Nuance Communications (NUAN) had an agenda the past seven years. That agenda was to spearhead their push to be, by far, the leader in speech recognition technology. Nuance was successful with their goal, but not without some sacrifices. Because of the many costs incurred by making acquisitions of smaller companies to help solidify their position as market leader, they haven't been able to quite put it together in regards to profits. This year Nuance is going from the red and into the black, and, I want to take a look at it because their kind of disruptive technology puts them in the category of a sexy security. Given human nature, this could catapult them to a much higher valuation level.
To the consumer, Nuance's technology is stealthily ubiquitous. Make a telephone call to Bank of America, Citibank, Disney, FedEx, United Airlines or Wells Fargo and you are interacting with Nuance voice-enabled technology. Dictate directions to a GPS device like a TomTom or a Garmin and you are working with Nuance know how. Have a Bluetooth set-up in your automobile from the likes of Audi, BMW, Ford or Mercedes Benz and again, those voice commands you utter are successful because of Nuance. Apple, HTC, LG Electronics, Nokia, Samsung and T-Mobile smartphones and, some tablets like the iPad, can use Nuance engineering for verbal prompts and speech to text solutions.
Besides their Consumer and Enterprise divisions, Nuance has also established beach-heads in Imaging and HealthCare. In fact, the Healthcare segment constitutes 40% of their revenues, while Consumer and Enterprise comprise 26% apiece, and, Imaging is a distant 4th with 8%. ValueLine seems to feel that the Consumer and Mobile division will probably make or break the company in the next few years. I disagree. I believe the Healthcare unit will be a big boon to both the top and bottom lines and I'm going to explore this division in greater depth because it will be boosted by the HITECH Act and could sway investor psychology.
I've written about the HITECH Act in other postings and in order to not be redundant, will give you the condensed version. The HITECH Act is part of the US Government Stimulus Plan where almost $30 billion has been slotted to reimburse physicians and hospitals for adopting electronic health records (EHR) in their practices. With a current minuscule market penetration of 10%, the US Government's goal is to equip 90% of doctors with electronic health records by 2019. This digital divide with physicians is not from a lack of technical expertise, but from a belief that electronic health records, "slow them down and don't achieve a measurable financial impact.", according to a recent Wall Street Journal article. That's where Nuance comes in.
Nuance's speech recognition products dovetail with most, if not all, of the main players in the EHR space. Companies such as Cerner, Allscripts Healthcare and Epic utilize Nuance technologies that are currently in use at The Cleveland Clinic, Department of Veterans Affairs, The Mayo Clinic and the US Army. In addition, Nuance and Athenahealth have recently partnered with a new platform to enable speech to text capabilities in the cloud computing space.
According to a 3/1/2011 article on PhysiciansMoneyDigest.Com, the Fallon Clinic in Worchester, MA, phased in Nuance's speech recognition products to interface with their EHR's and saved more than $7,000 annually per physician in transcription costs. With HMO's and medical insurance companies' iron grip on the Healthcare Industry, I would not be surprised if they insist of the adoption of voice enabling technologies to reduce costs and speed up patient processing. Adapting to Nuance's products will eventually be inevitable, like going from the telegraph to the telephone. Those who do not assimilate will be fighting the last war and be left behind.
With such a commanding lead in its industry, what could short-circuit Nuance's rise to prominence and make it hit the wall? The war chests of two of its rivals, Microsoft and Google. Nuance may have a fight on its hands in regards to a turf battle, but I believe that because of its dominating position in the space, it would most likely be an acquisition target with the deep pockets of its two lagging, but, larger competitors who covet their technology. After all, we're talking about going forward, not going back, and that's what speech recognition is all about.
The analyst circus in tow seems to be enamored with Nuance even though its shares have gained 300% in the last two years. Out of the 19 firms that cover the stock, 15 have a buy or strong buy recommendation on Nuance according to Yahoo Finance. It's a difficult stock to evaluate because of a lack of an earnings history, which always makes my knees buckle a bit, but, there is a work around for that. That alternative solution is a free cash flow analysis as opposed to your more traditional P/E, PEG or Price/Sales Ratios.
From the research that I've done on security metrics, a good rule of thumb when looking for an inexpensive equity based on a Price/Cash Flow Ratio is to find one with a P/CF Ratio under 10. According to ValueLine, the Cash Flow/Share on Nuance is $.80 and with its shares trading at roughly $18, you get a P/CF ratio of 22.5. That's way out of my league. I'm not implying I would wait for the P/CF ratio to get down to 10, but at more than double that, it looks very expensive to me despite the great story behind it.
