Motley Fool
Cerner Gets Shellacked
Thursday April 3, 11:36 am ET
By Matt Richey
Vindication came today for short sellers of Cerner (Nasdaq: CERN - News).
Shares of the fast-growing hospital information systems provider dropped more than 40% today on a massive earnings warning. The company guided first-quarter earnings to a range of $0.13 to $0.15, far below analysts' consensus of $0.38.
As of March 10, more than 20% of Cerner's shares were in the hands of short sellers, indicating that a lot of savvy investors saw trouble coming down the pike. A glance at the company's financials reveals a number of potential problems that the shorts may have spotted.
For one, it has been a very inconsistent producer of operating cash flow. In three out of the past five years, Cerner's cash flow from operations has been less than reported net income. That's always a telltale sign of financial weakness.
In addition to lackluster operating cash flows, Cerner incurs heavy capital expenditures in the course of its business. These heavy cash outlays prevent the company from achieving much in the way of free cash flow. In fact, it only generated positive free cash flow in two of the past seven years.
Until yesterday, Cerner was valued at a fairly rich 25 times earnings. For a company producing no free cash flow, this is a pretty steep valuation. Even after today's share-price shellacking, the shares may not yet be a bargain. On a conference call with analysts this morning, management suggested that the competitive environment that led the company to lower its quarterly earnings forecast would last for the next 18 months.
Apparently, competition is heating up in the hospital technology business. Management said Cerner faces heavy discounting by some of its competitors. So far, though, it has been unwilling to match these discounts. Only time will tell whether it has technology that's superior enough to justify its premium prices.
The takeaway from all this? Keep an eye on a company's short interest, and beware when it exceeds 20%. Also, watch those cash flows. When cash from operations trails reported net income, it can be a sign of low-quality earnings. |
