Craneware growth portfolio candidate

Develops, licenses and supports computer software for the United States healthcare industry, assisting hospitals and other healthcare providers with automated revenue integrity.  This will include automated billing, strategic pricing, supply management and audit & revenue recovery.  I have no holding in this company (epic code: CRW)

Market/Index	AIM/AIM 100	Industry	Healthcare Equipment & Supplies
Sales	$41.1m	Earnings	$8.89m
Market Cap	£102.6m	Share Price	383.5p
Norm. EPS	$0.33	Historic P/E	18.1
Est. 2013 growth	3%	Prospective P/E	17.6
Est. 2014 growth	15.0%	Prospective P/E	15.5
Rolling PEG	0.85	SGR	12.8%
PBV	4.30	Historic Yield	2.76%
ROE	25.5%	Operating Margin	27.0%
5 yr BV + Div return	64.5%	5 yr FCF return on BV	53.9%

CRW was one of the recent additions to the growth portfolio candidate list here.  It was founded in 1999 and came to the AIM market in 2007.  Since its IPO sales have grown by 22% pa and EPS by 44% pa.  Their operating margins over that period averaged 21% and today sit at an impressive 27%, with a ROE of just over 25%.

CRW suffered a fall in its SP following a January 2012 announcement that stated "...we have seen sales cycles extend for all the Group's product families. The Board believes this is due to an unexpectedly high percentage of healthcare providers choosing to focus on achieving the 31 December 2011 deadline for the first Electronic Health Records Incentive Payments..."  The SP has not really recovered from this fall.  Despite 32% & 20% EPS growth for their June year-end 2012 & recent half-year results.  They also stated at their half-year "...We believe the disruption to our market caused by the focus on Electronic Health Records incentive payments has largely dissipated, freeing up hospital resource to focus on other areas of technology investment..."

CRW is a company with good visibility of revenue, at the half-year CEO Neilson stated that he had visibility of $39.7m sales for the full year compared to $33.4m last year, an almost 19% increase.  Analysts have pencilled in a 10% increase in revenues for the full year, with just a 3% growth in EPS.  Although analysts are more bullish for 2014 & 2015 estimating 15% & 23% growth respectively.  The forecasts for this year may just be a case of analysts being cautious following the problems during 2012.

CRW compete with some extremely large corporation in the USA, in a market that is extremely fragmented.  MedAsset and Emdeon are two such competitors with sales of $640m and $1.1bn respectively.  It is interesting to note that Emdeon following their acquisition of EquiClaim in 2011, were themselves acquired by private equity company Blackstone in the same year, just 2 years after Emdeon's IPO.  It would seem to me that given the structure of such a fragmented market, the large participants and high returns available, that CRW is likely to eventually be acquired by one of those US corporations.

I would judge CRW to have a narrow economic moat, due to 1) the cost of a client switching out of their software once installed and 2) the intellectual property embedded in their software, that is most evident by their returns they are able to achieve.  A company with a good durable competitive advantage and a strong balance sheet - turning over net assets almost 5 times and $29m of net cash.

In summary, a reasonably priced candidate  for a growth portfolio (if you strip out the cash, the historic P/E drops from 18 to 13), earning good returns, with the potential kicker of an exit by way of a takeover.