I know I'm on a tightrope with the message that I believe we are due for a serious market correction which is why I'm hesitant to put money to work at this juncture. I am certainly keeping an eye on stocks like Nuance and including them in my watch list for investment opportunities under much more favorable conditions. If you are in the Bull's camp, then by all means knock yourself out and maybe make a wager on something with a very bright future like Nuance. Personally, I'm going to sit this one out and wait.
Wednesday, March 9, 2011
Saturday, March 5, 2011
Athenahealth: Not Going Away Quietly
Athenahealth (ATHN) took a major hit in 2010 when the company got rocked by an accounting scandal. Shares dropped from $47 to $21 in the matter of months because it was alleged they issued misrepresentations to the market that artificially inflated the equity value back in late 2009 and early 2010. Since those dark days the stock has clawed its way back to the $45 range because of its position as an up and comer in two market segments that are currently on fire. Those two particulars are cloud computing and electronic healthcare information systems, both poised to grow exponentially in the next five years.
With a 2011 P/E Ratio of 58 and a PEG Ratio (price/earnings/growth) of 1.8, Athenahealth is a bit out of my comfort zone (based on mean Yahoo Finance analyst estimates). Apparently a majority of the analysts don't have that much of a confidence level in the stock either because out of the 24 analysts that cover it, only 7 have a buy or strong buy rating while the majority of the remainder have issued a hold on it, and, three give it an underperform or sell. Athenahealth isn't bulletproof, no stock is, but I am wondering why so many analysts have a hold rating on it with a PEG Ratio of only 1.8 which isn't too out of the ordinary with a company experiencing such a high growth rate of 33%. A closer look is warranted.
Athenahealth is one of the few pure plays in the cloud computing space residing within the exploding electronic healthcare information systems industry. Its flagship offering is athenaCollector that automates billing functions for physicians and ensures they get paid faster and at a higher rate. A newer product, athenaClinicals, automates and manages medical record functions, and this product is where the real growth is. In a recent TheStreet.com ratings report, they state: "Only 10% of US hospitals have implemented HIT (healthcare IT) while 16% of primary care physicians have adopted EHRs (electronic health records)....The EHR market, estimated to be around $1.2 billion, is expected to surge 400% in the next 8 years.".
The catalyst for this billowing growth isn't unbridled demand from the free market economy, but government intervention from the American Recovery and Reinvestment Act of 2009, aka, the stimulus plan. Part of the stimulus plan is the HITECH (Health Information for Economic and Clinical Health) Act where nearly $30 billion has been slotted for the increase in use of electronic health records by hospitals and physicians. The goal of the HITECH Act, as reported by ALN Medical Management, is to: "...rapidly increase EHR adoption to 90 percent for physicians and 70 percent for hospitals by 2019.". Under the plan, each physician would receive up to $64,000 in the form of government incentive payments for those who comply with the HITECH Act. Reimbursement starts in January of 2011.
In Athenahealth's 2/18/11 conference call, CEO Jonathan Bush comments: "The reason that the HITECH Act hurt us, if it hurt us at all, would be the fact that lots of people made big decisions about their practice without first learning about Athenahealth.". I don't like to stereotype people or professions, but physicians tend to be smart, well informed and networked for the most part. I would assume that a majority of them would be familiar with the significant players in the EHR space from either following the stock market, recommendations from colleagues or the sales departments of the Healthcare IT companies which include Athenahealth.
Earlier in the conference call, CEO Bush stated that they were ramping up the sales force during the first quarter of 2011 which should propel revenues higher. This may moderate the stock's upside in the short-term because of the added SG&A expenses, but in the long run, it should pad Atheahealth's coffers.
In its most recent 10-K, they discuss the competition: "Other nationwide competitors have begun introducing services they refer to as 'on-demand' or 'software-as-a-service' models, under which software is centrally hosted and services are provided from central locations.". I believe this is a plus for Athenahealth because other HIT vendors are playing catch-up to their first-mover advantage. Athenahealth was founded in 1997 and has a 14 year head start in cloud computing and I believe that prospective clients would consider this a positive when deciding on who would be the best suited software provider for them. This could be especially true for individual physicians who may opt for cloud computing because no IT department is required to host, maintain and update the software. All you need is a browser and a broadband connection.
As far as both large and small hospitals with conventional legacy software systems, Athenahealth has an answer for that - Microsoft (MSFT). The two companies have a new partnership that connects Athenahealth's cloud based services with Microsoft's Amalga platform which is an enterprise health intelligence platform that collects data from disparate IT systems. This levels the playing field for Athenahealth and puts them on flat footing when vying for market share with more established enterprise HIT providers. They are in a great position to take advantage of the HITECH Act and all that it offers for revenue and earnings growth in the next five years.
