A Fundamental Breakdown of 3 Major EHR Companies

This article was updated on Oct. 9, 2014.

When most people talk about the electronic health record, or EHR, market, they tend to speak in terms of forward projections. They focus on the projection that the North American healthcare IT market will grow at a compound annual growth rate of 7.4% to $31.3 billion by 2017. They also point out that the U.S. government's HITECH legislation, started in 2009, will continue funding these businesses as medical practices are offered incentives to make "meaningful use" of their EHR services.

Shrewd investors, however, should know that forward growth projections are often far rosier than they actually are. Therefore, in our zeal to discuss the latest tech in healthcare IT, we shouldn't neglect the basis of all solid, long-term investments -- the fundamentals.

In this article, I'll take a look at the fundamental growth of three leading EHR companies -- Allscripts (MDRX 1.01%), Cerner (CERN), and athenahealth (ATHN) -- and how much scaffolding supports each one.

Understanding the businesses
We can't directly compare Allscripts, Cerner, and athenahealth's market shares with one another because they serve hospitals and smaller physician (ambulatory) practices in different capacities.

Privately held Epic is the market leader in both categories, and reaches over half of U.S. patients. Cerner and McKesson are the two largest publicly traded EHR companies by revenue, according to GlobalData, although McKesson is diversified in a wider variety of businesses than Cerner. Allscripts has a smaller presence in both categories, while athenahealth mainly focuses on cloud-based solutions designed for ambulatory markets instead of hospitals.

Apple (AAPL 1.27%) recently connected Epic, Cerner, and athenahealth's EHRs to its HealthKit platform, which synchronizes a patient's information directly to its iOS 8 Health app. Previous rumors suggested that Allscripts would be connected as well, although a deal has not materialized yet. 

The Foolish fundamentals
Now that we've established what EHR company does, we should compare their fundamental valuations.

Source: Yahoo! Finance, as of Oct. 9.

Fundamental investors should immediately notice some major problems with athenahealth -- its whopping P/E, P/S, and P/B ratios all suggest that the stock is overvalued. Its 5-year PEG ratio of 5.6 also suggests sluggish growth ahead. Moreover, the company's paper-thin margins and high debt-to-equity ratio should be considered red flags. Allscripts also suffers from a lack of profitability and negative margins, although its lower PEG ratio suggests that it has stronger earnings growth potential than Cerner and athenahealth.

Cerner, on the other hand, has more stable valuations than either athenahealth or Allscripts, but its high P/E and PEG ratios suggest that the stock could be overvalued with limited growth potential in the near future. However, Cerner has double-digit margins in an industry which often suffers from negative profit growth.

A look at the top and bottom line growth of these three companies shows that only Cerner has been able to preserve its top and bottom line growth over the past two years. Athenahealth has demonstrated spectacular revenue growth over the past five years, but has serious problems preserving its bottom line.

Data by YCharts

A look at the price performance of these three stocks over the same period indicates that although investors are satisfied with Cerner's solid growth, but they are more impressed by athenahealth's growth potential, despite its lack of fundamental support.

Data by YCharts

The Foolish bottom line
Fundamental valuations only tell half the story for these EHR companies. To fully gauge their market value, investors should also consider their future growth prospects.

Looking forward, athenahealth investors should recall its megadeal with Ascension Health Alliance, which added 2,700 doctors to its EHR service last year, the popularity of its popular Epocrates medical reference app, and its promising HealthKit partnership with Apple. Cerner investors should also keep an eye on HealthKit, its partnerships with Nuance in clinical documentation improvement, and its voice-enabled EHR apps. Last but not least, Allscripts' partnerships with Cisco and CVS Caremark, along with its iPad EHR app (which includes its own app market), could make it a popular choice among smaller physician practices.

With the EHR market becoming more saturated every day, it can be tough to separate the winners from the losers. Although healthcare IT companies have yet to reach their full market potential, investors should always do their due diligence and measure each company's financial health against its future growth prospects to find the best long-term investment.