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Stock of the Day
Feb 07, 2000
MedQuist: Booking Profits with Doctors Books
Senior Analyst: Luciano Siracusano (2/7/00)
It?s rare that we find a name that qualifies to be included within America ?s Fastest Growing Companies (AFGC) whose stock price has been chopped in half over the past six months.
But don?t let MedQuist Inc.?s (NASDAQ:MEDQ - news) stock performance fool you. It easily met our rule of focusing on companies that have doubled earnings in their latest quarter.
The company specializes in the conversion of free-form medical dictation into electronically formatted patient records, reported its year-end numbers a week ago. The company, which is the clear leader in the growing medical transcription industry, earned $0.31 a share its fourth quarter versus $0.15 a year ago.
The 107% earnings per share growth was generated by a 23% gain in quarterly revenue and continued margin improvement as the company continues to squeeze costs out of recent acquisitions.
Yet, despite the strong earnings growth and pristine balance sheet, MedQuist stock had been tumbling from its summer-high of $45.75.
By last week, with the stock breaking $20 on the downside, Wall Street apparently had had enough. Arguing that concerns over new competitors were overblown and that the stock was oversold, several analysts issued new reports, pounding the table in support of the shares.
The bulls do have a plausible case. This is a company that has beaten earnings expectations for the past five quarters, and is trading at a significant discount both to its forward share-profit estimates and to its projected long-term growth rate.
At Friday?s closing price of $25.25, the stock is trading at roughly 16 times the projected 2000 earnings of $1.63 per share. Its PEG ratio (forward p/e divided by long-term growth rate) is 0.54, another signal that the stock remains undervalued.
Incidentally, MedQuist?s 29.5% long-term growth rate is approximately the rate at which Cisco Systems (NASDAQ:CSCO - news) is projected to grow over the next five years.
It was precisely this unjust valuation accorded to MedQuist shares that triggered the outrage on Wall Street last week
Shortly after the stock made a 52-week low of $16.88 on January 31, Donaldson Lufkin & Jenrette analyst Steven Halper declared that MedQuist was now his ?top pick.?
During the week, other brokerage houses weighed in as well. Robertson Stephens placed a $44 price target on the stock. Not to be outdone, Gruntal & Co. raised its 18-month price target to $59.
We agree that MedQuist seems undervalued at these levels and believe that the stock has finally found a bottom after being pounded for the past 26 weeks.
But we like MedQuist because its management seems to have a vision about using technology to improve the efficiency of an overly bureaucratic health care system.
The company built its business by creating a nationwide network of more than 8,000 trained medical transcriptionists. It has developed software and sophisticated digital dictation equipment that can communicate directly with the computer systems of health care providers.
By quickly generating accurate medical reports, MedQuist improves patient care and helps health-care providers receive more timely reimbursement.
MedQuist chief executive David Cohen estimates that the medical transcription market may be as large as $6.6 billion and that the 15% of that market currently being outsourced will become a larger slice of the overall pie in the years ahead.
Cohen believes more hospitals and private physicians will outsource such transcription functions as technology becomes easier to use and as the benefits, including shortened customers billing cycles and reduced administrative costs, become clearer.
With 1,400 customers, Medquist procures 95% of its sales from long-term contracts. In an effort to generate new business and faster top-line growth, the company is sending its sales staff directly into hospitals, offering them incentives to switch to outsourcing medical transcriptions.
The company is also teaming up with technology leaders Intel (NASDAQ:INTC - news) and Internet venture Healtheon/WebMD (NASDAQ:HLTH - news) in an attempt to use technology, including voice recognition and ?data mining? software, to manage the flow of medical information.
Bottom Line:
Although MedQuist is growing share profits more than twice as fast as the S&P composite, it is currently trading at a discount to that index. MedQuist shares still look attractive, even after last week?s modest recovery.
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