The digital revolution is sweeping across the global economy, and the healthcare and life sciences industries are benefiting. New ways of managing business with digital systems are leading to more profitable operations and better outcomes for patients and customers.
At the heart of the movement, are Veeva Systems (VEEV 3.20%) and Cerner (CERN +0.00%), which provide cloud-based software and information technology solutions.
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As technology for healthcare management grows in importance, the companies that provide it have attracted investors' attention. Take Athenahealth (ATHN +0.00%), which is being bought up by Veritas Capital for $5.7 billion after its sales raced 35% higher over the last trailing three-year stretch. Veeva and Cerner have been growing too, as demonstrated by the below chart, but the two stocks are buys for two very different types of investors.
|
Metric |
Cerner |
Veeva Systems |
|---|---|---|
|
Revenue (current fiscal year) |
$4.00 billion |
$630 million |
|
YOY revenue increase (decrease) |
4% |
25% |
|
Operating profit (current fiscal year) |
$611 million |
$160 million |
|
YOY operating profit increase (decrease) |
(18%) |
34% |
|
Adjusted earnings (current fiscal year) |
$1.82 |
$1.18 |
|
YOY adjusted earnings increase (decrease) |
1% |
64% |
TTM = NINE MONTHS ENDING SEPT. 29, 2018 FOR CERNER, AND OCT. 31, 2018 FOR VEEVA SYSTEMS. YOY = YEAR OVER YEAR. DATA SOURCES: CERNER AND VEEVA SYSTEMS.
Life sciences for the digital age
Veeva Systems provides cloud-based software services for the life sciences industry, which includes businesses like healthcare providers and pharmaceutical companies.
In 2018 to-date, subscription services were up 24% and professional services 30%, which contributed to a 64% gain in adjusted earnings.
Veeva has enjoyed double-digit top-line growth for years. It isn't just winning new clients either: Its vast number of software offerings have helped Veeva grow its existing relationships as customers utilize more of Veeva's services over time. This' land and expand' strategy shows little sign of slowing. For the fourth quarter, management expects revenue to increase another 22% year-over-year, and adjusted earnings to grow 74%.
However, this fast earnings expansion comes at a cost. The stock's 12-month forward price-to-earnings ratio is currently 67.1, compared to 15.7 for the S&P 500 index. Paying for decades' worth of expected profits only makes sense if Veeva continues to grow at a breakneck speed, which should happen based on management's forecast, but it also makes this high-flying stock a volatile one.
A diversified healthcare IT assistant
Cerner provides a myriad of services for healthcare providers, from data management systems to compliance reviews and financial management solutions.
The company reports its sales in two basic categories: software and subscription services, and professional and managed solutions. During the third quarter of 2018, the latter notched strong double digit growth, while lagging software offset those gains. The result has been meager gains for both top and bottom lines -- just 4% during 2018.
Nevertheless, Cerner sees improvement coming during the fourth quarter. Revenue and adjusted earnings are expected to increase 5% and 9%, respectively, at the midpoint of guidance. Driving that increase is further strength in professional services and reductions in operating expenses in the quarters ahead.
As a result, Cerner's stock is priced lower than Veeva's. Its trailing 12-month price-to-free cash flow ratio (money left over after basic expenses and capital expenditures) is 26.5, and 12-month forward price-to-earnings ratio is even lower at 20.1 That implies expectations that the bottom line will improve in the next year.
Similar businesses, two very different stocks
Though Veeva and Cerner have similar models, the two stocks are for two very different investors. After a 22% decline in the last year, Cerner might be a value if it can post a rebound and positive guidance when it reports on its fourth quarter. As a larger and slower moving entity, the stock should also be less volatile over time as well -- although the lack of a dividend payment may make it unattractive for investors seeking income.
Veeva, on the other hand, is up 81% over the last year, supported by big increases in earnings. However, share prices can move wildly up and down depending on quarterly "misses" and "beats" relative to investor expectations. While I think Veeva is the better buy here with more robust sales growth and fast-expanding profit margins, potential volatility means it isn't for the faint of heart.
Check out the latest Veeva Systems and Cerner earnings call transcripts.
