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Eclipsys, Hologic and Sectra: Thinking Out Loud

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First pass notes on a few interesting businesses...

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Last night I spent some time looking into three companies that popped through one of my filters. None actually made the cut as far as digging deeper, but I am offering up my notes in case anyone involved wants to cross-check his/her thinking and/or volunteer additional thoughts.

ECLIPSYS (ECLP)

The company's primary competition is Cerner (CERN), McKesson/Per-Se Tech, Quality Systems (QSII) and Allscripts (MDRX). ECLP is entering fast growth phase for EPS. Fascinating how all these companies trade almost at the same premium multiple for roughly the same growth rate. Four competitors for a market like healthcare-info automation is not a crowded field and one would think that if anything close to universal healthcare passes there's going to be a lot of incremental infrastructure work. The problem is stocks already appear to discount a fair probability that new wave of projects will kick in. My first look does not suggest any eye-popping competitive advantage by any of the companies. ECLP might have an edge in acute-care niche. Shelve the idea until multiples come in.

HOLOGIC (HOLX)/SECTRA (SECTB)

Their primary competition is General Electric (GE), Siemens (SI), and Fuji. Digital mammography tools are the machines everyone wants but no one wants to pay for. HOLX and SECTB are the "pure plays" and they trade at almost identical premium multiples. My gut feeling is that there is a buy-out premium in both these names right now. Migration from analog/computed mammography to a fully digital process is inevitable and is just beginning, so the timing looks good. The problem is that everyone is slated for FDA approval of their DR machines in 2007 and research notes suggest that the key distinguishing factor will be price. With the largest installed share right now, HOLX should have a leg up in replacement cycle, or could have the most to lose if a price war breaks out. If we get universal healthcare, are these new gadgets going to be the first line victims of cheap care for everyone? SECTB might be somewhat protected since it's primarily a European operation. Multiples do not allow any cushion for shortfalls. I would shelve these guys as well until either multiples come in or landscape becomes clearer.

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