Merge Upgraded – Analyst Blog

We recently upgraded Merge Healthcare Incorporated (MRGE) to ‘Neutral’ with a target price of $2.25 based on a P/E multiple of roughly 9.4 and our fiscal 2010 EPS estimate of 24 cents. The company’s strong revenue growth in the first quarter coupled with the U.S. government’s increasing emphasis on the use of health care IT prompted us in upgrading the stock.

Total revenues in the first quarter increased 30.4% year over year to roughly $20.0 million. Growth was registered across both product segments. Services and maintenance revenues increased 60.1% year over year to $10.6 million. Software and other revenues increased 7.8% year over year to approximately $9.4 million.

Merge also witnessed strong recurring revenues in the first quarter. Recurring revenues were greater than 60% of net sales, compared with 45% of net sales in the year-ago quarter.

However, Merge reported earnings per share of 1 cent in the first quarter, compared with the Zacks Consensus Estimate of 3 cents and the year-ago earnings of 5 cents. Though earnings per share were lower than the Zacks Consensus Estimate and the year-ago figure, we expect Merge to portray a year over year increasing trend in both revenue and earnings per share.

Merge is a health care software and services company focused on integrating radiology workflow to improve productivity, profitability and patient care by fusing business and clinical workflow, and intelligently managing and distributing diagnostic images and information throughout the health care enterprise.