Quality Systems in Question

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Since receiving its follow-on endorsement from Piper Jaffray back in February, Motley Fool Stock Advisor recommendation Quality Systems (Nasdaq: QSII) has gone on a tear. A little less than four months had seen the stock gain more than 40% in value -- until today. Sadly, this morning's earnings news provided investors a lesson in the perils of trading on momentum.

Quality reported fiscal fourth quarter and full-year 2009 earnings Friday, and the news wasn't great. Although sales grew nicely (up 28% year over year for the quarter), profits at $0.40 per share didn't follow suit, dropping 2% in comparison to this time last year.

In fact, even the revenue number wasn't as good as it looks at first glance. 29% may sound great, but when you consider that Quality posted 32% revenue growth for the full fiscal year, it actually represented a tapping of the brakes on the breakneck pace Quality set last year. About the only good news we got this morning was that Quality's total profits for the year added up to $1.62 per share, a 13% improvement.

Management laid the blame for lackluster profits squarely on the delay in implementing stimulus packages. Pundits have prognosticated that the Obama administration's plan to offer rebates for doctors improving their back office IT will bring a windfall for tech shops like Dell (Nasdaq: DELL), Philips (NYSE: PHG), and General Electric (NYSE: GE). Others say the real beneficiaries will be focused players like Cerner (Nasdaq: CERN) and Quality Systems. But as of today, Quality is still complaining about "delays in purchasing decisions related to uncertainty surrounding the American Recovery and Reinvestment Act of 2009, which was signed into law in February 2009." Personally, I don't buy that argument. Why?

Read the numbers
I repeat: Sales were up 29% for the quarter. 32% for the year. Doesn't sound to me like customers were "delaying purchasing decisions." Now, maybe Quality hoped for a triple-digit increase quarter, and was disappointed when the President didn't deliver it, wrapped up in a bow. But that still doesn't explain why Quality failed to control the things it can control: its own costs. Its own profits on the revenues it did collect. In particular, while "Maitenance, EDI, and other services" revenue soared 56%, the associated costs moved at an even higher clip, 74%.

Foolish takeaway
With Quality's stock now fetching a king's ransom of 30 times earnings, profits growth posited at 19% long-term, and Quality so far failing to achieve even that, the stock looks priced for a perfection that Quality seems incapable of producing unassisted.