Medical Stocks

Cerner Corporation Valuation – April 2018 $CERN

Company Profile (excerpt from Reuters): Cerner Corporation (Cerner), incorporated on October 6, 1986, 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 of all sizes. The Company’s segments include Domestic and Global. The Domestic segment includes revenue contributions and expenditures associated with business activity in the United States. The Global segment includes revenue contributions and expenditures linked to business activity in Aruba, Australia, Austria, the Bahamas, Belgium, Bermuda, Brazil, Canada, Cayman Islands, Chile, Denmark, Egypt, England, Finland, France, Germany, Guam, India, Ireland, Kuwait, Luxembourg, Malaysia, Mexico, the Netherlands, Norway, Portugal, Qatar, Romania, Saudi Arabia, Singapore, Slovakia, Spain, Sweden, Switzerland and the United Arab Emirates. As of December 31, 2016, the Company had systems in over 25,000 facilities across the world, including hospitals, physician practices, laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics, surgery centers, extended care facilities, retail pharmacies, and employer sites.

CERN Chart

CERN data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CERN – April 2018

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 $18,765,139,396 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.01 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 224.66% Pass
6. Moderate PEmg Ratio PEmg < 20 25.44 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.99 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 3.01 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

EPSmg $2.22
MG Growth Estimate 12.93%
MG Value $76.17
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $32.15
MG Value based on 0% Growth $18.85
Market Implied Growth Rate 8.47%
Current Price $56.42
% of Intrinsic Value 74.07%

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 Undervalued after growing its EPSmg (normalized earnings) from $1.19 in 2014 to an estimated $2.22 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.47% 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 above the price.

At the time of valuation, further research into Cerner Corporation revealed the company was trading above its Graham Number of $28.85. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 25.44, which was below the industry average of 44.81, 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 $2.06.

Cerner Corporation performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $2.06
Graham Number $28.85
PEmg 25.44
Current Ratio 3.01
PB Ratio 3.99
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 12/1/2017
Total Current Assets $2,380,227,000
Total Current Liabilities $789,595,000
Long-Term Debt $0
Total Assets $6,469,311,000
Intangible Assets $2,154,917,000
Total Liabilities $1,683,963,000
Shares Outstanding (Diluted Average) 338,158,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.57
Dec2017 $2.57
Dec2016 $1.85
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.22
Dec2017 $1.93
Dec2016 $1.55
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

Recommended Reading:

Other ModernGraham posts about the company

Cerner Corporation Valuation – August 2016 $CERN
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 Analysis – June 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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