Express Scripts Has Strength In Numbers

3/11/2013


  Recent Price
$58
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
16
  Shares (millions)
832
  Long-Term Debt as % of Capital
39%
  52-Week Price Range
$66.06 - $49.79

In an industry where narrow margins make economies of scale crucial, Express Scripts ($58; ESRX) is the largest U.S. pharmacy-benefit manager (PBM).

With medical costs outpacing the rate of inflation, PBMs work to keep medications affordable. Operating in the U.S. and Canada, Express Scripts processes pharmacy claims and distributes drugs bought in bulk, passing some of the savings on to its customers — health insurers, employers, unions, and government programs.

The growth picture for the S&P 500 health-care sector looks bleak, with earnings per share projected to rise just 1% in 2013. Yet the consensus expects Express Scripts to grow per-share profits 14% to $4.27 this year, partly helped by the April acquisition of Medco Health Solutions for $29.1 billion.

Despite the strong outlook, Express Scripts shares trade at 16 times trailing earnings, a 30% discount to their five-year average. Even if the P/E ratio lingers at its current level, should Express Scripts hit the consensus 2013 profit estimate, the shares will advance 14% in less than a year. Express Scripts is a Buy and Long-Term Buy.

Business breakdown

By one estimate, Express Scripts controls 40% of the U.S. PBM market and a 30% share of the market for specialty pharmacy services.

Demand for cheaper generic drugs has helped lift Express Scripts' operating profit margins. Generics accounted for 79% of the company's prescriptions in 2012, versus 74% last year and 66% in 2008. According to the company, last year the use of generics lowered spending on treatments for common diseases nationwide, the first decline in 20 years.

Express Scripts has increased generic usage by designing an electronic system that alerts pharmacists when scripts for branded drugs can be filled with generic substitutes. The trend toward generics should continue. Over the next eight years, biological drugs with combined revenue of $77 billion will lose patent protection.

The Medco acquisition should also improve profitability over time, though in February management refused to give an update on the $1 billion in cost savings it once claimed the deal would deliver.

Express Scripts should benefit from an improving employment outlook and the influx of newly insured when health reform launches next year. Some analysts speculate many companies will elect to pay a fine rather than provide insurance for their workers. However, Express Scripts expects most employers to participate in the new insurance exchanges, though they might be cautious at first.

The Medco deal strapped Express Scripts with a heavy debt load — $13.10 billion, net of cash. But the company also generates plenty of cash, with operating cash flow of $4.74 billion and free cash flow of $4.58 billion in 2012. Management forecasts cash from operations of $4.5 billion to $5 billion in 2013 and plans to resume share repurchases midway through the year. About one-quarter of the PBM's book of business comes up for renewal this year, which qualifies as a light year.

An annual report for Express Scripts can be obtained at One Express Way, St. Louis, MO 63121, (314) 996-0900, www.express-scripts.com.

EXPRESS SCRIPTS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '12
1.05
vs.
0.82
126%
66.06
-
49.79
19 - 14
Sep '12
1.02
vs.
0.79
130%
64.46
-
53.61
20 - 17
Jun '12
0.88
vs.
0.71
143%
58.98
-
50.31
19 - 16
Mar '12
0.76
vs.
0.66
9%
55.34
-
45.66
19 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
93.97
3.74
0.00
66.06
-
45.66
18 - 12
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
82
80
78
16
93
26

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


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