ARRA Deals Coming Through In Second Quarter 2010: See Which Stocks Will Benefit Greatly From Stimulus Dollars
March 17, 2010 - The Wall Street Transcript has just published Health Care IT Report offering a timely review of the Health Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Leo Carpio is a Senior Research Analyst covering the health care information technology and services sector. Mr. Carpio joined Caris & Company after a seven-year stint with Prudential Equity Group LLC, for which he covered numerous health care sectors, including health care facilities, managed care and pharmacy benefit managers.
Mr. Carpio began his career with GE Capital in the municipal finance insurance division, called the Financial Guaranty Insurance Company (FGIC). Mr. Carpio holds a B.A. in management from the University of Pennsylvania's Wharton School, and an MBA in corporate strategy and finance from the University of Michigan. He holds the Series 7, 63, 86 and 87 licenses.
TWST: How would you say the ARRA will affect the health care IT industry? Has your perception changed since the last time we spoke?
Mr. Carpio: The shorter answer is my perception has changed, yes. In terms of the effect, clearly it's not going to be the hockey-stick demand increase that everyone was thinking about. It's going to be a moderate rising tide, but this tide is going to be sustainable. Let me explain it and let me provide some more color on that. Last year everyone was exuberant over ARRA and thought that ARRA was going to provide a huge surge of demand starting in 2010, that doctors and hospitals would be rushing to buy systems. And what we have seen so far is more of a fragmented response in that the mid-size and large group physician practices, and mid-size and large hospitals, and academic hospitals have moved forward and are buying systems.
But on the lower end of this space, the small group - individual physicians and small hospitals - are hesitating. And what is driving that is a couple of forces. One is the economy; simply the finances are tough for doctors and hospitals at this point. And then secondly, the rules itself. The unexpected surprise was back in December. The proposed meaningful use contained a loophole, and the loophole was this: In the first year of the program, doctors and hospitals only need to submit 90 days' worth of data to earn the first year's worth of financial incentives.
TWST: Do you think that's when the surge will happen, in the fourth quarter?
Mr. Carpio: Actually, I think the order surge is going to happen; we are going to start seeing some of these ARRA deals coming through in the second quarter. And then the earnings impact will be in the third quarter of this year. But in terms of the tide, it will be a rising tide in 2010, but it will be accelerating in 2011 and beyond.
TWST: Who will benefit the most from the ARRA funding? Will the positive effects be evenly distributed or will certain sectors of health care IT benefit more? How do you expect that to play out?
Mr. Carpio: The way I expect it to play out is this: You take a step back, and look at capital spending and IT systems spending in the market; what happened in the last 18 months is everyone has been on a pause, on a vacation, due to the economy, due to concerns of ARRA regulations. And now after the 18-month vacation, the hospitals and large group physician practices have to move forward, and what they are facing is regulations. In the case of hospitals, they are facing new Medicare regulations - starting to get Medicare reg. audits, and then three years down the road they face ICD-10, which is a new coding reg. We have positioned the same situation with coding reg. ICD-10 three years down the road. If they are not up and running, they are going to not be paid. And what ARRA does is it gives them funding to reinforce that decision to move forward and buy systems. In effect, they were going to buy systems anyway, but ARRA gives them another excuse to go forward with the plans.
So the mid-sized and large groups are going to benefit. The ones on the small end, they are going to take their time. And even then, I think the financial penalties are such that they may be latecomers to the game. So in terms of the space, the people who are going to benefit the most directly are the hospitals and physicians, health care IT companies focused on the mid- and large customer bases, also any derivative support company who works on serving those segments. For example, everything from consultants through transcription service companies through staff support companies, those will be the big beneficiaries.
TWST: What companies seem to be strong stock picks and why?
Mr. Carpio: In this economy, and in terms of the market right now and just in general, my picks would be this: On the hospital side, I would look at Eclipsys (ECLP), that's ticker symbol ECLP. They are focused on the mid-size hospital segment, and I think they are undervalued right now for potential earnings growth. On the physician side, I would emphasize Allscripts (MDRX) and Quality Systems (QSII), both focused on the mid- and large segments of the market; both have shown good growth. And lastly, in terms of the valuation, they are discounted versus the growth potential.
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