Is Quality Systems a Quality Investment?

The world's top value investors love it when their best stocks ideas are selling at bargain-basement prices. For those investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one, get one" sale on their stocks.

Last year represented a long road down for electronic health records specialist Quality Systems (NASDAQ: QSII  ) , which lost 60% of its value as changes in how doctors affiliate pose a threat to its business. Yet despite the risks, there exists numerous opportunities to expand as well, so you'll still want to do more due diligence before buying in to see if this is a chance to pick up a quality stock at a severe discount.

Quality Systems snapshot

Market Cap

$1.0 billion

Revenues (TTM)

$456 million

1-Year Stock Return

(51.7%)

Return on Investment

21.8%

Dividend and Yield

$0.70/4%

Estimated 5-Year EPS Growth

11.9%

52-Week High

$43.70

Recent Price

$17.39

% Below 52-Week High

(60.2%)

CAPS Rating (out of 5)

****

Source: FinViz.com.

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

Surgical strike
I live in an area where there are a number of well-regarded hospitals within minutes of each other. That poses a challenge of how best to attract patients, and while regulations encourage them to specialize but not overlap -- one is a trauma center, another is a cancer specialist, a third specializes in children -- a new method of marketing seems to be the branding of their doctors. Billboards are sprouting up touting this doctor or that who will be best able to care for what ails you.

The independent doctor is going the way of the house call. As Medicare and Medicaid reimbursements pressure doctor salaries and the cost of running a practice grows, physicians are essentially left with two choices: Join with other doctors to form large, independent medical groups, or join up with a hospital that has the money to put into marketing.

With Obamacare encouraging hospitals to streamline costs by forming "affordable care organizations," doctors are following the money and going that route, shrinking the market for new sources of revenue for Quality Systems. At the same time, it's facing stiffer competition from rivals such as Cerner (NASDAQ: CERN  ) , Allscripts Healthcare Solutions (NASDAQ: MDRX  ) , and athenahealth (NASDAQ: ATHN  ) , even as the adoption of national health-care system reforms provided some $17 billion in subsidies for the implementing EMR systems.

That should have been a catalyst for growth, but Cerner, McKesson (NYSE: MCK  ) , and other players make it a crowded field. It's not just doctors following the money, and analysts believe that Cerner, which already caters to hospitals, will benefit most from the law's implementation.

It continues to show up in Quality Systems' earnings reports, which saw second-quarter net profits fall 23%, dragged lower by weak software license sales. Merge Healthcare (NASDAQ: MRGE  ) has also fallen on hard times and is looking for private equity to take it out.

Worse, there's also an acute shortage of physicians just as Obamacare is theoretically bringing in tens of millions more Americans to the health-care system. The law is expected to increase the number of primary-care physicians by 3,000 over the next decade, but analysts say 45,000 will be needed.

Of course, Quality Systems hasn't been standing still in all this, making acquisitions that bolster organic growth of its primary revenue streams while giving it a doorway into the small hospital market. Not everyone is convinced that entering rural health care will be a game-changer, but electronic medical records will need to be established sooner rather than later.

At 14 times earnings estimates, the EMR specialist trades at a discount to some of its larger rivals, and with its enterprise value going off at 15 times its free cash flow, it's not a bargain-basement stock. But it's not wildly overpriced, either, and may ultimately be a takeover candidate in its own right.

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