Article 1 of 130
WEEKDAY TRADER:Can Express Scripts Write Its Own Ticket?
05/20/1999
Dow Jones News Service
(Copyright (c) 1999, Dow Jones & Company, Inc.)
By Lawrence Strauss
This story was first published Wednesday
NEW YORK (Dow Jones)--Express Scripts Inc. (ESRX), a leading pharmacy benefit management company, attached a .com to its name in late March when it announced it had formed a subsidiary to sell drugs online.
The stock promptly soared to 105 1/2 on March 30, up more than 30 points on the day, before closing just south of 92.
But Express Scripts' stock came back down to earth. And quickly. It closed Wednesday at 69, up 3 13/16 on the day but still off about 35% from its peak less than two months ago.
Why the plunge? After the initial euphoria, the company's Internet strategy failed to catch fire. Similarly, retail drugstore stocks such as CVS Corp. (CVS) have sold off amid anxiety about online competition. (See Weekday Trader, "Can CVS Spell Relief to Shareholders?," May 12. CVS announced Monday that it agreed to buy startup Internet drug retailer Soma.com in a move aimed at coopting online competition.)
Moreover, an impending secondary offering, in which Express Scripts will sell 4.5 million shares to the public, has raised concerns about there being too much stock on the market. The company says it plans to use some of the offering's proceeds to pay down debt. Express Scripts, in which insurance company New York Life holds about a 45% stake, has a market value of about $2.4 billion.
But even the bulls are at a loss to explain exactly why the share price has fallen below where it traded before the fateful Internet announcement in late March. That's because they regard Express Scripts as a fundamentally sound company whose solid financial pedigree includes long-term earnings growth at least in the high-20% range.
"The core business is great; the Internet [business] would be cream," declares Karey Barker, a portfolio manager of Wasatch Mid-Cap Fund, whose holdings include Express Scripts.
What's more, the bulls insist that Express Scripts, with its strong ties to health benefits payers, is in a much better position to capitalize on e-commerce than is a drugstore.com, which thus far has had little success cracking crucial third-party-payment contracts.
Express Scripts, which handles the prescription-drug piece of health benefit packages, has more than 46 million customers and a strong mail-order business, a base that offers lots of potential leverage online, the bulls contend.
And Express Scripts really is planning to step up its Internet presence this summer when it rolls out YourPharmacy.com, which will offer prescription drugs and over-the-counter items like vitamins online. Express Scripts does not sell those items now, relying solely on reimbursements from third-party payers.
Fans of the company also point out that Express Scripts, the number-three player in the industry behind Merck-Medco and PCS, is well-positioned to take advantage of the growing elderly population and its use of prescription drugs. "There aren't super-high margins [in the industry]," says Barker. "But they are in a good position, and people like the fact that they're independent." That independence from big drug companies also gives Express Scripts lots of buying clout with different suppliers.
Merck & Co. (MRK), the U.S. pharmaceutical giant, owns Merck-Medco, while drugstore retailer Rite Aid Corp. (RAD) owns PCS. But thanks to the acquisition in the last 13 months of two players in the pharmacy benefit management field - ValueRx a year ago and Diversified Pharmaceutical Services in April - Express Scripts has solidified its position against the competition. The stock offering should help Express Scripts make more strategic acquisitions, online or otherwise, by helping it pay down debt.
And the proof is in the numbers. Barbara Ryan of BT Alex. Brown and the handful of securities analysts who track the stock were encouraged by the company's strong first-quarter results.
"We expect continued momentum to drive operating performance in 1999 and beyond," notes Ryan, whose firm rates the stock Strong Buy with a 12-month price target of 95 to 99. (BT Alex. Brown is an underwriter of the secondary offering.)
In the first quarter, net income rose 38% from a year earlier, to 40 cents per share, a penny better than analysts' consensus estimate, according to First Call. Helped by the purchase of ValueRx, revenues came in at just under $900 million, up 142% from a year earlier.
Meanwhile, Barker, the Wasatch fund manager, calls Express Scripts' valuation "reasonable." She says her fund "trimmed a little on [the] Internet run," which she called "a little crazy." And at current prices? "We think it's an interesting opportunity," she says.
As of Wednesday's close, the shares changed hands at about 30.7x the consensus 2000 earnings per share estimate of $2.25, according to First Call. That's not exactly a bargain-basement multiple, but it is a discount to Express Scripts' projected 2000 earnings growth rate of 32% (though it's a slight premium to its long-term compound annual growth rate of 27%). Historically, the stock has traded "from right below its growth rate to 35% to 50% ahead of it," says Ryan.
Also, with New York Life holding such a large stake, Express Scripts hasn't traded "like most $2.4-billion [market cap] companies," says Morgan Keegan & Co. analyst Gary Stevenson. Morgan Keegan is also underwriting the secondary offering, which Stevenson hopes will improve the stock's liquidity.
Liquidity isn't the only concern. Contracts with payers typically don't last more than three years, leaving Express Scripts vulnerable to defections or consolidation within the HMO industry. There's also strong competition from other physician benefit management companies, which could poach some key drugstore-chain customers.
But the bulls are confident that Express Scripts is poised to write a much more compelling story-online, on Wall Street and in the real world.
(END) DOW JONES NEWS 05-20-99
08:00 AM
|
