August 5, 2016

CPSI Is A Good Pick For Both Stock Price Appreciation And Dividends


  • This long idea was uncovered by screening through the Adjusted ROAs, Adjusted P/Es, and Adjusted P/B ratios of 167 companies in the Healthcare sector with a market cap of $500mn.
  • CPSI’s Adjusted ROA of 34.8% and Adjusted P/B of 6.2x drive an Adjusted P/E of 19.6x, which set it up as an interesting long GARP idea given its fundamentals.
  • The market is wary of the firm’s recent acquisition of Healthland, changes occurring in the healthcare industry, and a potentially unsustainable dividend yield of over 6%.
  • These worries ignore CPSI’s consistently strong ROA’, ranging from 20.4%-50.5%, as well as the firm’s plans to expand geographically.
  • This analysis was conducted as part of an intensive seminar-based investment idea generation program using databases from July 14-17, 2016.

Computer Programs and Systems, Inc. (CPSI) is in the Healthcare Services and Equipment sub-industry of the Healthcare sector. Its stock price was $39.64 as of July 29, 2016, with a market capitalization of $529.2mn. CPSI is traded on the NASDAQ exchange with headquarters in Mobile, Alabama.

After careful analysis of the firm’s historical trends relative to their current valuations and analyst estimates, we believe the embedded expectations of CPSI make it a very interesting long GARP growth idea.

At $39.64 per share, CPSI has embedded expectations of future performance that are high but can be much higher.

Based on the stock price of $39.64, market valuations are pricing in CPSI to see Adjusted ROA (ROA’) levels decline to 24.1% over the next five years, with a 5-year CAGR of only 3%. These would be among the lowest ROA’ and sustained Adjusted Operating Assets (Asset’) growth rates the company has seen the last ten years.

We use adjusted, rather than “as-reported”, metrics because GAAP creates inconsistencies when comparing one company to another, and when comparing a company to itself from year to year. By making adjustments, we aim to remove the financial statement distortions and miscategorizations of GAAP. To learn more about our adjustments, and how to better understand the chart below, go here.

PVP Chart

What is the market thinking and why

At a 19.3x Adjusted P/E (V/E’), the market is pricing in expectations for ROA’ to decline from 34.8% in 2015 to 24.1% in 2020, whereas analysts expect ROA’ to decline in 2016 to 28.7% before rebounding to 37.9% in 2017.

Bearish market expectations are likely a result of industry-wide headwinds, as well as company specific concerns. In January of 2016, the company completed its $250mn acquisition of Healthland, expanding its product and service offerings in the community hospital and post-acute care market. However, as acquisitions traditionally cost more than they return, investors may be wary about risks associated with the acquisition and anxious to see how possible synergies impact CPSI’s bottom-line.

Additionally, as the overall healthcare industry changes dramatically under Obamacare, and Medicaid/Medicare billing systems are updated, investors may be concerned that the firm will be unable to keep up with changes, or unable to sustain prior ROA’ performance.

To find out why the market is wrong, and what are the catalysts to the market revising its expectations, continue reading this article at Seeking Alpha.