April 17th, 2005
Analyst: Naveen Sikka
Ian Madsen, MBA, CFA, Editor
1-800-767-3771 ext. 417;
North Wacker Drive Chicago, IL 60606
IDX Systems Corp. (IDXC-NSDQ) $30.89
Overview
IDX Systems Corporation is a provider of software, services and technologies for healthcare organizations. The Company provides information systems and services for physician group practices, hospitals and integrated delivery networks. IDX System's patient access, financial and business intelligence products for hospitals, integrated delivery networks and group practices are packaged as IDX Flowcast and IDX Groupcast. The clinical solutions are packaged as the IDX Carecast System. Its radiology and imaging products are marketed as IDX Imagecast. During the year ended December 31, 2003, IDX systems served approximately 138,000 physicians, and installed over 3,370 customer sites, including over 175 group practices, over 665 small- and mid-sized group practices with less than 200 physicians and over 380 integrated delivery networks serving more than 500 hospitals. The Company is based in South Burlington, VT and employs over 2,400 people. For more information about the Company, visit its website at
Analysts have identified the following factors for evaluating investment merits of IDXC.
Key Positive Arguments / Key Negative Arguments- The Company has over $5/share in cash and no debt
- Company is well diversified in all areas of HIT (healthcare IT); analysts are confident it will deliver solid double-digit growth going forward
- Company’s UK contracts provide near-term support for estimates and guidance
- Pilot programs (with VA and Healthsouth) could add upside to forward guidance
- The Company’s Business Services Outsourcing (BSO) offering considered a huge growth catalyst moving forward
- Company continues to gain share in the RIS/PACS markets; is also considered the industry leader
- Company reported disappointing bookings for Q4’04 (lack of domestic wins in the Carecast clinical business)
- Backlog continues to decline on a sequential basis; more UK contracts needed to help reverse this trend
The Company recently reported solid Q4’04 results. EPS came in at $0.39, up 68% YoY and two cents higher than consensus. Revenues were also above consensus at $152MM, up 42% YoY. The higher-than-forecasted results were largely due to stronger-than-expected maintenance and service fees. Analysts continue to forecast additional UK contracts, which should reverse negative bookings growth and backlog in the most recent quarters. Management recently narrowed FY2005 guidance to $610-$630MM in revenue and $1.25-$1.31 in EPS, from the previous $1.25-$1.35 forecast. New guidance represents roughly 25%-30% earnings growth for FY2005.
Revenues
Total Revenue
Fiscal Year Ends: December$ in millions / Q1’05E / Q2’05E / Q3’05E / Q4’05E / FY2005E / FY2006E
Digest High / 148.3 / 153.0 / 163.4 / 174.5 / 626.1 / 729.9
Digest Low / 138.5 / 149.4 / 156.8 / 162.1 / 619.1 / 694.4
Digest Average / 144.3 / 151.2 / 159.0 / 167.6 / 622.1 / 712.7
Digest Average YoY Growth / 40.59% / 15.96% / 16.85% / 10.40% / 19.45% / 14.57%
Analysts are forecasting solid double-digit top-line growth for the next 1-2 years. Growth will likely come from further contract wins in the UK (which has been a recent focus of management) and potential orders of the Company’s BSO offering (analysts expect 1 or 2 orders in the $50-$200MM range for FY’05). Continued robust growth in Imagecast sales will also help the Company meet top-line expectations. Analysts generally feel that healthcare IT spending remains strong, and competitive pressures have yet to materialize, thus, top-line growth exceeding 20% is likely over the next few years.
Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.
Margins
FY2004A / FY2005E / FY2006EOperating Margin / 8.66% / 10.31% / 11.34%
Operating margins are forecasted to expand markedly over the next two fiscal years as the Company benefits from high-margin new order growth and the completion of prior legacy contracts (with zero margins). A key catalyst for OM growth will be the potential realization of BSO contracts in FY2005/FY2006. If the Company signs more than 1 or 2 of these contracts, investors should expect margin growth to eclipse current estimates.
Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.
Earnings Per Share
Fiscal Year Ends: December$ in millions / 1Q05E / 2Q05E / 3Q05E / 4Q05E / FY2005E / FY2006E
Zacks consensus
Digest High EPS / 0.30 / 0.31 / 0.35 / 0.43 / 1.31 / 1.75
Digest Low EPS / 0.21 / 0.28 / 0.33 / 0.36 / 1.25 / 1.52
Digest Average / 0.26 / 0.30 / 0.34 / 0.39 / 1.29 / 1.64
Digest Average YoY Growth / 415.6% / 16.9% / 12.1% / 2.9% / 29.7% / 27.2%
Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Target prices for IDXC stock range from $37 to $43 with an average of $40. The most common valuation method used by the covering analysts involves the application of a 29X-30X multiple on FY2005 EPS estimates. This range is consistent with the Company’s near-term earnings growth outlook.
Please refer to Zacks Research Digest Spreadsheet for further details on valuation.
Long-Term Growth
Long term growth rates range from 15% to 25%. Analysts believe the Company’s well diversified business should lead to above-average top-line and bottom-line growth for the foreseeable future. International expansion beyond the UK (into areas in East Asia, Australia, and Canada) will also provide growth potential. Analysts believe the Company will be active in terms of making international alliances and engaging in M&A activity. The healthcare IT spending environment is forecasted to remain robust, thus, sales expectations for new product offerings (such as BSO) and existing segments (Imagecast) remain well north of 20%. Add this to a turnaround in the UK operations (with recent bookings growth) and the Company will likely produce growth at the higher-end of the range set forth by analysts.
Individual Analyst Opinions
POSITIVE RATINGS
First Albany – The stock is rated a BUY with a $40 price target. Analyst believes the Company remains well positioned to gain market share in the robust healthcare IT market, thus, he remains bullish on the shares.
Friedman, Billings – The stock is rated OUTPERFORM with a $39 price target. Analyst believes the Company’s large UK contracts and pilot projects with VA/HealthSouth provide potential upside to FY2005/FY2006 estimates. As such, he remains bullish on the shares.
Jefferies – The stock is rated a BUY with a $42 price target. Analyst believes several growth catalysts in the near-term coupled with the Company’s strong market position should lead to a higher share price.
Piper Jaffray – The stock is rated OUTPERFORM with a $39 price target. Analyst believes several near-term catalysts will boost the share price. He feels the recent sell-off in the share price (following the release of Q4 results) was “unwarranted”, thus, he continues to recommend the shares.
Raymond James – The stock is rated OUTPERFORM with a $37 price target.
Soleil Sec. – The stock is rated a BUY with no given price target. Analyst points to a strong HIT market, IDXC’s diversified revenue stream, and excellent earnings growth prospects as reasons to own the shares.
Thomas Weisel – The stock is rated OUTPERFORM with a $40 price target. Analyst feels robust earnings growth and a solid outlook for new contracts provide enough reason to own the shares at current levels.
WR Hambrecht – The stock is rated a BUY with a $43 price target.
NEUTRAL RATINGS
Bear Stearns – The stock is rated PEER PERFORM with no given price target. Analyst believes the shares will be “range bound until bookings momentum is re-established.”
NEGATIVE RATINGS
J.P. Morgan – The stock is rated UNDERWEIGHT with no given price target. Analyst believes the weak quality of Q4 results along with an “in-line” outlook for FY2005 will hamper share price performance relative to the peer group in 2005.
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