1 Health-Care Tech Stock Ready to Face the Giants

Long live Obamacare? The Supreme Court has ruled, but the voters haven't yet. Regardless of what happens in November, electronic health record (EHR) vendor stocks should fare well. The Meaningful Use provisions that drove -- and continue to drive -- health-care providers to adopt EHR systems were part of an act passed before Obamacare.

The EHR market is fragmented, with many small companies competing against a few large vendors. One small-cap EHR vendor positioned to challenge the health-care technology big boys for investor consideration is Quality Systems (NAS: QSII) . Let's take a look at this rising star.

Facing the giants
Quality Systems' flagship NextGen system competes in the ambulatory EHR market, which includes physicians and other specialist practitioners.


Source: American EHR Partners.

Source: American EHR Partners.

Five companies have a higher market share than Quality Systems. Three are publicly traded -- Allscripts (NAS: MDRX) , Cerner (NAS: CERN) and General Electric (NYS: GE) . McKesson's (NYS: MCK) market share puts it in sixth place. Three of those four companies are giants compared against Quality Systems in terms of market capitalization, but their businesses are more diverse. Allscripts is closer in size to Quality Systems, but its market cap is still $500 million higher.

Why is Quality Systems a strong contender for investors' attention against these bigger rivals? Take a look at how each company's performance stacks up.


Return on Investment Capital (ROIC) --
5-Year Average

Sales 5-Year Growth Rate

Earnings-Per-Share 5-Year Growth Rate

Dividend Yield

Quality Systems

























Sources: Motley Fool CAPS, 10-K Reports, author calculations.
*McKesson had a fiscal-year change.

Quality Systems matches up pretty well against its larger rivals in all criteria. The one I put the most emphasis on, though, is ROIC. This metric conveys how effectively a company is using investors' money. Quality System clearly outperformed the others on this important measurement.

Ready with rocks
The past five years look great, but what about the future? Quality Systems has several rocks in its arsenal that it's ready to sling.

The company recently announced a partnership with Humana. The large insurance company agreed to subsidize the cost of physicians who choose the NextGen EHR system. Another recent partnership with Dell and Puerto Rico Hospital Supply gives NextGen an entree into the Latin American market. This comes on top of a previous agreement to be Dell's EHR system partner.

Smart acquisitions help position Quality Systems more effectively, too. The company bought ViaTrack Systems to bolster its EDI capabilities. Quality Systems acquired several other companies in the past few years to gain traction in the hospital systems market. This strategy seems to be working, with its hospital segment increasing revenues by 92.6% in fiscal 2012.

At the Healthcare Information and Management Systems Society's annual conference earlier this year, the company unveiled several new products. These included new mobile applications and a digital pen that captures information directly from a form and transfers the data to the NextGen system. These innovations enable Quality Systems to help its customers take advantage of the latest technology.

Not everything is rosy, though. Quality Systems faces a few challenges.

While Obamacare's fate doesn't affect EHR adoption, other scenarios might. Money remains a precious commodity in Washington. The possibility exists that the next Congress could enact changes that slow down EHR Meaningful Use incentives and/or penalties. Any such action could slam all the EHR vendor stocks.

Quality Systems also could be affected by customer adoption of the software as a service (SaaS) subscription payment model. This model has become increasingly popular since the company began offering it in 2009. Converting from a license fee payment model to a SaaS model could disrupt revenue streams and cash flow.

The dental segment's performance has been poor. Revenue decreased by 1.9% for fiscal 2012. Operating income dropped 28.3%. Overall market conditions for dental system sales remain weak. However, management believes that the introduction of a new SaaS dental system and the acquisition of ViaTrack should be positive factors.

While they are real, none of these challenges appear to be show-stoppers.

Big results from a small cap
Quality Systems compares very favorably against larger rivals in nearly every category. The stock trades at a forward P/E below the low end of its five-year P/E range. Barring some unforeseen federal Meaningful Use changes, earnings should continue to grow at a solid pace.

Investors should seriously consider Quality Systems. I expect big results from this small cap -- maybe even giant-slaying results.

If you're interested in more giant-sized results in the health-care industry, there are plenty of opportunities. Find out about one great prospect in The Motley Fool's new free report, "The Next Rule-Breaking Multibagger."

At the time thisarticle was published Fool contributorKeith Speightshas no positions in the stocks mentioned above.Motley Fool newsletter serviceshave recommended buying shares of McKesson and Quality Systems. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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