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Express Scripts: How Its Performance Contributed to Its Valuation

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Why did revenue fall?

Express Scripts’ (ESRX) revenue fell 1% in both 2016 and the first nine months of 2017. A fall in the PBM (pharmacy benefit management) segment’s revenue was offset by the revenue of the other business operations segment for both periods.

Growth in home delivery and specialty revenues in the PBM segment was offset by network and service revenues in the same segment in 2016 and the first nine months of 2017. Growth in other revenue in the other business operations segment was offset by service revenue from the same segment in 2016. The other business operations segment recorded growth in other revenue and service revenue for the first nine months of 2017.

What led to diluted EPS growth?

ESRX’s gross profit rose 3% in 2016 and remained flat in the first nine months of 2017. SG&A (selling, general, and administrative) expenses decreased 13% and 12% in 2016 and the first nine months of 2017, respectively. As a result, operating income grew 17% and 8% in 2016 and the first nine months of 2017, respectively. Net interest expense increased in 2016 before decreasing in the first nine months of 2017. After that, net income rose 5% and 1% in 2016 and the first nine months of 2017, respectively. Diluted EPS (earnings per share) rose 16% and 9% in 2016 and the first nine months of 2017, respectively. Share buybacks enhanced EPS. The company has maintained an impressive free cash flow balance.

How does ESRX compare to its peers and the broad indexes?

ESRX stock has risen 7.1% on a YTD (year-to-date) basis. The company has not declared any dividend. A forward PE (price-to-earnings) ratio of 10.5x compares to a sector average forward PE ratio of 11.8x and a dividend yield of 2.1%. The S&P 500 (SPX-INDEX) (SPY) offers a dividend yield of 2.2%, a PE ratio of 23.7x, and a YTD return of 19.8%. The Dow Jones Industrial Average (DJIA-INDEX) (DIA) has a dividend yield of 2.2%, a PE ratio of 22.3x, and a YTD return of 25.3%. The NASDAQ Composite (COMP-INDEX) (ONEQ) has a PE ratio of 25.4x and a YTD return of 29.4%.

What is ESRX’s outlook?

ESRX’s revenue has been projected to remain flat at $99.8 billion in 2017. It’s expected to rise 1% to $100.7 billion in 2018. Diluted EPS has been projected to rise 10% to $7.02 in 2017. It’s expected to rise 10% to $7.70 in 2018.

The iShares US Healthcare Providers (IHF) has exposure to ESRX. It has a PE ratio of 22.9x and a dividend yield of 0.2%. The SPDR S&P Health Care Services ETF (XHS) has exposure to ESRX. It has a PE ratio of 18.8x and a dividend yield of 0.2%.

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