To say the Affordable Care Act (better known as Obamacare) has
been controversial is an understatement.
So, as investors, what should we make of the latest political
How about we make some money?
Remember: No matter what the situation, there is always a bull
market somewhere. Obamacare is no exception.
Here's how we're going to profit: 32 million currently uninsured
Americans could soon be insured through the Affordable Care Act.
This, combined with an aging population, will be a boon to the
pharmaceutical industry. And I'd like to tell you about the best
pure-play pharmacy benefit company on the market.
Express Scripts (Nasdaq: ESRX)
is the largest pharmacy benefit management (
) company in the U.S.
Put simply, PBMs operate as middlemen between drugmakers and
Express Scripts operates a mail-order pharmacy business as well
as a network of retail pharmacies. The company also provides a
service that processes prescription claims made by its clients'
In today's age of shopping and doing business online, ESRX offers
several unique services. The company offers a no-cost home
delivery program and operates Express Scripts Mobile, a service
that allows customers to manage their prescriptions using their
Revenue growth between 2011 and 2012 was astounding, more than
doubling from $46 billion to $93 billion. Over the past three
years, total revenue has grown an average of 56% per year.
The company's status as the largest PBM in the country has
allowed it to negotiate lucrative deals with favorable terms.
One of these was a 2012 deal with
, the largest pharmacy chain in the U.S. Another was the
acquisition of Medco in April 2012 for $29 billion, which allowed
Express Scripts to essentially double the number of claims it
Although ESRX doesn't pay a dividend, it bought back 8.2
million shares of stock in the second quarter. And even without a
dividend, investors should be happy with ESRX's recent
Shares hit a new high at the end of July, almost breaking the $65
dollar mark before settling back down to today's price near $62 a
share. The stock has been on quite a run, gaining 14% so far this
Still, in spite of the recent run-up in share prices, ESRX
still appears to be a bargain, for several reasons.
The company's status as the largest PBM in the
country has allowed it to negotiate lucrative deals with
favorable terms, including a 2012 deal with Walgreen.
Express Scripts' compound annual growth rate (
) is expected to grow significantly from present levels. Keep in
mind, a company's CAGR is an excellent measure of return over
time. This is because a different but also frequently used
measurement, average annual return, ignores the effects of
compounding and can sometimes inflate the growth prospects of an
Express Scripts' claim volume is expected to increase at a
compound annual rate of 4.3% over the next five years. Operating
profit per claim is expected increase at a compound annual rate
of 20% in that time.
During the second quarter, the company's earnings before
interest, tax, depreciation and amortization (EBITDA) exceeded
$1.7 billion. And EBITDA per prescription was $4.69, up 26% over
the prior year. As a result, adjusted earnings per share was
$1.12 for the second quarter, up 29% over 2012.
Lastly, the company expects client retention for 2013 to be in
the mid-90% range.
One advantage in the PBM business is that customers tend to be
loyal to their providers, and are reluctant to switch. A high
client-retention rate, coupled with "sticky" customers who would
rather not switch to a competitor, has earned Express Scripts a
"wide moat" status.
The company's forward price-to-earnings (P/E) ratio of 12 and
price-to-book (P/B) ratio of 2 make the stock fairly valued at
Risks to Consider:
Express Scripts does not pay a dividend, making ESRX less
suitable for income investors. Possible regulatory changes in
health care laws could hurt profitability.
Action to Take -->
For growth investors looking to add exposure to this fast-growing
market, Express Scripts rates a buy at today's prices.
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