Recently, we downgraded Merge Healthcare (MRGE) to Neutral with a target price of $5.25.
Merge reported an adjusted EPS of 4 cents in the fourth quarter of fiscal 2010, consistent with the year-ago period, although missing the Zacks Consensus Estimate by a penny. For the full year, adjusted EPS came in at 10 cents, missing the Zacks Consensus Estimate by a penny. Adjusted EPS in the previous year was 22 cents.
Revenues came in at $46.2 million in the quarter, up 139.4% from $19.3 million in the year-ago period. Results for the reported quarter include sales of AMICAS, which was acquired in April 2010.
However, adjusted revenue was $51.1 million, higher than the year-ago quarter’s adjusted revenue of $49.8 million. The Zacks Consensus Estimate was $49 million. For fiscal 2010, adjusted revenue came in at $190.7 million, compared to $164.6 million in 2009. The Zacks Consensus Estimate was $152 million.
Merge has a huge market potential based on the various incentives proposed by the HITECH Act. The company is confident about its iConnect platform and expects greater acceptance of the solution going forward. Earlier this year, the iConnect platform was selected by Radiology Associates of Sacramento (RAS), North California.
To better focus on business, Merge has restructured its managerial body and appointed anew CEO, Jeffrey Surges, who was the president of sales at Allscripts Healthcare (MDRX), a partner of Merge. During the immediately reported quarter the company included two other seniors of Allscripts. Moreover, the company is increasing the strength of its sales force over time.
Meanwhile, Merge has expanded its client base to over 2,200 imaging centers, 800 orthopedic clinics, and 1,500 hospitals and health systems, 1,200 laboratories and 250 OEM partners globally. Of these clients, only a small proportion uses more than one of the company’s solutions, thereby representing a significant scope for cross-selling.
Although the potential of the targeted market is huge, its margin will remain under pressure with expansion of its sales force. Accordingly, we have lowered the EPS estimate of 2011 by $0.04 to $0.18.
Meanwhile, since our Outperform recommendation in November 2010, the stock price appreciated more than 25% which forces us to take a cautious stand. Consequently, we prefer to go back to Neutral recommendation.
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MERGE HEALTHCAR (MRGE): Free Stock Analysis Report
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