Portfolio

Summary

  • Express Scripts shares are 12% lower than they were at the start of the year.
  • Is it priced at a discount?
  • What kind of returns can you expect?

Express Scripts Holding Company(NASDAQ:ESRX) has declined 12% year to date. So, it maybe a good time to see if it’s priced at a value.

Source: Google Finance

First, let’s review its business.

Business overview

Express Scripts is a pharmacy benefit manager in the United States. It provides services such as home delivery pharmacy care, specialty pharmacy care, specialty benefit management, drug utilization review, and medical and drug data analysis services.

Photo: Paul Sableman. Licence: CC by 2.0. Source: flickr

Quality shares

Express Scripts has an investment-grade S&P credit rating of BBB+. Furthermore, its long-term earnings per share (“EPS”) growth has been wonderful, as illustrated by the FAST graph below.

Express Scripts doesn’t pay a dividend, but it has been buying back its shares in recent quarters. It repurchased $1,132.5 million worth of shares in the third quarter.

ESRX Average Diluted Shares Outstanding (Quarterly) data by YCharts

The PBM has also been consistently growing its profits over time, but it’d be even better if it can boost its revenues which have stagnated.

ESRX Revenue (NYSE:TTM) data by YCharts

Although its EPS growth is expected to slow down to 8% next year (compared to this year’s estimated 16% growth), it’d still be pretty good growth. Here are the recent results.

Recent results

The following data compares the results of the first three quarters with that of the same period last year. Express Scripts generated revenues of $75,424 million, which was essentially flat compared to the previous year.

Yet, its gross profit and operating income were higher. Ultimately, the PBM managed to earn net income of $1,969 million, which was 15% higher. As a result, Express Scripts’s diluted EPS were $3.09, up 27%.

At the end of the quarter, the company had cash and cash equivalents of $2,304.7 million.

What kind of returns can you expect?

From the end of October, Express Scripts’s most recent adjusted EPS guidance for this year was $6.36 to $6.42. Using the midpoint, the company trades at a forward multiple of about 12 at $76.90 per share.

Its recent selloff seems to be overdone.

The consensus analyst estimates the company’s EPS to grow at 11.3% to 13.3% per year for the next 3-5 years.

Using the low end of that estimate and giving it the full five years to expand the multiple to 15, Express Scripts could deliver annualized returns of 15%. This makes it an attractive investment which could deliver about 1.5 times the average market returns.

Morningstar thinks the wide-moat PBM is worth $100 and rates it 4 stars as undervalued.

Value Line’s last report on Express Scripts was in mid-September. Back then, Express Scripts was trading at about $73 per share and Value Line had a 3-5 year price target range of $105 to $155 per share for an annualized return of 10-21%. A new Value Line report on Express Scripts should come out soon.

Though I don’t think the shares will rise significantly higher anytime soon, if the shares do trade at a multiple of 15 and the company achieves the midpoint of its adjusted EPS guidance, the shares would be worth about $95 by the end of the year. If so, the shares are discounted by about 19% today.

Conclusion

An analyst at Thomson Reuters believes the shares could drop to $59 within the next 12 months, implying a potential to decline 23% from current levels. The mean price target is $81.20 across 18 analysts, which indicates the shares are roughly fairly valued.

Express Scripts seems to be priced at a decent discount for price appreciation if you have a long-term horizon of at least 3-5 years. However, don’t expect the shares to move significantly higher anytime soon.

Share your thoughts in the comments below

  • Which healthcare companies are you buying today?
  • Which are your core healthcare companies?
  • Which are for short-term trading?

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Disclaimer: This article is not financial advice but consists of my opinions and is for educational purposes only. Additionally, the information provided is believed to be accurate but is not guaranteed to be so. Please do your own research and due diligence and consult a financial advisor and or tax professional if necessary before making any investment decisions.

Disclosure: I am/we are long ESRX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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