Wednesday, September 06, 2006

Calls of Note Part 2

- First Analysis Securities' Gregg Haddad has some positive things to say about Allscripts Healthcare Solutions (NASDAQ:MDRX) after he and his collegues spent a couple of days last week with Allscripts Healthcare Solutions CFO Bill Davis. Sessions reinforced their positive outlook on the company's fundamentals, both in the short and long term.

They are increasingly confident that Allscripts can beat its 2006 guidance of $0.71 to $0.73 cash EPS (firm's estimate currently $0.71, consensus $0.72) and perform better than current expectation for 2007 ($0.96 cash EPS). The upside--perhaps a penny or two for 2006, and maybe a bit more for 2007--should come both from better-than-anticipated volume and margin rates. Their view does not result from any single data point. Firm sees a number of demand drivers accelerating favorably. In addition, they think the competitive environment, while intense, generally favors Allscripts and a few other leaders with strong track records in physician clinical software over at least the next 12 to 18 months.

They expect margin expansion (both gross and EBITDA) in the second half of 2006 and continuing through 2008. Firm believes the EBITDA margin rate should increase from about 13% in 2005 to 21% to 23% for 2008. Most of the improvement should result primarily from high-margin clinical and practice software sales representing a larger portion of aggregate revenue and margin.

Also, the physician practice software market disruption resulting from pending sales of Emdeon's (HLTH) and Misys' (MSY.L) businesses is resulting in share gain possibilities for Allscripts. GE's acquisition of IDX Systems also appears to be creating opportunity.

A major product transition appears to have been one of the primary drivers of the recent weakness. Firm sees Allscripts as increasingly confident in its ability to book solid order volume in the second half, better than they've been anticipating.

Firm's $24 target price is based on a PE ratio of 19x their 2008 cash EPS estimate of $1.29.

Notablecalls: Not actionable but good to know category.

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