Does This Company Have a Prescription for Investor’s Portfolios?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to pinpoint on a leading pharmacy benefit manager, Express Scripts (NASDAQ: ESRX).

 

Strengths:

  • Explosive Revenue Growth: In 2006, Express Scripts reported revenue of $17.6 billion; in 2011, the company announced revenue of $46.1 billion, representing year over year annual growth of 21.24%; this trend of explosive double digit growth is widely anticipated to sustain into the future, with projections placing 2015 revenue at $102.9 billion; this growth is a result of an increase in the number of customers Express Scripts possesses

 

  • Institutional Vote of Confidence: 82.62% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Cash & Equivalents: At the moment the company possesses around $1.25 billion of cash and cash equivalents on their balance sheets, a major upside to the business

 

  • Price to Sales Ratio: Currently Express Scripts carries a price to sales ratio of 0.49, displaying a company deeply undervalued
  • Independent Nature: The company has no firm contracts or agreements with massive pharmaceuticals, and possesses a leading 61.1% generic dispensing rate, keeping their customers best interests in mind, sacrificing massive margins for a larger volume of customers

Weaknesses:

  • Lack of Dividend: Express Scripts has never paid out a dividend, and has not expressed any plans to do so anytime in the near future
  • Debt: At the moment Express Scripts holds about $16.2 billion of debt on their balance sheets, a major downside to the business

 

  • Historically High Valuation: At the moment Express Scripts possesses a price to earnings ratio of 29.1 and a price to book ratio of 10.44, both of which indicate a company which carries a pricy valuation, however the company’s explosive growth compensates for some of the valuation

 

  • Tight Margins: Currently, Express Scripts carries a net profit margin of 2.77%, which leaves very little room for unexpected expenditures; these tight margins are a result of the company's attempt to remain competitive
  • Operating Expenses: When a business expands such as Express Script’s has, the costs related to operating that business will increase, however over the past years operating expenses have grown at a faster pace than revenue, an ominous sign

 

  • Margin Compression: Over the past years revenue growth has well outpaced gross profit growth, representing margin compression, a terrible sign

 

Opportunities:

  • Merger/Acquisitions: On July 20, 2011, Express Scripts entered a merger agreement with Medco Health Solutions Incorporated, and further acquisitions and mergers in the future could fuel growth
  • Gaining Market Share: As of the 2nd quarter of 2011, Express Scripts possesses a leading position in the pharmacy benefit management industry, with 90,000,000 total covered lives, representing a 12.68% market share, and any increase in this market share could fuel growth (excluding Medco’s 9.16% market share at the period)
  • Government Regulation: Beginning in 2014, the wide majority of people in the United States will be required to possesses health insurance, and with this increase in the number of people with insurance will come an increase in the number of customers Express Scripts possesses
  • Growing US Population: The more people there are in the United States, the more people that will require prescriptions and drugs that Express Scripts provides, and in theory the more customers Express Scripts will have if they are able to maintain their current market share

 

Threats:

  • Competition: The pharmacy benefit manager industry is very competitive, and this competition to offer the prescriptions for the least amount of money can lead to margin compression
  • Rising Input Prices: If prescription prices to were to rise, Express Scripts would be forced with the decision of either passing on the costs to their customers or swallowing the extra costs in their margins
  • Fiscal Cliff: If the United States was to fall off of the fiscal cliff, taxes would be raised on all Americans, leading to them having less money to spend on possibly expensive prescriptions, hurting Scripts

Competition:

Major publically traded competitors of Express Scripts include Catamaran (NASDAQ: CTRX), AmerisourceBergen (NYSE: ABC), UnitedHealth (NYSE: UNH), and CVS Caremark (NYSE: CVS). All of these companies offer services and products similar if not identical to those of Express Script’s. Catamaran is valued at $9.74 billion, pays out no dividend, and carries a price to earnings ratio of 57.93. AmerisourceBergen is valued at $10.15 billion, pays out a dividend yielding 1.95%, and carries a price to earnings ratio of 15.97. UnitedHealth is valued at $55.39 billion, pays out a dividend yielding 1.57%, and carries a price to earnings ratio of 10.32. Finally, CVS is valued at $60.22 billion, pays out a dividend yielding 1.86%, and carries a 16.22 price to earnings ratio.

The Foolish Bottom Line:

Express Scripts faces heavy competition in its industry, however due to their merger with Medco now possesses a commanding lead in terms of market share. Financially, the business is relatively strong however possesses a massive debt load. Additionally, the company does not pay out a dividend, a major disadvantage, especially in these uncertain economic times. Above all, Express Scripts is a growth play, with explosive double digit revenue growth. All in all, Express Scripts is a tremendous growth play on the health care industry, and should prosper into the coming decade and beyond.      


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Catamaran and Express Scripts. Motley Fool newsletter services recommend Catamaran, Express Scripts, and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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