Star 40

Cerner tops Star 40; others in economic ‘sweet spots’ also doing well

Updated: 2013-05-15T03:26:37Z

By DIANE STAFFORD, STEVE EVERLY and MARK DAVIS

The Kansas City Star

It was a safe bet that Cerner Corp. would once again lead the The Kansas City Star’s rankings as the region’s top-performing public company.

Cerner, the nation’s second-largest company that helps hospitals and doctors’ offices convert paper files into computerized medical records, is in a sweet spot.

At a time when national health care law mandates switching to digital health records and “interoperability” of systems between health providers and insurers, Cerner is in the right business at the right time.

The health care law and the health care economy – aggressively in pursuit of cost savings – “absolutely play to Cerner’s strengths,” said Matthew Swindells, Cerner senior vice president for population health and global strategy. “The use of information and technology has caught up with what Cerner leadership has been saying for 30 years.”

Cerner isn’t the only area company The Star picked out as being in a sweet spot for 2012 performance and poised for 2013 growth.

CorEnergy Infrastructure Trust Inc. and the tandem of Inergy LP and Inergy Midstream LP are carving out a place in the nation’s oil and gas boom.

In fact, being in a hot sector can make a company a merger target. Inergy and Inergy Midstream announced Monday that they were being bought out by a Houston firm, Crestwood Midstream Partners LP.

Kansas City Southern has tapped into Mexico’s rejuvenating economy and the U.S. rail industry’s renaissance.

And NIC Inc., the Olathe-based builder of websites for more than half the 50 states, faces no real competition in what it does.

Cerner

Cerner tops the Star 40 performance list thanks to a combination of strong revenues and profits as well as an increasingly valuable stock.

And its success shows in other ways.

“In the last two years we’ve added 3,000 associates just in the Kansas City area,” said Marc Naughton, Cerner’s chief financial officer. “Worldwide, we’re approaching 13,000 associates, with approximately 9,000 in the Kansas City area.”

The company now works in 24 countries and in four languages. Swindells said it can claim title to being the only genuinely global health care IT company, thanks to the worldwide push to switch to digital health care records.

Investment adviser Barry Randall said Cerner’s strength is its ability to keep pace with a rapidly expanding industry.

“They’re not the lumbering giants; they’re the fast moving giants,” said Randall, a Covestor investment model manager in St. Paul, Minn.

More visible in the Kansas City area is Cerner’s sizable footprint in three locations — its headquarters’ campus in North Kansas City, its “Three Trails” campus in south Kansas City, and its under-construction “Legends” campus in western Wyandotte County.

A year from now, Cerner expects to have 4,000 associates working at the third location. And within three to five years, “We’ll keep the three campuses and add more,” Naughton forecast.

That construction and job growth have a sizable ripple effect on the Kansas City area’s economy. There’s also a strong financial ripple for Cerner stockholders.

“Given that we’re near an all-time record high for the stock price, our investors tend to be happy with us,” Naughton said.

And because of the long-term demand to do what Cerner does, he added, Cerner investors tend to take a long-term positive position on the stock.

“When we look at the future of population health management” — everything from fostering fitness to providing timely and cost-effective care — “we think it’ll be worth more than our total business today,” Naughton said.

CorEnergy

A U.S. energy boom is reshuffling global oil and natural-gas markets, and that is flowing into the nooks and crannies of the country’s economy, notably at three Star 40 companies.

CorEnergy Investment Trust Inc., based in Leawood, and Inergy LP and Inergy Midstream LP, based in Kansas City, have found their sweet spots in the business of moving and storing fuel.

They ensure the growing volumes of domestic oil and natural gas get to where they’re refined, processed or eventually used. It calls for pipelines, storage and other infrastructure, and that’s the need targeted by these three area companies.

They each focus on the so-called midstream sector of the burgeoning energy industry by buying storage and transportation facilities and giving investors the opportunity to participate. These midstream assets are sprinkled around the country.

In December, CorEnergy completed its biggest acquisition so far by paying $229 million for about 150 miles of pipeline and other facilities in Wyoming that gather natural gas produced in that state.

Its purchase highlights a shift in what CorEnergy does. Since its founding in 2005, CorEnergy bought investment securities tied to energy. It has been liquidating those and funneling the money into real assets, such as the Wyoming operation. That accounts for the company’s unusual ability to generate more profits than revenues. It’s still earning money from the securities it hasn’t sold yet.

Future asset buys won’t necessarily be restricted to oil and gas. It already owns part of an electric transmission line in New Mexico which fits with its mission. The company’s name is a play on being a “corridor” for energy.

CorEnergy — in an interesting twist — is housing its midstream assets in a real estate investment trust.

“We will own real estate assets in the energy right-of-way,” said David Schulte, the company’s CEO and co-founder.

