The days of the "hot IPO" may be over, but capital is still available (albeit rarely) for promising companies with proven profitability. Such is the case with Computer Programs & Systems (Nasdaq: CPSI), a profitable, growing healthcare information technology provider. On May 28, CPSI successfully sold 3,000,000 shares at the high end of its expected price range of $16 to $18. The stock opened that day at $18.75 and closed at $19.15. On Friday, the stock closed at $21.53, giving it a market cap of $225.8 million, including $5.8 million in cash and no debt.
CPSI is too new to the public markets to have a relative strength, but it already meets the other seven of our Foolish 8 criteria. And with a stock that's risen nicely from its offering price, CPSI appears to be well on its way to official Foolish 8 qualification. Let's give the company a look.
Mobile, Alabama-based CPSI provides information technology systems and support to community hospitals. The company was founded in 1979 and performed its first hospital installation in 1981. At present, the company has over 400 hospital installations in 45 states, with a concentration in the southeast. Most of these installations (92%) are with hospitals that have 100 or fewer beds, but the company considers its target market as hospitals with up to 300 beds. There are 4,100 such community hospitals nationwide, so there's room to grow.
CPSI's healthcare information systems are a comprehensive, single-source solution. They help hospitals improve their clinical quality, revenue cycle management, cost control, and regulatory compliance. The company's services break down into three categories of revenue: 1) systems sales, which are the basic installations of hardware and software, paid for by a one-time licensing fee; 2) support/maintenance, which is billed monthly and includes ongoing service to clients for anywhere from one to seven years, with a typical duration of five years and automatic renewals on an annual basis until the contract is terminated; and 3) outsourcing services, which include electronic billing, statement processing, and accounts receivable management, all performed pursuant to one-year customer agreements, with automatic one-year renewals until terminated.
The important thing to notice here is that categories two and three represent sources of recurring revenue, which the company is purposefully trying to build into the economics of its business. In the table below, notice that the recurring revenue categories have higher gross margins.
($ million) TTM Rev % Rev Gr. Margin Systems Sales $32.4 51% 27.4% Support/Maint. $26.9 43% 54.8% Outsourcing $ 3.8 6% 38.8% Total $63.1 100% 39.8%
With that basic overview, let's look at how CPSI stacks up versus the Foolish 8 criteria.
1) Revenue less than $500 million.
This very basic criteria is simply to ensure that we're looking at small companies, not just small caps. CPSI, with its $63 million in trailing 12-month revenue (thru March '02), is well below this cut-off.
2) 25% or better year-over-year growth in revenue and earnings.
Over the past year, CPSI's revenues have grown 25% and net income has grown even faster at 79%. That net income growth rate is a bit deceptive, however, because the company had easy comps to the quarters in 2000, which were temporarily weak due to the post-Y2K fall-off in healthcare IT spending. For a truer picture of CPSI's growth, let's look at a longer cycle. From 1997 to 2001, revenue growth averaged 25.5% and net income grew at a 17.8% annual clip.
3) Net profit margin of at least 7%.
CPSI easily clears this hurdle with a 9.7% net margin, in line with the average net margin produced from 1997 to 2001. Over that five-year span, CPSI missed the 7% standard only once, in 2000, when it recorded a net margin of only 6.2%. Similar to what we just discussed in the paragraph above, this was due to the lower healthcare IT spending that resulted in 2000 after the heavy spending years that led up to Y2K.
4) Daily dollar volume of $1 million to $25 million.
During CPSI's one-month life on the Nasdaq, the stock has averaged 90,000 shares daily, which when multiplied by the current share price translates to daily dollar volume of around $1.9 million.
5) Insider ownership of at least 10%.
According to the company's S1 Registration filing (a must-read if you're interested in studying CPSI in more depth), insiders own 71.4% of the company. That figure is net of the 1.8 million shares, which were sold by insiders as part of the IPO. Of those shares sold by insiders, it's worth pointing out that about two-thirds were sold by Dennis Wilkens, a director and one of the company's original founders. Even after this large sale (representing about 39% of Wilkens' former total holdings), Wilkens retains a substantial 17.7% ownership stake in the company, making him the largest shareholder.
6) Share price no less than $7.
At Friday's close of $21.53, CPSI is safely above this threshold.
7) Relative strength of 90 or higher.
As I mentioned at the outset, CPSI is too new to the markets to earn a meaningful RS rating. For the past four weeks, though, CPSI's RS is 89, very close to the Foolish 8 standard.
8) Positive cash flow from operations.
For each of the past three fiscal years, CPSI has earned positive cash flow from operations that totaled $24.3 million. By way of comparison, CPSI's reported net income totaled $22.5 million, so, on a multi-year basis, it appears that CPSI's net income is tracking comparably to actual cash generated -- which is always a good sign.
Conclusion
CPSI is definitely one to watch in the quarters ahead as it puts out its first earnings releases as a publicly traded company. Look for revenue and earnings growth of at least 25% if the stock is to maintain its valuation of nearly 37 times trailing earnings. It's not a ridiculous price for a fast-growing little software company with a return on equity of 60% in 2001. But it's not a bargain price, either. I profiled a similar healthcare software company in the latest edition of Motley Fool Select, which is trading at a much more attractive valuation.
Matt Richey is a senior investment analyst for The Motley Fool. At the time of publication, he had no position in any of the companies mentioned in this article. Matt's personal portfolio is available for view in his profile. The Motley Fool is investors writing for investors.
