Quality Systems Ests Upped

Quality Systems, Inc. (QSII) reported Q1 EPS that beat our estimate by $0.04 on revenue that also exceeded our forecast. We again increased our FY09 revenue estimate and also increased our FY09 EPS estimate.

With gross margin and operating margin at significant highs, substantial further improvement may be difficult. The company completed the acquisition of Healthcare Strategic Initiatives on May 20. Our target price of $46 is based around a 1.0x P/E/G on our calendar 2009 EPS estimate.

We are optimistic about QSII's earnings growth primarily as a result of the continued strong revenue growth and also any improvements in gross margin. The specifics on this growth are as follows. Total revenue growth continues to be driven by the strength of the NextGen division. System sales are growing due to strength of NextGen practice management and clinical software offerings to both new and existing customers, as well as delivery of related implementation services.

The risk to earnings growth is the continued strong investment emphasis in research and development (R&D) and increase in selling, general, and administrative (SG&A) expenses. QSII anticipates continued additions to headcount in the NextGen division in areas related to sales and delivering products and services. In addition, the company expects increased expenditures for trade shows and advertising and for headcount additions at the corporate level.

At its current price of $43.51 per share, QSII is trading at roughly 25x our fiscal 2009 EPS of $1.72 and at roughly 23x our calendar 2009 EPS estimate. At this stage, multiple expansion may be limited. Despite solid market fundamentals, the lack of operating visibility (backlog) may also play a role in limiting multiple expansion.

H&R Block Concerns Remain

We reiterate our Hold rating on shares of H&R Block, Inc. (HRB) following the release of Q1 financial results.

Although the fallout from the mortgage business implosion will likely be felt for some time to come, and we continue to have significant concerns regarding other aspects of HRB's business, we believe that negative and positive aspects of the company's outlook are now roughly balanced. Steps have been taken by the management to refocus the company on its core tax businesses, and the emphasis on expense reduction should result in improved margins going forward. Our price target of $23.50 per share represents a multiple of 15x our 2009 EPS estimate.

Given our outlook for future earnings, balanced against our remaining concerns regarding HRB's ongoing business, we consider the shares to be appropriately valued near present levels. Over the last five years, the shares of H&R Block have traded within a range of 10x and 20x forward twelve-month earnings.

While we view some recent developments at the company as long-term positives, we do not believe that the stock should trade in the upper half of this historical multiple range. Currently, the shares trade at approximately 16.8x our 2009 EPS estimate.