One of the largest pharmacy benefit managers in the U.S., Express Scripts Holding Company (NASDAQ:ESRX), has grown its revenues dramatically over the past decade, even if you don’t include the acquisition of Medco Health Solutions last year. The company is generally expected to grow its earnings significantly over the next few years, mostly due to an increased number of insured prescription customers as a result of the Affordable Care Act. Despite very high earnings growth, Express Scripts Holding Company (NASDAQ:ESRX) trades at a much lower valuation that many would expect, so I thought it would be worth taking a look before their next earnings report on May 1.
About Express Scripts
Express Scripts Holding Company (NASDAQ:ESRX) is now the largest player in the pharmacy benefits management space, with over 10 million patients who receive over 1 billion prescriptions per year. For those who aren’t familiar with the pharmacy benefits management business, it essentially combines pharmacy claims processing with management and home delivery services. Some PBMs also offer such services as compliance programs, drug therapy management services, and data analysis services.
Express Scripts Holding Company (NASDAQ:ESRX) makes virtually all of its money from the delivery of prescription drugs to customers, either through retail channels or home delivery services. Their clients include health insurance companies, employers, government programs, and others. The largest five clients make up 39% of Express Script’s revenues, including Wellpoint (13.7% of all revenues) and the Department of Defense (10.6%).
Looks Cheap, But is It?
At just 12.9 times forward earnings, Express Scripts looks very reasonably valued, especially considering the growth projections for the next few years. The company is projected to earn $4.26 per share this year, growing to $4.91 and $5.62 in 2014 and 2015, respectively. This corresponds to an average annual earnings growth rate of 14.6%, and is attributed to cost savings created by their recent acquisition, as well as the aforementioned influx of new insured patients to the market.
However, not all is great. Express Scripts Holding Company (NASDAQ:ESRX) carries a lot more debt than I would like to see, about $15 billion, which is a third of the company’s entire market cap. There is also the growing risk of more government regulation of PBMs, which is looking increasingly likely to happen as time goes on.
Express Scripts competes against PBMs owned by managed care organizations, such as CIGNA Corporation (NYSE:CI), as well as those owned by retail pharmacy chains, my favorite of which is CVS Caremark Corporation (NYSE:CVS). Would either of these be better investments, given the more diverse nature of their revenues?
In addition to prescription management, CIGNA Corporation (NYSE:CI) gives investors exposure to a wide variety of health care offerings, such as medical, dental, and behavioral health plans. Cigna trades for just 10.3 times forward earnings and is expected to grow its earnings at 8.7% annually going forward, according to the consensus of analysts covering the company. Going forward, CIGNA Corporation (NYSE:CI) should also stand to benefit considerably from the Affordable Care Act.