Acquisition Fuels Earnings Surprise for Express Scripts

Includes: ANTM, ESRX, IHE, MHS
by: Kevin Kennedy
While Democrats and Republicans sparred over health care reform on a national stage Thursday, one of America’s leading health care expense cutters continued to laugh all the way to the bank.
On Wednesday, pharmacy benefits manager, Espress Scripts (NASDAQ:ESRX), reported adjusted fourth-quarter earnings of $0.97 per share – seven cents better than expected - and increased its guidance for 2010 (see transcript here). This led shares into all-time high territory. The stock rose 9% Thursday, closing at 95.23, and its daily volume of 8.3 million shares was more than four times its daily average.
The company’s earnings have flattened out in the past four quarters, but its
ESRX's April 2009 purchase of NextRx from WellPoint (WLP) helped earnings and could be a catalyst for future profit growth. The company guided 2010 earnings expectations higher, predicting full-year earnings of $4.80-$5 compared to analyst expectations of 4.69. Analysts are expecting $6 in earnings in 2011.
The company also expects NextRx, which cost about $4.7 billion, to eventually provide more than $1 billion in annual earnings power.
St. Louis-based Express Scripts is the second largest pharmacy benefits manager behind Medco Health Solutions (NYSE:MHS). Its market cap of $26 billion isn’t much more than its 24.75 billion in annual sales, a number which grew almost 13% over full-year 2008 figures. Annual earnings increased 7% to $827.6 million.
The company helps cut costs by increasing its utilization of generic drugs to almost 70% of all prescriptions. Prescription drug costs make up about 10% of all health care costs, according to the United States Centers for Medicare & Medicaid, and that is expected to rise to 12% in 2016.
The company also helps participants in the drug distribution chain increase efficiencies in several ways, including its bulk buying power. The company processed more than 530 million claims last year and sees that rising above 700 million in the coming year.
The stock has seen its PE ratio range from the teens to the 30s in the past few years. Slap a multiple of 30 on $6 of projected annual earnings in 2011, and this could easily grow into a $180-$200 stock.
Disclosure: No positions