This article is excerpted from a letter by Luis Sanchez and John Pelly, co-founders and managing partners of Overlook Rock Asset Management, based in New York.
This quarter we would like to highlight an investment we have made in Cerner (NASDAQ: CERN). Luis recently presented Cerner at Wide-Moat Investing Summit 2018, hosted by MOI Global.
Cerner is an investment made in our High Quality Company Strategy. The High Quality Strategy focuses on investing in businesses that can compound their earnings power at an above market rate over an extended time horizon. In this strategy, we are focused on identifying businesses with sustainable competitive advantages and are less sensitive to short-term valuation metrics. Cerner exemplifies these characteristics.
Cerner is a leading healthcare IT business, primarily selling electronic health records software and revenue cycle management software to hospitals. The company’s software is critical infrastructure for hospitals and serves as the basic foundation for a hospital’s IT ecosystem. Cerner is deeply integrated with its customers, creating a very sticky client base with a 99% retention rate.
The company is benefiting from tailwinds that will enable revenue to grow at a high single-digit rate for the next 10 years. Furthermore, Cerner is executing a plan to increase operating margins by 30 to 60 basis points per year. The combination of tailwinds and margin enhancement will enable the company to compound its earnings growth at a double-digit rate for the foreseeable future.
Cerner recently traded at a valuation multiple of roughly 18x cash flow. This valuation is a slight premium to the average market multiple but we believe this is a bargain because Cerner is a high quality business with very strong earnings growth prospects.
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