Express Changes For The Better

5/28/2012


  Recent Price
$52
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
17
  Shares (millions)
833 (estimated)
  Long-Term Debt as % of Capital
79%
  52-Week Price Range
$60.89 - $34.47

Successful companies stay on top because of their willingness to change when needed — even if their business model has worked in the past. Over the last five years, Express Scripts ($52; ESRX) grew sales at an annualized rate of 21% while per-share profits rose at a 25% clip.

The pharmacy-benefit manager enjoys a 95% client-satisfaction rate. It fulfilled nearly 193 million claims in the March quarter, up 3.6% from a year earlier. More than 76% of those prescriptions used more-profitable generic drugs, up from 73.8% a year earlier, while EBITDA (earnings before interest, taxes, depreciation, and amortization) per claim rose 3% to $3.40.

Increasing use of generics and the proliferation of specialty drugs have driven much of Express's growth in recent years. But going forward the company expects to profit from new trends, including biosimilars (generic biotech drugs) and online prescriptions. In addition, Express Scripts bulked up last month with the $29.1 billion takeover of Medco Health Solutions. Express Scripts was added to the Buy and Long-Term Buy lists in the May 21 issue of the Forecasts.

The new Express Scripts

In the wake of the Medco purchase that closed April 2, Express expects to eventually reap annual cost savings of $1 billion. Promised postmerger cost savings don't always come to pass. But Express Scripts' targets seem reasonable, in part because Medco has a substantially higher cost structure.

In the 12 months ended March, Medco spent 2.2% of revenue on selling, general and administrative costs, versus 1.7% for Express Scripts. Express Scripts' operating profit margin of 5.7% dwarfs Medco's 4.5%, suggesting the acquirer has room to improve Medco's profitability.

It will take more than a year to fully digest Medco, which was nearly 50% larger than Express before the merger as measured by revenue. But analyst estimates reflect confidence. The consensus projects per-share-profit growth of 20% this year and 24% next year, versus the 16% growth seen in the 12 months ended March.

Express says it plans to change how it invests its $3 billion to $4 billion in annual free cash flow. The company spent more than $3.5 billion on buybacks during the last two years, reducing the share count by 12%.

But while the Medco deal raised the number of outstanding shares by about 70%, it also ballooned Express's debt to $18 billion, up from $8 billion at the end of 2011. Over the next two years, Express Scripts intends to deploy most of its free cash flow to pare the debt load; substantial buybacks are unlikely.

Attractive valuation

Considering Express's potential for sustained profit growth, the shares seem unduly cheap. Express trades at a discount of at least 25% to its five-year average trailing price/earnings, price/sales, and price/operating cash flow ratios. The shares sell for just 14 times expected 2012 earnings, and their PEG (price/earnings-to-growth) ratio is 0.9, below the average of 1.1 for health-care distributors and service providers in the S&P 1500 Index. An annual report for Express Scripts can be obtained at One Express Way, St. Louis, MO 621, (314) 996-0900, www.express-scripts.com.

EXPRESS SCRIPTS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '12
0.73
vs.
0.66
+ 9%
55.34
-
45.66
19 - 15
Dec '11
0.82
vs.
0.71
+ 7%
48.39
-
34.47
17 - 12
Sep '11
0.79
vs.
0.65
+ 3%
57.47
-
37.06
21 - 14
Jun '11
0.71
vs.
0.60
+ 1%
60.89
-
52.27
23 - 20
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
46.27
2.97
0.00
60.89
-
34.47
21 - 12
2010
45.06
2.50
0.00
55.68
-
37.75
22 - 15
2009
24.76
1.79
0.00
44.94
-
21.38
25 - 12
2008
21.98
1.59
0.00
39.55
-
24.18
25 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
65
66
93
19
82
61

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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