Richard Green, the former head of the defunct Aquila Inc., is the other founder of CorEnergy. Schulte is also a founder of Tortoise Capital Advisors which is also in Leawood. It offers energy investments in closed-end funds, mutual funds and separate accounts.

Inergy

Inergy LP in 2005 was a growing U.S. seller of retail propane when it bought a natural-gas storage facility about 150 miles northwest of New York City. That facility turned out in a few years to be near one of the most prolific shale-gas plays in the country.

“It seems to have worked out very well,” said Brooks Sherman, president of Inergy. “That was our first big step into the midstream area.”

Other steps that followed have essentially remade the company into a midstream company. It still has a wholesale propane business but last year it sold its retail propane business.

Inergy Midstream LP is a subsidiary of Inergy LP, and between the two they share the assets including U.S. Salt. That’s a profitable business of mining salt, which also leaves behind caverns suitable to store natural gas.

The company decided to sell its retail propane business because of volatile prices, which created a risk, and a couple of warm winters, which curbed sales. What propane it owns in the wholesale business is hedged against price volatility, said Sherman.

Its midstream assets include its Colt facility in North Dakota that serves the prolific Bakken oil shale play. The facility has storage for 720,000 barrels of crude oil. There also is a hub for rail cars to load the oil, and it is capable of delivering 120,000 barrels per day to the East and West coasts.

The company also had aimed to grow through acquisitions, to make the most out of its assets, but instead it’s being acquired in the big merger it announced Monday.

“This is a partner we sought out,” John Sherman, Inergy’s chairman and CEO, said in an interview. “We feel very good about this deal and what it could mean for the entire company.”

Kansas City Southern

In late March, the head of BNSF Railway said rail carriers were investing heavily to take advantage of the energy boom and the revival in steel, chemicals and other industries it was triggering.

“All those things have put the railroads into a great sweet spot for what’s next in this economy,” Matthew K. Rose, chief executive of BNSF, told The Wall Street Journal.

Money manager Fred Russell agrees. He holds shares of Union Pacific, CSX and Norfolk Southern. And his shares of Berkshire Hathaway – Warren Buffett’s company – adds exposure to BNSF, which it bought in 2009.

The one rail stock missing from his portfolio is Kansas City Southern, though it too will share in the industry’s bounty.

What’s the problem?

Too expensive, said Russell, of Fredric E. Russell Investment Management Co. in Tulsa. Kansas City Southern shares cost much more compared with the company’s earnings per share than other rail stocks do.

The opposite was true two years ago when Russell bought Kansas City Southern shares. Then, the market saw the company as damaged. Russell saw it in a sweet spot.

“That’s when you can make a fortune,” he said.

Russell’s shares nearly doubled by the time he sold. With big profits to protect, Russell said he “got worried” about Mexico’s drug traffic.

But he still likes the company’s strategic Mexico rail business and its service to the key port of Lázaro Cárdenas, which provides Asian manufacturers access to Mexican and U.S. markets.

NIC Inc.

NIC Inc. in Olathe builds and runs websites for state governments, including Kansas. It has signed deals with 29 states, five of those in the last year and a half.

Two more – Washington and Wisconsin – probably will sign this year, said Peter Heckmann, an analyst at AvondalePartners LLC.

The contracts require NIC to spend its own money to design and operate the sites as well as handle user questions. Payback comes through convenience fees that the sites’ users – from state residents to companies retrieving state records – pay on top of the state’s fees.

So where’s the sweet spot? There are only 50 states.

NIC has hitched its revenues to the online bandwagon. As more and more residents and businesses go online to renew driver’s licenses, retrieve driver safety records, buy fishing licenses and handle other transactions with state governments, NIC’s revenues climb.

Of course, sweet spots have to be defended. Washington’s state Legislature is working toward imposing limits on some of the add-on fees that would accompany an NIC-run website should the state sign a contract. And a Pennsylvania lawmaker complained when that state hired NIC without competitive bidding.

“They don’t have any real competition,” Heckmann said, noting that NIC’s rivals essentially do project work and send a bill to the state.

Covestor’s Randall likes NIC’s unique business and the certainty it brings to its revenues.

“It has the most perfect business model I’ve ever seen,” Randall said.

If there’s a downside to being in such a sweet spot, it’s that those companies may not be the best place for investors to shop.

Heckmann, for example, rates NIC’s shares neutral at prevailing prices. Each share costs more than 40 times what the company earns per share, which is a relatively high earnings multiple.

Cerner’s stock similarly commands a premium earnings multiple, and Kansas City Southern’s premium keeps it out of Russell’s portfolio.

“When you’re in your sweet spot, that’s when your (earnings) multiple is at its highest,” Heckmann said.

To reach Diane Stafford, call 816-234-4359 or send email to stafford@kcstar.com. To reach Steve Everly, call 816-234-4455 or send email to severly@kcstar.com. To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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