So what don't all of these analysts like about Athenahealth? I really can't figure that out, but can only surmise that it's from a valuation perspective. As a momentum investor, I wouldn't think that it's PEG Ratio of 1.8 would make you hyper-ventilate, maybe make your palms sweaty, but that's the nature of momentum investing. I'm a value investor and believe that the market is due for a correction, so I'll let that scenario play out before I allocate my cash position. When and if that situation happens, I would think that Athenahealth would be a candidate for a trophy stock with ample upside potential. This company takes it to another level.
With a 2011 P/E Ratio of 58 and a PEG Ratio (price/earnings/growth) of 1.8, Athenahealth is a bit out of my comfort zone (based on mean Yahoo Finance analyst estimates). Apparently a majority of the analysts don't have that much of a confidence level in the stock either because out of the 24 analysts that cover it, only 7 have a buy or strong buy rating while the majority of the remainder have issued a hold on it, and, three give it an underperform or sell. Athenahealth isn't bulletproof, no stock is, but I am wondering why so many analysts have a hold rating on it with a PEG Ratio of only 1.8 which isn't too out of the ordinary with a company experiencing such a high growth rate of 33%. A closer look is warranted.
Athenahealth is one of the few pure plays in the cloud computing space residing within the exploding electronic healthcare information systems industry. Its flagship offering is athenaCollector that automates billing functions for physicians and ensures they get paid faster and at a higher rate. A newer product, athenaClinicals, automates and manages medical record functions, and this product is where the real growth is. In a recent TheStreet.com ratings report, they state: "Only 10% of US hospitals have implemented HIT (healthcare IT) while 16% of primary care physicians have adopted EHRs (electronic health records)....The EHR market, estimated to be around $1.2 billion, is expected to surge 400% in the next 8 years.".
The catalyst for this billowing growth isn't unbridled demand from the free market economy, but government intervention from the American Recovery and Reinvestment Act of 2009, aka, the stimulus plan. Part of the stimulus plan is the HITECH (Health Information for Economic and Clinical Health) Act where nearly $30 billion has been slotted for the increase in use of electronic health records by hospitals and physicians. The goal of the HITECH Act, as reported by ALN Medical Management, is to: "...rapidly increase EHR adoption to 90 percent for physicians and 70 percent for hospitals by 2019.". Under the plan, each physician would receive up to $64,000 in the form of government incentive payments for those who comply with the HITECH Act. Reimbursement starts in January of 2011.
In Athenahealth's 2/18/11 conference call, CEO Jonathan Bush comments: "The reason that the HITECH Act hurt us, if it hurt us at all, would be the fact that lots of people made big decisions about their practice without first learning about Athenahealth.". I don't like to stereotype people or professions, but physicians tend to be smart, well informed and networked for the most part. I would assume that a majority of them would be familiar with the significant players in the EHR space from either following the stock market, recommendations from colleagues or the sales departments of the Healthcare IT companies which include Athenahealth.
Earlier in the conference call, CEO Bush stated that they were ramping up the sales force during the first quarter of 2011 which should propel revenues higher. This may moderate the stock's upside in the short-term because of the added SG&A expenses, but in the long run, it should pad Atheahealth's coffers.
In its most recent 10-K, they discuss the competition: "Other nationwide competitors have begun introducing services they refer to as 'on-demand' or 'software-as-a-service' models, under which software is centrally hosted and services are provided from central locations.". I believe this is a plus for Athenahealth because other HIT vendors are playing catch-up to their first-mover advantage. Athenahealth was founded in 1997 and has a 14 year head start in cloud computing and I believe that prospective clients would consider this a positive when deciding on who would be the best suited software provider for them. This could be especially true for individual physicians who may opt for cloud computing because no IT department is required to host, maintain and update the software. All you need is a browser and a broadband connection.
As far as both large and small hospitals with conventional legacy software systems, Athenahealth has an answer for that - Microsoft (MSFT). The two companies have a new partnership that connects Athenahealth's cloud based services with Microsoft's Amalga platform which is an enterprise health intelligence platform that collects data from disparate IT systems. This levels the playing field for Athenahealth and puts them on flat footing when vying for market share with more established enterprise HIT providers. They are in a great position to take advantage of the HITECH Act and all that it offers for revenue and earnings growth in the next five years.
