I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.
Next up: Express Scripts (Nasdaq: ESRX ) . Is this pharmacist the real thing? Let's get right to the numbers.
|CAPS stars (5 max)||****|
|Bullish pitches||67 out of 71|
|Highest rated peers||America Service Group, Psychemedics, IPC The Hospitalist|
Data current as of Nov. 9.
Fools tend to rate Express Scripts highly, mostly thanks to the size and complexity of the business of delivering health-care services. So long as everyone needs medicine, they reason, investors should do well.
"With health care adding more customers, this giant in the field is set to capture some nice profits," wrote All-Star investor denofhc in September. The stock is up close to 17% since, a solid market-beater.
The elements of growth
Last 12 Months
|Normalized net income growth||33.3%||14.4%||25.6%|
|Shares outstanding||526.2 million||550 million||495.3 million|
Source: Capital IQ, a division of Standard & Poor's.
Can the rally continue? As this table shows, there are strong trends in the underlying business. Let's review:
- Revenue growth is accelerating at a blistering pace -- a good sign. What's interesting is the reversal. Revenue isn't just growing fast; it's growing faster than both receivables and normalized net income.
- Gross margin is a bit more troubling. Expenses related to the integration of WellPoint's former NetRx subsidiary, which the company acquired last year for $4.7 billion, have dragged down margins after a brief uptick last year. During the third-quarter conference call, CFO Jeff Hall told analysts in to expect improvements as integration work is completed, but it could be a while before Express Scripts is earning more than 9% on the top line.
- But it's shares outstanding where this stock story sings. Express Scripts' $2.5 billion in free cash flow helped fund $1.27 billion in share repurchases.
Competitor and peer checkup
Normalized Net Income Growth (3 yrs.)
|Aetna (NYSE: AET )||29.1%|
|CIGNA Corp. (NYSE: CI )||59.8%|
|Humana (NYSE: HUM )||34.8%|
|MedcoHealth Solutions (NYSE: MHS )||12.2%|
|Rite Aid (NYSE: RAD )||Not measurable|
|UnitedHealth Group (NYSE: UNH )||21.9%|
Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 9.
This table tells me two things. First, that health services is a heck of a business. Seriously, where else besides software have you seen growth like this? Second, among its peers, Express Scripts is one of the better growers.
What this table doesn't show is the swings in normalized net income. That's why the first table matters. As a growth investor, I prefer businesses with accelerating earnings and cash flow gains. Express Scripts hasn't achieved this. Yet.
Perhaps it will at some point. For now, the company isn't showing enough signs of a sustainable growth story.
And even if the valuation is reasonable -- with the stock trading almost in-line with Wall Street's long-term growth projections that seems to be the case -- declining gross margin suggests there's still too much integration work to do. I'd rather wait for management to make good on its promise to boost gross margin than risk betting on the stock too soon.
Now it's your turn to weigh in. Do you like Express Scripts at these levels? Let us know what you think using the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.
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