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Express Scripts Flying

A first-quarter beat sends the stock to a new high.

Express Scripts (ESRX) surged 4% late Monday after the big mail-order pharmacy posted strong first-quarter numbers and boosted full-year guidance for the second time.

The St. Louis-based pharmacy benefit manager made $134 million, or 97 cents a share, up from the year-ago $105 million, or 70 cents a share. Excluding certain costs, earnings jumped 49% from a year ago to $1.04 a share.

Revenue rose to $4.54 billion from $4.38 billion a year ago. Analysts surveyed by Thomson Financial were looking for a 94-cent profit on sales of $4.5 billion.

The company boosted its earnings guidance for 2007 to a range of $4.29 to $4.41 a share, above the $4.21-a-share analyst consensus estimate. Express Scripts had raised its target just a month ago, at the end of its losing bid to buy rival Caremark.

Shares, which closed within a dollar of their 52-week high, rose $4 late Monday to $92.90.

Generic utilization -- which hit a record 60.3% during the quarter -- lifted the company's results. A big share-repurchase program, adopted after the Caremark buyout fell through, will further boost the company's performance going forward.

"I am pleased by the strong start to 2007," Express Scripts CEO George Paz stated on Monday. "Express Scripts' fundamental business model continues to produce outstanding results."

Analysts urged investors to snatch up shares of Express Scripts ahead of the company's first-quarter report. Many expected the company to at least meet Wall Street expectations for the latest period, if not beat them, and raise its guidance a third time for the current year.

Importantly, they noted, Express Scripts promised an accelerated share-buyback that, up to now, had been excluded from the company's future outlook. They saw the company's stock climbing even higher as a result.

"While ESRX shares have had a significant run since our February upgrade, we believe that the stock still has substantial upside from current levels," Jefferies analyst Arthur Henderson wrote. "If operations are performing better than expected -- as we anticipate -- we believe the company's fair value could be higher than $102" a share.

Henderson has a buy recommendation on Express Scripts' stock. His firm makes a market in the company's securities.

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Susquehanna analyst Constantine Davides believes the rally will continue. Indeed, he highlights Express Scripts as his leading stock pick for 2007.

For starters, Davides assumed that Express Scripts would easily beat first-quarter expectations. He noted that several popular drugs, such as Zocor and Zoloft, had generic equivalents available throughout the first quarter of the year. And he stressed that Express Scripts -- which boasts an industry-leading generic utilization rate -- knows how to capitalize on such opportunities.

Moreover, Davides sees those opportunities continuing for years to come.

"Our constructive outlook on the PBM sector is driven by strong fundamentals associated with a burgeoning generics pipeline," Davides says. Importantly, he stresses, "Express Scripts' growth opportunity remains intact following (the) failed Caremark acquisition."

Davides likes the industry's biggest pure-play PBM as well. He portrays



as a "best-in-class" operation with plenty of room to boost its own generic utilization rate.

Davides looks for Medco to beat Wall Street expectations next week in the meantime. He highlights the company's industry-leading mail-order business as a key driver of results. He notes that the company has recently scored some new mail-heavy contracts -- which tend to carry generous margins -- and continues to compete for a key prize in this arena.

Notably, Medco is trying to win back a huge government account that the company lost to rival Caremark a few years ago. Some believe that Medco could succeed because Caremark has been consumed by its merger with CVS in recent months.

Davides has a positive outlook on Express Scripts and Medco alike. His firm seeks to do business with the companies it covers and holds more than 1% of Express Scripts' stock itself.