So what don't all of these analysts like about Athenahealth? I really can't figure that out, but can only surmise that it's from a valuation perspective. As a momentum investor, I wouldn't think that it's PEG Ratio of 1.8 would make you hyper-ventilate, maybe make your palms sweaty, but that's the nature of momentum investing. I'm a value investor and believe that the market is due for a correction, so I'll let that scenario play out before I allocate my cash position. When and if that situation happens, I would think that Athenahealth would be a candidate for a trophy stock with ample upside potential. This company takes it to another level.
Tuesday, March 1, 2011
Illumina: From Outer Space
There's something about a high flying stock with the type of technology that only a Martian could engineer that piques the interest of most investors. That's because these equities have a lot of growth behind them and that is where the action is if you want to make money. Warren Buffett suggests to stay within your "circle of competence", which basically translates into, "invest in what you know", but that is difficult in the space age world in which we live where technology advances at the speed of light.
Illumina (ILMN) is one of those stocks that seems to have invaded us from the outer limits and the maker of next generation DNA sequencers has had a torrid advance in the last six years, rising from $2 in 2005 to it's current price of $70. Illumina has always intrigued me and I've followed it closely for years, but have refrained from buying it because I've been of the bearish persuasion of late. Recent developments in the security have made me take a closer look at it and I still like what I see.
These developments are the facts that it's been downgraded twice in the last six weeks (which I like as a value investor because it tends to bring the price down), and, Illumina's inclusion in the Investor's Business Daily top 50 stock picks where it ranks 25. This seems like it could be conflicting information if you are a momentum investor, but if momentum is what you want, momentum is what is has. Illumina's ranking has pegged the meters in the Investor's Business Daily evaluation process with relative price strength and earnings growth near 100 on a scale that can go no further. This company is a direct play on 'personalized medicine', and I can see why investors are enamored with the stock.
Personalized medicine is a relatively new but rapidly advancing field of healthcare that utilizes a patient's unique genomic, genetic and environmental information to determine what medication is best suited for them. It is already being used with some cancer patients to evaluate their likelihood of serious reactions to prescribed pharmaceuticals. Besides cancer, personalized medicine is also attempting to fight heart disease and diabetes. Other markets Illumina is tapping for an expansion of business are forensics and agriculture, both in their infancy stages in regards to genomics.
What I find most impressive is that in addition to its current client base of large laboratories, Illumina is launching a scaled down, but more affordable sequencer for smaller labs which should be a boon for revenues. To compliment the new sequencer, a beefed up R&D budget has contributed to numerous new products coming to market. Citigroup Global Markets estimates that Illumina commandeers a 50%-60% share of the key growth areas in the life sciences research market and its closest competitor Life Technology Corporation (LIFE) has only a 20% slice.
I like my stocks inexpensive on a P/E basis and Illumina gives me the heebie jeebies where valuations are concerned, but you may be from a different school, so let's get some perspective because this stock has legs - for now. At its current quotation of roughly $70/share, Illumina has a P/E Ratio of 51 for 2011 and 42 for 2012 based on the average earnings estimates of the 23 analysts that cover the stock as reported on Yahoo Finance. Those may seem high, but when you look at the PEG (price/earnings/growth) Ratios, Illumina looks much more affordable. With a five year CAGR at an impressive 27.5%, the 2011 PEG Ratio is 1.8, while 2012 is 1.53. That's not out of the stratosphere, and if you use the rule of thumb to sell when the PEG Ratio reaches 2, there's still room to run. So what's not to like about it?
If you are a value investor, what would seem to be a plus for a momentum investor, is a negative for you, and that negative is its inclusion in the Investor's Business Daily top 50 stock picks. Stocks on this list usually have a fairly short shelf life and come back down to lower price levels in the matter of about a month or two according to my casual observations. Sometimes they stay up there longer, but for a majority of stocks in the IBD 50, the party doesn't last very long. You may be able to pick up Illumina at a much more advantageous price in the not too distant future, especially if we get a market correction in the near term.
Another red flag for Illumina is what appears to be one of its big strengths and that is its installed customer base. According to Citigroup Global Markets: "Roughly 72% of Illumina's revenues come from the academic and government end markets.....Because of its higher dependence on those markets, any large swings in government stimulus could have greater impact on Illumina relative to its peers.". In a Februray 25th ValueLine analysis they report: "...management believes that funds made available to the National Institutes of Health through the American Recovery and Reinvestment Act of 2009 should continue to beef up orders until 2012.". That only gives it 10 more months until Illumina's clients need more funding. If the GOP has its way, there may be some cutbacks and that would put pressure on the stock.
