Express Scripts: Good Investment Decisions Do Not Require Rocket Science

| About: Express Scripts, (ESRX)

K.I.S.S. - Good Investing Decisions Do Not Require Rocket Science

Some people insist on complicating what should be easy decision-making. The K.I.S.S {Keep It Simple, Stupid} principle should prevail unless you can find a good reason to override it.

One of the best examples to illustrate this principal is pharmacy benefit manager Express Scripts (NASDAQ:ESRX). ESRX acquired Medco Health Services last April. Combined revenue is expected to come in at about $95 billion this year.

Here are Express Scripts' per-share, split-adjusted numbers for a variety of metrics going all the way back to 1996. The 2012 earnings estimates shown below are from Value Line. Zacks sees $3.70 for 2012 and $4.49 for 2013.

What was even more impressive than the spectacular growth? Over the entire sixteen-year period there was not one down year-over-year comparison in any of the four measured categories.

Express Scripts' incredible long-term sustained growth would typically make the shares really expensive. Surprisingly, that assumption is not accurate. As of Monday's close of $62.60, Express Scripts is offered at about 17.4x its calendar 2012 earnings estimate of $3.60. That's a 17.1% discount to its 10-year median multiple of 21.0x.

During major broad-market sell-offs ESRX briefly touched lower valuations. Each of those times proved to be a tremendous buying opportunity [see the green stars in the chart above].

When enthusiasm ran rampant ESRX generally topped out at 25x - 28x that year's earnings [see the blue stars]. The company's fundamental performance was so strong that patient investors who made the mistake of buying too high ended up looking good anyway.

Value Line assumes a slightly below normal 20x multiple in making their 3 - 5 year projections for ESRX (shown above).

VL notes that Express Scripts falls into the top 10% (of its 1700-stock) main research universe for both 'price growth persistence' and 'earnings predictability'. Its shares are more stable than 75% of all covered stocks. Financial strength is rated A.

Morningstar also likes ESRX. It assigns Express Scripts 4-Stars (out of 5), seeing present-day fair value as $73 while maintaining a sell target of $98.55.

Standard & Poors carries higher estimates than Value Line and Zacks for both this year and 2013. If it is right, Express Scripts' P/E is even lower than I indicated using the more conservative figures.

Why are ESRX shares selling so cheaply relative to their solid underlying fundamentals? I suspect it's nothing more than that it pays no cash dividend in an income-crazed investment world. With so many people single-mindedly focused on yield, these fine shares have been somewhat overlooked.

Demographics (the aging of America) strongly favor the continuance of all the positive trends. The recently renewed deal with Walgreen (WAG) put ESRX back into partnership with the nations #1 drug store chain. The company was already working with CVS (NYSE:CVS) and Rite Aide (NYSE:RAD).

Owning ESRX is about as simple a decision as you get in a complicated world. Buy some now. Then hope you get a market retracement that allows you to increase your stake at an even better price.

Disclosure: I am long ESRX, WAG. 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.