Stock Report: Allscripts Healthcare Solutions (MDRX)

Takeaway: We added MDRX to Investing Ideas on the short side on 1/12.

Stock Report: Allscripts Healthcare Solutions (MDRX) - HE MDRX table 1 14 16

THE HEDGEYE EDGE

Allscripts Healthcare is a legacy provider of Electronic Medical Record and Practice Management software and solutions to physician offices (ambulatory) and hospitals (inpatient). The market for ambulatory EHRs (50% of MDRX Sales) is highly fragmented, with over 400 different vendors claiming some stake to the market. The large number of vendors is the result of government subsidies issued to purchase software under the HITECH Act (2009), which mandated their purchase or face penalties longer term.

 

However, the stimulus spending has now ended and going forward, we believe market share will naturally accrue to the top vendors in the market. Our view is that Allscripts is NOT a top vendor.

 

Allscripts has a difficult past and questionable future. The company made a series of acquisitions in the 2005-2010 period and failed to integrate them properly. As HITECH requirements began, also called "Meaningful Use" attestation, in 2011 Allscripts was unable to keep up.

 

What resulted was a 30% drop in bookings in 2012, 50% drop in stock price, a board shakeup and ultimately a new CEO and management team. The new CEO, Paul Black, has made great strides to turn Allscripts around. Unfortunately, we believe the damage is already done and the most optimistic version of the turn-around story is reflected in the current stock price.

 

We have done a lot of work in the Health IT space as a derivative of our Best Idea Long call on athenahealth (ATHN), building proprietary tracking tools and analyzing large datasets to track share gain/loss over time. We also conduct a great deal of primary research, mainly in the form of speaking with those in charge of making purchasing decisions at large Health Systems and system users. The results of this research suggest that Allscripts will continue to be a share donor for the foreseeable future.

 

Stock Report: Allscripts Healthcare Solutions (MDRX) - 20150106 MDRX EHR GainLoss

 

 

INTERMEDIATE TERM (TREND)

 

Based on our assessment of the market, we believe bookings growth will slow over the course of 2016, and expect the multiple to compress as a result. Historically, there has been a 0.85 correlation between bookings growth YoY and the change in forward multiple. This results in a stock price closer to $10 on a trend duration.

 

We expect our thesis to play out on both a trend and tail duration. Our key thesis points are as follows:

  • MARKET SHARE DONOR
    Data continues to show ambulatory and inpatient share losses. We expect this trend to continue as large health systems consolidate and value-based reimbursement drives the need for a single inpatient EHR. On the ambulatory side (~50% sales), Allscripts will continue to lose business (prospective and current) to peers athenahealth and eClinicalWorks, both of whom surpass Allscripts in interoperability and outsourcing capabilities. We will be receiving quarterly market share updates to monitor our thesis, and will continue to update our proprietary trackers.
  • LIMITED ADDRESSABLE MARKET
    While Allscripts reputation has markedly improved since the dark days of 2012-2013, the reality is that the damage is already done. Many Hospital Executives refuse to include Allscripts in RFPs and estimates of mind share vs. market share do not bode well for bookings growth. Based on industry ratings and anecdotes, the probability of Allscripts unseating the current acute care EMR vendor at any large IDN is low. We will continue to collect anecdotes from industry participants, including current Allscripts customers. 
  • ESTIMATES TOO HIGH
    Current valuation appears to be supported by accelerating sales growth in 2018-2019 from low single digits to mid-teens. In order for this to occur, bookings would need to sustain +25% growth and backlog conversion would need to accelerate. With system sales in secular decline, new contract lengths ranging from 5-10 years and for the reasons outlined above, we find this unlikely.

Stock Report: Allscripts Healthcare Solutions (MDRX) - 2015 01 06 EHR SHare Losers Gainers

 

LONG TERM (TAIL)

 

Allscripts has amassed a large install base, and currently ranks 3rd in Ambulatory EHR market share. Share losses at Allscripts will come at both ends:

  1. Competitive displacement from the likes of athenahealth and eClinicalWorks and
  2. Health system consolidation resulting in the rip and replace of the legacy system.

On the last point, the shift to value-based reimbursement will likely accelerate health system consolidation in the coming years. The vendors that survive will be the ones who invest in the usability and interoperability of their products, and whose incentives are aligned with that of the physician. Allscripts does not rank favorable in either of these categories.

 

While there will certainly be volatility along the way, on a tail duration we believe the stock can reach the $5-7 level. 

 

Click here to watch a video of Healthcare analysts Tom Tobin and Andrew Freedman laying out their MDRX short thesis.

ONE-YEAR TRAILING CHART

Stock Report: Allscripts Healthcare Solutions (MDRX) - HE MDRX chart 1 14 16

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more