As a value investor, Illumina is out of my price range, but I am continuing to monitor it. With its lofty P/E Ratio, it could get whacked if it misses a quarter on either the sales or earnings side. I realize this is a tail event with low probability, but it's how I shop for good companies that get slightly ahead of themselves. That's how I bought Cisco (CSCO), EMC (EMC) and Oracle (ORCL) back in the dot.com boom. If you are a momentum investor and a member of the Illumina fan club, then this would be a terrific stock to put in your portfolio if you are nimble enough to get out at the appropriate time.
Illumina (ILMN) is one of those stocks that seems to have invaded us from the outer limits and the maker of next generation DNA sequencers has had a torrid advance in the last six years, rising from $2 in 2005 to it's current price of $70. Illumina has always intrigued me and I've followed it closely for years, but have refrained from buying it because I've been of the bearish persuasion of late. Recent developments in the security have made me take a closer look at it and I still like what I see.
These developments are the facts that it's been downgraded twice in the last six weeks (which I like as a value investor because it tends to bring the price down), and, Illumina's inclusion in the Investor's Business Daily top 50 stock picks where it ranks 25. This seems like it could be conflicting information if you are a momentum investor, but if momentum is what you want, momentum is what is has. Illumina's ranking has pegged the meters in the Investor's Business Daily evaluation process with relative price strength and earnings growth near 100 on a scale that can go no further. This company is a direct play on 'personalized medicine', and I can see why investors are enamored with the stock.
Personalized medicine is a relatively new but rapidly advancing field of healthcare that utilizes a patient's unique genomic, genetic and environmental information to determine what medication is best suited for them. It is already being used with some cancer patients to evaluate their likelihood of serious reactions to prescribed pharmaceuticals. Besides cancer, personalized medicine is also attempting to fight heart disease and diabetes. Other markets Illumina is tapping for an expansion of business are forensics and agriculture, both in their infancy stages in regards to genomics.
What I find most impressive is that in addition to its current client base of large laboratories, Illumina is launching a scaled down, but more affordable sequencer for smaller labs which should be a boon for revenues. To compliment the new sequencer, a beefed up R&D budget has contributed to numerous new products coming to market. Citigroup Global Markets estimates that Illumina commandeers a 50%-60% share of the key growth areas in the life sciences research market and its closest competitor Life Technology Corporation (LIFE) has only a 20% slice.
I like my stocks inexpensive on a P/E basis and Illumina gives me the heebie jeebies where valuations are concerned, but you may be from a different school, so let's get some perspective because this stock has legs - for now. At its current quotation of roughly $70/share, Illumina has a P/E Ratio of 51 for 2011 and 42 for 2012 based on the average earnings estimates of the 23 analysts that cover the stock as reported on Yahoo Finance. Those may seem high, but when you look at the PEG (price/earnings/growth) Ratios, Illumina looks much more affordable. With a five year CAGR at an impressive 27.5%, the 2011 PEG Ratio is 1.8, while 2012 is 1.53. That's not out of the stratosphere, and if you use the rule of thumb to sell when the PEG Ratio reaches 2, there's still room to run. So what's not to like about it?
If you are a value investor, what would seem to be a plus for a momentum investor, is a negative for you, and that negative is its inclusion in the Investor's Business Daily top 50 stock picks. Stocks on this list usually have a fairly short shelf life and come back down to lower price levels in the matter of about a month or two according to my casual observations. Sometimes they stay up there longer, but for a majority of stocks in the IBD 50, the party doesn't last very long. You may be able to pick up Illumina at a much more advantageous price in the not too distant future, especially if we get a market correction in the near term.
Another red flag for Illumina is what appears to be one of its big strengths and that is its installed customer base. According to Citigroup Global Markets: "Roughly 72% of Illumina's revenues come from the academic and government end markets.....Because of its higher dependence on those markets, any large swings in government stimulus could have greater impact on Illumina relative to its peers.". In a Februray 25th ValueLine analysis they report: "...management believes that funds made available to the National Institutes of Health through the American Recovery and Reinvestment Act of 2009 should continue to beef up orders until 2012.". That only gives it 10 more months until Illumina's clients need more funding. If the GOP has its way, there may be some cutbacks and that would put pressure on the stock.
As a value investor, Illumina is out of my price range, but I am continuing to monitor it. With its lofty P/E Ratio, it could get whacked if it misses a quarter on either the sales or earnings side. I realize this is a tail event with low probability, but it's how I shop for good companies that get slightly ahead of themselves. That's how I bought Cisco (CSCO), EMC (EMC) and Oracle (ORCL) back in the dot.com boom. If you are a momentum investor and a member of the Illumina fan club, then this would be a terrific stock to put in your portfolio if you are nimble enough to get out at the appropriate time.
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