Cerner: Margin turnaround, with potential growth upside

Cerner’s share price has moved sideways for ~ 5 years, throughout this period there has been huge digestion of slowing growth and Cerner has disappointed many times.

2018 was a disaster, both on growth and margins, however we think it gets better from here. 2019 could turn out to be a pivotal moment for Cerner, setting the company up for the next 5 years.

In our opinion the downside case has been derisked as EPS has limited downside, and revenue growth of 6% for the next 3 years looks to be a minimum.

Activist investor (Starboard Value) gave the new CEO and management the kick that was needed and acted as a catalyst for more rapid change. Other investors had been agitating for transformation and a plan was already in place.

Over the next two years the bet is on margin expansion. We believe there is much more room for margin expansion than company guidance.

• See room to get to 24-25% operating margins in 2022, vs 18.8% in 2018.

• Longer term upside will be driven by successful growth in new products.

We are convinced on value-based-care as the critical tailwind to this growth. Cerner needs to execute.

Potential Upside:     $98(+44%)

Sensible Downside: $57(-16%)

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