Prescription for Profits

The latest Medicare bill – soon to be passed – could put a lot of money in certain companies’ pockets. Cramer’s focus this week is telling investors who he thinks those companies will be.

Yesterday he highlighted dialysis provider Fresenius, but for Tuesday’s show one of the stocks Cramer focused on was Allscripts, the top company for electronic medical records and drug prescriptions. (Read about his other pick, ResMed.)

Cramer was quick to admit that this stock has been a real loser, but there a provisions in the updated Medicare bill that are just the catalysts Allscripts needs. Both the House of Representatives and the Senate want to offer incentives for doctors to switch to e-prescribing systems while at the same time penalizing those who don’t. So Allscripts could very well be in the sweet spot of this transition from paper to computer.

Only 2% of the 1.47 billion new prescriptions and renewals in 2007 were handled electronically, so there’s tremendous potential for growth here. In fact, e-prescriptions are supposed to grow 400% this year. That’s good news for a company that gets 90% of its profits from its software and services division, which handles these electronic ‘scripts.

Allscripts trades at just 18 times next year’s earnings estimates, but has a long-term growth rate of about 24%. When the multiple is equal to or less than the growth rate, that’s Cramer’s definition of cheap.

What’s the stock really worth? Cramer said a multiple of 25 would do. That puts boosts this $12.16 stock to $17.50, a nice 44% jump from Tuesday’s close.

Questions for Cramer?

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