Healthstream Inc.—New Buy Recommendation

Healthstream Inc. (NASDAQ–HSTM)
Closing price August 1, 2008-$2.40

In this market we are looking for what we think are stable businesses with good margins and a decent cash cushion in downturn resistant industries. Healthstream fits the bill we think.

E-Learning to healthcare professionals is here to stay. HSTM had 1.639 million paying subscribers at June 30, 2008. They also have over 1,000 hospitals signed up for their research services. We view this as a very valuable customer base that is worth much more than the $53 million market cap of HSTM today ($32 each). At $50 per subscriber these shares are worth $3.63 and at $75 they are worth $5.44.

HSTM announced Q2 earnings in late July. $13 million in revenues (up about 8%) and GAAP income of $739,000 million (up about 74%) or $.02 per share.

HSTM’s earnings are lightly taxed due to prior year loss carry-forwards ($38 million at 12/31/2007), and should continue this low taxation for many more years.

EBITDA was $2.2 million up from $1.9 million.

HSTM has about $.26 per share in cash and is using its excess cash-flow to buy back shares (spent $1 million in Q2). Debt is about $1.5 million.

Trading at 54% of our valuation, with $.26 per share in cash—and with their subscribers valued at $32 each, we think this is a compelling buy-out candidate. Their growing subscriber base and earnings should also move the share price higher over time.

The 52 week low has been $2.21 and the high–$3.76.

HSTM trades about 26,000 shares a day, so be careful buying. We bought a little over the last week or so at $2.30 and $2.35.

There are about 22.6 million fully diluted shares outstanding.

About HealthStream

HealthStream is a leading provider of research and learning solutions for the healthcare industry, transforming insight into action to deliver outcomes-based results for healthcare organizations. Through HealthStream’s learning solutions—which have been contracted by over 1.7 million hospital-based healthcare professionals—healthcare organizations create safer environments for patients, increase clinical competencies of their workforces, and facilitate the rapid transfer of the latest knowledge and technologies. Through our research products, executives from healthcare organizations gain valuable insight about patients’ experiences, workforce challenges, physician relations, and community perceptions of their services. Based in Nashville, Tennessee, HealthStream has two satellite offices.


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