Seeking Alpha
Special situations, biotech, growth, hedge fund manager
Profile| Send Message|
( followers)  

Past Performance: Express Scripts (NASDAQ:ESRX) has only missed EPS expectations three times in the past four years. The last time ESRX missed EPS expectations was the first quarter of 2012. In fact, ESRX has missed EPS expectations in the first quarter the last two years. Wall Street is expecting EPS to grow from $0.73 per share in the first quarter of 2012 to $0.98 per share in the first quarter of 2013. That represents a lofty growth rate of 26% on an EPS basis.

Last November, Express Scripts' stock fell off a cliff, dropping from $62.02 per share to $50.05 per share. The plunge was due to the CEO stating the Wall Street expectations for 2013 were "overly aggressive". That sparked a sell-off, ESRX lost ten percent almost immediately after the conference call.

Fundamentals: Express Scripts has an attractive valuation when you look at forward looking fundamentals. Currently, ESRX trades with a P/E of 34.04, a forward P/E of 12.13, a P/S of 0.51, and a PEG of 0.79. Compare that to the healthcare industry as a whole which trades with a current P/E of 20.9 and a forward P/E of 16.1. The healthcare industry is trading at a discount to the overall market as well, with the S&P 500 trading with a current P/E of 20.5 and a forward P/E 16.1.

Based solely off of the current P/E, ESRX looks expensive. Look at the forward P/E, P/S, and the PEG. The forward P/E for Express Scripts is cheaper than both the healthcare industry and the S&P looking forward. The PEG shows that ESRX's earnings are still growing faster than the stock price, which is impressive considering the over twenty percent average growth of earnings annualized over the past seven years and subsequent run up in stock price. The 0.51 P/S just reaffirms the opinion of an undervalued price as sales growth has far outpaced the price action of the stock price.

The Story: Quite possibly the best thing that could have happened for Express Scripts was the break down in contracts with Walgreen (NYSE:WAG) in 2011. With the exclusive contract rights no longer an issue, it allowed ESRX to extend their distribution to multiple providers. After the contract expiration, ESRX signed a nonexclusive deal for their services with CVS Caremark (NYSE:CVS), a direct competitor with Walgreen. By the time Express Scripts and Walgreen signed a new deal, Walgreen had lost customers to competitor CVS and Express Scripts was able to negotiate a nonexclusive deal after Walgreen lost 8.1% of their sales to competitors.

With the ability to sell ESRX's services through multiple channels, Express Scripts has been able to capitalize on the opportunity to expand sales. Express Scripts is enjoying phenomenal growth, 29% on annualized basis over the past fifteen years. As the nation's largest pharmacy benefits manager, ESRX stands as the "best of breed" in the healthcare sector.

How To Play It: The forward looking metrics still have Express Scripts attractively priced despite the run from $35 in October of 2011, to the current $60 level. There is resistance at $62.50 per share, but another strong earnings report from ESRX should help move the stock to new all-time highs. My personal 52-week price target: $73.06.

Source: Your Earnings Season Preview: Express Scripts

Additional disclosure: Always consult with a registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.