Sometimes you have to look closer than the income statement to get a full picture of a company's health. Shares in Medco Health Solutions
In the pharmacy benefit management business, that's a big no-no. Medco, Express Scripts
But a closer look at the numbers paints a much brighter picture. The generic fill rate increased 2.9 percentage points to a record high 69.7%. Medco makes more off generic drugs than it does branded drugs. Mail order drugs also come with a larger profit because it's cheaper to fill prescriptions without having to pay for retail space, unlike Walgreen
So where did the slip in gross margins come from? Margins for its specialty pharmacy business slipped, but that's because it was compared to a very strong quarter a year ago. Margins were also hurt by seasonal costs associated with new clients. You have to spend money to make money, as the saying goes. Look for margins to head back in the right direction next quarter.
Yesterday's share price decline may also have had to do with the company's guidance of growing earnings per share "at least 5% over the first quarter." At the low end, that's not very impressive considering the speed it's been growing, but management tends to be conservative with its guidance. Last quarter it guided for a 5% quarter-over-quarter increase in revenue; it turned out to be 7%.
I've always thought the pharmacy benefit management business was a good one, but shares always seem a little overpriced. After the pullback yesterday, this might be a good opportunity for investors to get a quality company on the cheap.