Healthstream (HSTM $5.25) is the leading provider of Internet based learning systems used by the health care industry. Hospitals, drug companies, and medical device manufacturers sign deals covering most of their employees so they can take the courses and access a wide range of educational material. Healthstream currently covers about 40% of the five million workers comprising the U.S. market. Applications cover a lot of territory, including OSHA training, various certification programs, compliance, and best practices training. Courseware usually is supplied by independent experts, although Healthstream does produce some mainstream products internally. The company's Internet based delivery system sets it apart from most of its competition, which still rely on printed materials and CD based instruction. Demand has been fueled by 3%-4% annual increases in the health care workforce over the past several years. That dynamic has stalled with the recent recession. But growth has been sustained in the 15% range by providing new products to existing customers, and by persuading hospitals to switch from older technologies.
Healthstream also provides research services for hospitals. That line produces patient, physician, employee and community surveys, data analysis, and other measurement tools to keep hospitals abreast of the market, and how their own organizations are performing. That segment has stumbled of late, registering growth in the 4%-6% vicinity. Broad-based research companies have been gaining market share at Healthstream's expense. Investments in sales and marketing are beginning to bear fruit, however, re-establishing momentum. Growth is poised to pick up speed in upcoming periods.
A joint venture aimed at the simulation market could transform the industry over the next 5-10 years. Healthstream and Norway based Laerdal Medical recently formed a 50%-50% partnership to develop training dummies that link to the Internet. Currently, when a student practices resuscitation on a dummy, for example, there isn't any direct feedback or method to evaluate how well the job was done. The simulation technology now in development will allow those measurements to be taken, making it easier for students to correct mistakes in technique. Initial applications will be launched early in 2011. A wide range of products are slated to follow over the next several years. Those products promise to generate significant incremental revenue directly. They also could pull in demand for Healthstream's traditional business if customers elect to buy from a single source.
We estimate 2010 sales will advance 13% to $65 million. Overall growth will be retarded by the research unit, which represents about one-third of revenue. Earnings appear on track to rise 22% on a fully taxed (40% rate) basis to $.22 a share, excluding amortization of intangibles and non cash stock option costs. Next year, excluding the simulation partnership, revenue and income gains of 15% and 35% appear achievable, respectively. That would put revenues at $75 million; earnings at $.30 a share. Earnings should benefit from a decline in start-up costs associated with the simulation venture, which are expected to cost 2010 results approximately $.02 a share. As the simulation line picks up momentum overall growth could accelerate as time goes on. In 2-3 years sales could reach $100 million to produce earnings of $.50 a share. A stronger showing is possible if simulation is broadly adopted. Applying a P/E multiple of 20x suggests a target price of $10 a share, potential appreciation of 90% from the current quote.