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Here's Why You Should Hold on to Cerner (CERN) Stock Now

Zacks Equity Research

Cerner Corporation CERN is well poised for growth on the back of big data based electronic health records (EHR) system and strategic deals. However, sluggishness in both gross and operating margins remains a concern.

Shares of Cerner have gained 30.9% outperforming the industry’s growth of 12.4% in a year’s time. Meanwhile, the S&P 500 Index has rallied 18.4% in the same timeframe.

The company, with a market capitalization of $22.39 billion, offers healthcare information technology (HCIT) solutions worldwide. It anticipates earnings to improve 13.6% over the next five years. Moreover, it surpassed estimates in the trailing four quarters by 1.2%, on average.

Let’s take a closer look at the factors that substantiate the company’s Zacks Rank #3 (Hold).

What’s Favoring the Stock?

Cerner has been benefiting from the prospects of the EHR services in the U.S. MedTech space. Notably, Cerner's HealtheIntent is a big data platform, which provides the company with significant exposure to AI trends in the medical world.

According to Transparency Market Research, the global EHR market is expected to see a CAGR of 5.7% from 2017 to 2025, to reach an estimated value of $38.29 billion.

The company has strengthened foothold in the Healthcare Information Technology (HCIT) space through both organic and inorganic means and plans to collaborate with leading companies and academic institutions to provide a wider portfolio of EHR solutions.

In fact, the company announced an investment and partnership with i2i Systems in third-quarter 2019. i2i holds 25% market share within the federally qualified health centers segment, which covers nearly a third of all Medicaid patient data and has a strong payer business with 13 managed care clients.

A strong outlook for fourth-quarter 2019 instills optimism in the stock. For fourth-quarter 2019, Cerner expects revenues between $1.41 billion and $1.46 billion. The mid-point of this range indicates growth of 5% from the prior-year quarter.

Adjusted earnings per share are anticipated to range between 73 cents and 75 cents.

What’s Deterring the Stock?

Cerner has been witnessing sluggishness in gross and operating margins in the last couple of quarters. For the coming quarters, the company anticipates a few headwinds that might weigh on the operating margins in 2019.

In third-quarter 2019, gross margin was 80.9%, down 190 bps on a year-over-year basis thanks to higher third-party services. Adjusted operating margin contracted 110 bps to 18.1% in the reported quarter.

Which Way Are Estimates Headed?

For 2019, the Zacks Consensus Estimate for revenues is pegged at $5.69 billion, indicating an improvement of 6% from the prior-year period. The same for earnings stands at $2.67 per share, suggesting growth of 8.9% from the previous year’s reported figure.

Stocks to Consider

Some better-ranked stocks from the broader medical space are Conmed Corporation CNMD, West Pharmaceutical Services, Inc. WST and Edwards Lifesciences Corporation EW, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conmed has a long-term earnings growth rate of 17%.

West Pharmaceutical has a long-term earnings growth rate of 14%.

Edwards Lifesciences has a long-term earnings growth rate of 14.8%.

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