Express Scripts Overdue for a Pause

A lot of what I said last week about Caremark (NYSE:CMX) can be applied to ExpressScripts (NASDAQ:ESRX). More people are taking more drugs, customers are increasingly willing (or forced) to use mail-order services to get those drugs, and the considerable size of these enterprises leaves room for economies of scale and cost reductions.

That's not to say, though, that the two companies are twins. Caremark is considerably larger and a fair bit more profitable and seems to be growing its mail-order business at a faster rate. On the other hand, Express Scripts is growing faster overall.

Looking at fourth-quarter results, we see that the company posted 18% revenue growth, with a fair bit of that amount coming from the acquisition of Priority Healthcare. Total adjusted claims processed rose 4%, and the addition of Priority gave a major boost to the specialty pharmaceuticals business, where sales jumped more than 300%.

Profitability did improve -- operating income rose 45%, and operating margins were up by about 80 basis points. Looking at earnings before interest, taxes, depreciation, and amortization per adjusted claim, though, we see that Express Scripts experienced better growth than Caremark (37% versus 31%), but Caremark's absolute numbers are still meaningfully better ($2.86 versus $1.53).

I also found two other points of interest. First, while generic substitution improved on a year-over-year basis (from 52% to 55%), that figure was flat sequentially. I also find it interesting that this quarter's reported earnings per share were only slightly above the average estimate, given that this company has recently been surpassing estimates by a fairly good margin. I don't give a fig about performance in relation to expectations, but I wouldn't be surprised if some of today's sell-off is due to the "disappointment" of not beating estimates by as much as in the past.

I do see room for Express Scripts to continue growing, but the stock just seems too danged expensive to me. If you want to maintain some exposure to health care, I'd suggest thinking about looking at cheaper pharmaceutical or device companies and giving these shares a pass. As today's trading would suggest, these shares are priced at a level where even modest outperformance isn't quite good enough.

For more Foolish thoughts on drugs and health care:

• Good Marks for Caremark
• Aexcellence From Aetna
• Can ESRX Spell P-r-o-f-i-t-s?

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).