Express Scripts Holding Company (ESRX): Playing the Pharmaceutical Distribution Stocks

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According to Barron’s, Maxim Group ranked Express Scripts Holding Company (NASDAQ:ESRX) as a buy after its better-than-estimated first quarter earnings results. Since the beginning of the year, Express Scripts has experienced a gain of 10.4%, lower than the S&P 500’s gain of nearly 11%. However, in a longer historical time horizon of 5 years, the company has gained more than 67.5%, leaving the S&P 500 in the dust with only a 12.3% gain. Express Scripts Holding Company (NASDAQ:ESRX) is currently in the portfolio of many famous investment managers, including David Rolfe, Wallace Weitz, Glenn Greenberg and Ken Fisher. Should we get into Express Scripts Holding Company (NASDAQ:ESRX) at its current trading price? Let’s find out.

Huge jump in revenue due to Medco’s acquisition

Express Scripts is considered the biggest player in pharmacy benefit management (PBM), providing various services to wide range of clients including health insurers, managed care organizations, workers’ compensation plans and government health programs. Most of its revenue derived from PBM. In the PBM segment, most if its revenue, $57.76 billion, or 63% of the total 2012 revenue, was generated from network revenue, while home delivery and specialty revenue contributed more than $33 billion in revenue.

In the first quarter of 2013, Express Scripts Holding Company (NASDAQ:ESRX) experienced a huge growth in both its top line and bottom line. Revenue came in at more than $26 billion, more than double the revenue in the first quarter 2012 of only $12.1 billion. The significant increase in its revenue was due to the inclusion of Medco’s operating results. The company’s chairman and CEO commented that a year after Medco’s acquisition the combined company was better than the sum of its parts.

Net income rose as much as 39.2%, from $267.8 million to $373 million. However, EPS experienced a drop by more than 18% to $0.45. The higher net income but lower EPS was due to the significant increase in the total number of outstanding shares, from nearly 490 million shares in the first quarter last year to 832.5 million shares. Express Scripts Holding Company (NASDAQ:ESRX) employed a reasonable amount of debt in its operations. As of March 2013, it had $23.63 billion in total stockholders’ equity, nearly $2 billion in cash, and more than $14.4 billion in both long and short-term debt.

Walgreen Company (NYSE:WAG) and AmerisourceBergen Corp. (NYSE:ABC) might be better picks?

Two years ago, Express Scripts Holding Company (NASDAQ:ESRX) had a dispute on the prescription issue with Walgreen Company (NYSE:WAG). When the company’s exclusive contract with Walgreen was no longer valid, Express Scripts could expand its partnership with other companies, selling its services via various channels. For Walgreen, after the dispute, the stock price experienced a serious free fall. Walgreen lost around $4 billion in revenue because of the dispute. However, Walgreen’s share price has regained its momentum, rising significantly from $32 per share to nearly $49 per share within just more than a year.

Recently, Walgreen and its partner, Alliance Boots, made a big move by signing a 10-year agreement with distributor AmerisourceBergen Corp. (NYSE:ABC) for the distribution of pharmaceuticals to Walgreen’s retail stores. This agreement was reported to be worth as much as $400 billion over 10 years. The partnership between the two will have the huge impact on the pharmaceutical industry because of their market leading positions. Walgreen Company (NYSE:WAG) is the largest U.S. pharmaceutical operator, with nearly 8,400 stores including drugstores, specialty pharmacies, worksite health and wellness centers, and infusion and respiratory services facilities. AmerisourceBergen Corp. (NYSE:ABC) is one of the largest global pharmaceutical services companies, with more than 98% of its revenue coming from pharmaceutical distribution. Interestingly, the largest customer of AmerisourceBergen used to be Medco, representing around 17% of its total revenue in fiscal 2012. Jeff Jonas, a portfolio manager at Gamco Investors commented on the deal:

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