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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (49973)	11/6/2012 10:24:18 AM
From: Asymmetric	1 Recommendation Read Replies (1) \| Respond to of 78628

ESRX - got filled at 51.70. FWIW, Here's a small blurb from June 9, Barron's Vital Signs: AT FRIDAY'S CLOSE OF $53.39, shares of Express Scripts Holding (ESRX) are down about 10% from a 2012 high of nearly $59. The stock of the giant pharmacy benefit manager has been hurt by investor hand-wringing over an ongoing spat with drug retailer Walgreen (WAG) and potential integration risks with newly purchased Medco Health Solutions. Nevertheless, in a world where the "risk on, risk off" daily market gyrations can be painful for economically sensitive stocks, the drop in the shares of a more defensive PBM like Express Scripts might provide a good entry point and prove a less aggravating stock for long-term investors. This seems particularly so in the face of a sign that the Express Scripts-Walgreen tiff has become a few degrees less heated. On June 1, the two agreed to dismiss a lawsuit Express Scripts filed last year over certain of Walgreen's marketing practices. While Walgreen has said the dropped suit has no impact on the "ability or inability" to forge a new PBM agreement, it's also true that the drugstore chain has been suffering lately, partly as a result of its decision to stop using Express Scripts' prescription-filling network on Jan. 1, 2012. Walgreen's April same-store sales fell sharply, 6.4%, and they've been negative for the first four months of 2012—unusual for the well-run retailer. The idea that there will be a settlement is gaining credence, says Jean-Francois Comte, co-president of Lutetia Capital, which owns Express Scripts shares. "It's hurting Walgreen and not great for Express Scripts, either. People will calm down, and there will be a settlement," he predicts. ESRX shares are still trading below their level of July 21, 2011, when the $29 billion merger with Medco was announced, creating the country's biggest PBM. The market, meanwhile, is up over 20% since then, and a health-services peer group is ahead about 8%. Though investors are concerned about integration risk, the merger will lead to "huge synergies," he adds, or about $1 billion, according to Express Scripts. That will help expand margins, and it's a substantial number, even for a big company like this, which had $2.6 billion in Ebitda (earnings before interest, taxes, depreciation and amortization) last year. Some of those savings will be passed along to consumers, but some will accrue to shareholders. The timing of the synergies will be critical and should be phased in by 2014 at the latest, Comte says. As a defensive stock with relatively limited downside, it is undervalued, he opines. The company's price/earnings ratio of 14 is significantly below the median of the last ten years, while its enterprise value to Ebitda ratio, at 10, is close to historical lows. (Enterprise value is stock-market value plus net debt.) The St. Louis PBM's average return on equity for the past decade is impressive, at nearly 40%. "There's not much debt and it's a great business," Comte says. As markets lurch from "risk on" to "risk off," there is some solace in the fact that most prescription drugs don't represent discretionary spending. The integration risk can't be completely ignored, but as the synergies go from planned to realized over the next 12 months, Express Scripts could return to $60,13% above its current quote.