This stock is an Obamacare win

This company was already benefiting from the graying of America -- and it stands to benefit even more from millions of Obamacare enrollees.

By StreetAuthority Oct 7, 2013 9:29AM
Image: Pills (© Sean Justice/Corbis)By Chad Tracy

To say the Affordable Care Act (better known as Obamacare) has been controversial is an understatement.

So, as investors, what should we make of the latest political brinkmanship?

How about we make some money?

Remember: No matter what the situation, there is always a bull market somewhere. Obamacare is no exception.

Here's how we're going to profit: 32 million currently uninsured Americans could soon be insured through the Affordable Care Act.

This, combined with an aging population, will be a boon to the pharmaceutical industry. And I'd like to tell you about the best pure-play pharmacy benefit company on the market.

Express Scripts (ESRX) is the largest pharmacy benefit management (PBM) company in the U.S.

Put simply, PBMs operate as middlemen between drugmakers and employers.

Express Scripts operates a mail-order pharmacy business as well as a network of retail pharmacies. The company also provides a service that processes prescription claims made by its clients' members.

In today's age of shopping and doing business online, ESRX offers several unique services. The company offers a no-cost home delivery program and operates Express Scripts Mobile, a service that allows customers to manage their prescriptions using their cellphones.

Revenue growth between 2011 and 2012 was astounding, more than doubling from $46 billion to $93 billion. Over the past three years, total revenue has grown an average of 56 percent per year.

The company's status as the largest PBM in the country has allowed it to negotiate lucrative deals with favorable terms.

One of these was a 2012 deal with Walgreen (WAG), the largest pharmacy chain in the U.S. Another was the acquisition of Medco in April 2012 for $29 billion, which allowed Express Scripts to essentially double the number of claims it processes.

Although ESRX doesn't pay a dividend, it bought back 8.2 million shares of stock in the second quarter. And even without a dividend, investors should be happy with ESRX's recent performance.

Shares hit a new high at the end of July, almost breaking the $65 dollar mark before settling back down to today's price near $62 a share. The stock has been on quite a run, gaining 14 percent so far this year.
Still, in spite of the recent run-up in share prices, ESRX still appears to be a bargain, for several reasons.

Express Scripts' compound annual growth rate (CAGR) is expected to grow significantly from present levels. Keep in mind, a company's CAGR is an excellent measure of return over time. This is because a different but also frequently used measurement, average annual return, ignores the effects of compounding and can sometimes inflate the growth prospects of an investment.

Express Scripts' claim volume is expected to increase at a compound annual rate of 4.3 percent over the next five years. Operating profit per claim is expected increase at a compound annual rate of 20 percent in that time.

During the second quarter, the company's earnings before interest, tax, depreciation and amortization (EBITDA) exceeded $1.7 billion. And EBITDA per prescription was $4.69, up 26 percent over the prior year. As a result, adjusted earnings per share was $1.12 for the second quarter, up 29 percent over 2012.

Lastly, the company expects client retention for 2013 to be in the mid-90 percent range.

One advantage in the PBM business is that customers tend to be loyal to their providers, and are reluctant to switch. A high client-retention rate, coupled with "sticky" customers who would rather not switch to a competitor, has earned Express Scripts a "wide moat" status.

The company's forward price-to-earnings (P/E) ratio of 12 and price-to-book (P/B) ratio of 2 make the stock fairly valued at today's prices.

Risks to consider:
Express Scripts does not pay a dividend, making ESRX less suitable for income investors. Possible regulatory changes in health care laws could hurt profitability.

Action to take:
For growth investors looking to add exposure to this fast-growing market, Express Scripts rates a buy at today's prices.

Chad Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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