Why Cerner Shares Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of health-care information technology company Cerner (Nasdaq: CERN  ) jumped as much as 17% on Friday after reporting better-than-expected third-quarter earnings results.

So what: For the quarter, Cerner reported an 18% rise in revenue to $676.3 million and a 25% advance in profits to an adjusted EPS of $0.60, which is slightly higher than Wall Street's expectations on both accounts. Cerner's fourth-quarter outlook also fell perfectly within the Street's consensus figures. The real share-moving news has to do with expectations that it'll pick up an additional $925 million to $975 million in new business in the fourth quarter.

Now what: On paper, Cerner's business model makes a lot of sense. The company makes software and a cloud-based platform that handles electronic health records, revenue management cycles, and support service for the health-care industry. New laws essentially require the digitization of medical records, and the Affordable Care Act should bring medical care within reach for millions of new Americans in 2014.

However, putting all of that aside, I'm having a hard time looking past Cerner's premium valuation. After today's move higher, Cerner is valued at a frothy 28 times forward earnings, and its growth rate is beginning to slow. It's a company I'd pass on based on valuation alone.

Craving more input? Start by adding Cerner to your free and personalized watchlist so you can keep up on the latest news with the company.


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