaysia, Mexico, Netherlands, Norway, Portugal, Qatar, Romania, Saudi Arabia, Singapore, Slovakia, Spain, Sweden, Switzerland and the United Arab Emirates. It offers software, hardware, professional and managed services. Its solutions are offered on the unified Cerner Millennium architecture and on the HealtheIntent cloud-based platform. Its solutions include Cerner ITWorks, Cerner RevWorks, PowerWorks and CommunityWorks, among others.

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CERN Chart

CERN data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of CERN – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $20,887,099,613 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.23 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 251.25% Pass
6. Moderate PEmg Ratio PEmg < 20 36.23 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.47 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.23 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

CERN value chart August 2016

EPSmg $1.71
MG Growth Estimate 14.65%
MG Value $64.64
Opinion Fairly Valued
MG Grade C+
MG Value based on 3% Growth $24.80
MG Value based on 0% Growth $14.54
Market Implied Growth Rate 13.86%
Current Price $61.95
% of Intrinsic Value 95.84%

Cerner Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $0.87 in 2012 to an estimated $1.71 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 13.86% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Cerner Corporation revealed the company was trading above its Graham Number of $24.52. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 36.23, which was below the industry average of 40.07, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.15.

Cerner Corporation receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

CERN charts August 2016

Net Current Asset Value (NCAV) $0.15
Graham Number $24.52
PEmg 36.23
Current Ratio 2.23
PB Ratio 5.47
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $1,728,638,000
Total Current Liabilities $775,932,000
Long-Term Debt $0
Total Assets $5,594,492,000
Intangible Assets $2,095,656,000
Total Liabilities $1,678,165,000
Shares Outstanding (Diluted Average) 345,900,000

Earnings Per Share History

Next Fiscal Year Estimate $2.32
Dec2015 $1.54
Dec2014 $1.50
Dec2013 $1.13
Dec2012 $1.13
Dec2011 $0.88
Dec2010 $0.70
Dec2009 $0.58
Dec2008 $0.57
Dec2007 $0.38
Dec2006 $0.34
Dec2005 $0.28
Dec2004 $0.22
Dec2003 $0.15
Dec2002 $0.16
Dec2001 -$0.15
Dec2000 $0.37
Dec1999 -$0.01
Dec1998 $0.08
Dec1997 $0.06
Dec1996 $0.03

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.71
Dec2015 $1.35
Dec2014 $1.19
Dec2013 $0.99
Dec2012 $0.87
Dec2011 $0.70
Dec2010 $0.57
Dec2009 $0.48
Dec2008 $0.41
Dec2007 $0.31
Dec2006 $0.26
Dec2005 $0.19
Dec2004 $0.15
Dec2003 $0.11
Dec2002 $0.09
Dec2001 $0.06
Dec2000 $0.15

Recommended Reading:

Other ModernGraham posts about the company

26 Best Stocks For Value Investors This Week – 2/6/16
Cerner Corporation Valuation – February 2016 Update $CERN
Cerner Corporation Analysis – September 2015 Update $CERN
Cerner Corporation Valuation – February 2016 Update $CERN
Cerner Corporation Analysis – September 2015 Update $CERN

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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