Express Scripts (NYSE:ESRX) seems to be finally catching a bid which means its sub $60 lows should now end p being a thing of the past. The main reason we saw those lows was because of its biggest client “Anthem” basically threatening to pull their business which is sizeable to say the least. In fact the contract that both parties have at present is expected to end within two and a half years ( by the end of 2019). Anthem added over $17 billion to Express Scripts’ turnover last year so from a top line point of view, it’s definitely a big deal in the near term. However long term investors will see this as opportunity for a number of reasons especially when you observe how low sentiment fell to recently.
Source : Sentimentrader.com
The first reason is the company’s long term financial history which looks very sound. In fact every important financial metric is well up over the past decade . Net income grew to over $3.4 billion last year and free cash flow surpassed $4.5 billion. Furthermore analysts (despite the pending loss of the anthem business), are still expecting Express Scripts to grow their earnings at an annual rate of something like 12% per annum over the next five years. Therefore I feel one would have to would have back the company here.
Along with proven financials a second reason would be the company’s competitive advantages. In the pharmacy benefit managing sector scale both on the buying side and on the selling side is obviously hugely beneficial. Express Scripts at present is the biggest benefit manager in the US. It just needs to concentrate on developing more relationships over the next 30 months or so. The company has a ninety eight percent retention rate which demonstrates clear customer satisfaction and economies of scale.
Another reason would be the biotech sector in general. If you look at the biotech ETF below (NASDAQ:IBB), this E.T.F. actually bottomed about 12 months ago and has been making higher highs and higher lows ever since. Nevertheless Express Scripts has been declining since the cyclical biotech top in June of 2015 as it has failed to make higher highs over any sort of sustained period. However I don’t think you’re going to see this divergence continue indefinitely as Express Scripts is just too strong a stock to keep on going down in the face of a health sector rally. With an earnings multiple of just over 11 at present, I think you’re going to ultimately witness a big move appear in Express Scripts shortly. Could earnings be the catalyst ? You will know in a couple of weeks..