Express Scripts: Betting on Healthcare Reform

Express Scripts (ESRX) seems to bucking the trend today, a day in which the market is off 2%. Perhaps this is due to Obama’s announcement that the public plan need not be a part of his health care overhaul. If this happens, then Express Scripts might be among those companies relied upon should cost controls be mandated but also left to insurers to sort out for themselves.

Nevertheless, until the health care reform issue is completely resolved – that is, until we know for certain what exactly will occur – Express Scripts seems like a very overvalued stock that will have trouble meeting its Required Business Performance unless something drastic and unforeseen occurs soon.

The stock is up more than 60% from its March low and its current price implies that revenue will grow 0.2% this year, 3.8% next year and 5.9% the year following – at a minimum. (See ESRX’s RBP Snapshot) Unfortunately, historical growth data doesn’t bode well for this type of growth occurring. While the company was a hot growth stock earlier this decade, since 2005 sales have gone nowhere, rising only a meager 0.4% over this entire period. So while 0.2% may sound low, it really isn’t from a practical point of view. The company’s difficulty growing in recent years puts its RBP Probability at a relatively low 46.51%.

The only way to reconcile the stock’s 60% gain with no meaningful concurrent rise in sales or earnings is to attribute the rise to speculation. However this is somewhat dangerous. The hope appears that certain aspects of Obama’s health care reform will benefit Express Scripts directly. For instance, any provision targeting patented drugs that would make generic drugs either more common or more accessible would benefit Express Scripts. But at this point, with so much uncertainty regarding what will ultimately happen, any boost the company may get in the future should be discounted greatly. While it is possible that Express Scripts will come out as a big winner from reform, because it is unclear what form the reform will take it is best to rely on what we know for certain about the company and its ability to meet its Required Business Performance.