It was a safe bet that Cerner Corp. would once again lead the The Kansas City Stars rankings as the regions top-performing public company.
By DIANE STAFFORD, STEVE EVERLY and MARK DAVIS
The Kansas City Star
Cerner, the nations 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 Cerners 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 isnt 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 nations 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 Mexicos rejuvenating economy and the U.S. rail industrys 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 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 weve added 3,000 associates just in the Kansas City area, said Marc Naughton, Cerners chief financial officer. Worldwide, were 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 Cerners strength is its ability to keep pace with a rapidly expanding industry.
Theyre not the lumbering giants; theyre the fast moving giants, said Randall, a Covestor investment model manager in St. Paul, Minn.
More visible in the Kansas City area is Cerners 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, Well keep the three campuses and add more, Naughton forecast.
That construction and job growth have a sizable ripple effect on the Kansas City areas economy. Theres also a strong financial ripple for Cerner stockholders.
Given that were 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 itll be worth more than our total business today, Naughton said.
A U.S. energy boom is reshuffling global oil and natural-gas markets, and that is flowing into the nooks and crannies of the countrys 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 theyre refined, processed or eventually used. It calls for pipelines, storage and other infrastructure, and thats 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 companys unusual ability to generate more profits than revenues. Its still earning money from the securities it hasnt sold yet.
Future asset buys wont 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 companys 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 companys 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 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. Thats 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 its being acquired in the big merger it announced Monday.
This is a partner we sought out, John Sherman, Inergys 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 whats 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 Buffetts 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 industrys bounty.
Whats 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 companys 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.
Thats when you can make a fortune, he said.
Russells shares nearly doubled by the time he sold. With big profits to protect, Russell said he got worried about Mexicos drug traffic.
But he still likes the companys 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. 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 states fees.
So wheres 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 drivers licenses, retrieve driver safety records, buy fishing licenses and handle other transactions with state governments, NICs revenues climb.
Of course, sweet spots have to be defended. Washingtons 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 dont have any real competition, Heckmann said, noting that NICs rivals essentially do project work and send a bill to the state.
Covestors Randall likes NICs unique business and the certainty it brings to its revenues.
It has the most perfect business model Ive ever seen, Randall said.
If theres a downside to being in such a sweet spot, its that those companies may not be the best place for investors to shop.
Heckmann, for example, rates NICs 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.
Cerners stock similarly commands a premium earnings multiple, and Kansas City Southerns premium keeps it out of Russells portfolio.
When youre in your sweet spot, thats when your (earnings) multiple is at its highest, Heckmann said.
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