Why Athenahealth is on Einhorn's Short List

athenahealth (NASDAQ: ATHN) has been targeted by hedge fund manager David Einhorn of Greenlight Capital following his assertion that high momentum stocks are in a bubble. In a letter to his hedge fund’s investors, Einhorn stated that he was shorting a basket of high-momentum stocks whose valuations were exorbitant and not sensible based on traditional valuation metrics.

Unfortunately for athenahealth, it’s one of those stocks. But what makes athenahealth so overvalued compared to its competitors Allscripts Healthcare Solutions and Cerner Corporation ?

How do the companies stack up?
athenahealth offers back-office operations to medical practices and hospitals through cloud-based computing. athenahealth’s offerings include billing management, insurance claims processing, and business intelligence applications that give medical practitioners more insight into their financial progress and quality of care for patients. The company counts over 40,000 health care providers in 48 states as its clients. KLAS, the health care research company, awarded athenahealth the best ranking in five categories in its most recent report. Some of the categories athenahealth was voted the best in were overall software vendor, overall physician practice vendor, and practice management service. KLAS’s ratings are derived from the opinions of thousands of health care workers from around the country.

Allscripts provides information solutions, software, and helps connect physicians to promote collaboration in patient care. Allscripts’ services are used by over 30,000 doctors in more than 3,500 health clinics, and like athenahealth, many of its services are offered through the cloud. The company’s rankings increased in the recent KLAS report with two of its software products, TouchWorks and SunRise, improving their ratings by 11% and 4%, respectively. The company’s scores also increased in KLAS’s categories of Implementation and Training and Service and Support.

Cerner provides information technology, financial, and consulting services to the entire health care industry. The company’s cloud services help health care institutions and businesses to manage their revenues and focus on patient care. Around 9,000 health care facilities-hospitals, doctor’s offices, laboratories, and surgery centers-use Cerner’s services. Like athenahealth, Cerner was awarded the distinctions of being the best in some of KLAS’s categories. Cerner was rated the best in application hosting and was tops in community health care information systems as well.

Einhorn’s beef with athenahealth
Einhorn actually said that athenahealth is an efficient business, but its valuation is wildly detached from its underlying fundamentals. In other words, he believes that even a great business has a finite price. athenahealth’s CEO, Jonathan Bush, took a defensive stance in response to Einhorn’s short. Bush asserted that Einhorn does not understand the company’s business, and is comparing it to the wrong peer group. But to whatever degree that athenahealth successfully executes on an operations basis, it does not mean that its valuation should be what it currently is.

	P/E	Forward P/E	PEG (5-year expected)	P/S
athenahealth	—-	87	5.0	6.8
Allscripts Healthcare	—-	27	1.6	1.9
Cerner Corporation	45	26	1.9	6.0

Data Source: Yahoo Finance

Over the past 12 months, neither athenahealth nor Allscripts has turned a profit. Cerner has, and trades at a P/E of 45, which still looks pretty expensive. On a forward-looking basis, Cerner and Allscripts look pretty cheap compared to athenahealth.

A five-year PEG higher than one could be a sign that a company is overvalued, and each company meets that criterion, but athenahealth really shows its pricey valuation on a PEG basis. athenahealth’s PEG is over two and a half times Cerner’s at 5.1, and carries a lofty valuation on that basis. The multiple an investor would pay for athenahealth’s sales is also extremely high at 6.8, more than twice the industry average of 3.33. Only Cerner comes close on a sales basis with P/S of 6.

The S&P 500 currently trades at a forward P/E of 16.7 and a P/S of around 1.7. All of the companies trade at significant premiums to the market, but athenahealth stands high above the S&P 500 based on these valuation metrics. athenahealth’s forward P/E is more than five times higher than the market’s, and its P/S is four times the market’s. Furthermore, athenahealth’s cash flow multiple, based on its price, is about three-and-a-half times that of the market.

It is clear that athenahealth trades at significant premiums to not only the market, but also some of its competitors. This is what Einhorn most likely sees in light of his comments that he thinks athenahealth is actually a decent company.

athenahealth goes down, down, down

ATHN data by YCharts

athenahealth’s stock has actually been on a steady decline, even before Einhorn’s announcement. During the last three months, all three stocks have fallen while the S&P has risen. athenahealth has declined the most, however, falling close to 34% in the past three months.

Foolish takeaway
Investors should take caution going forward as Einhorn warned that athenahealth could fall another 80%. Personally, I’m not confident in the stock either, as its valuation seems way too high given earnings and revenue.

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The article Why Athenahealth is on Einhorn’s Short List originally appeared on Fool.com.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Athenahealth. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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